1. Economies of scale
Average total costs changes as the output of a firm changes
Increasing, decreasing or constant economies of scale.
Short run cost curve (SRATC)
Long run cost curve (LRATC)

2. Constant economies of scale
Cost
SRATC1
SRATC2
LRATC Q2 Q Q1

3. Increasing economies of scale
Cost
SRATC1
SRATC2
LRATC Q1 Q2 Q

4. Decreasing economies of scale
Cost
SRATC2
SRATC1
LRATC Q1 Q2 Q

5. US Pork Sector Study Financial results for 2000
Net Profit Breakeven Net Loss
1-2 65% 24% 11%
2-3 77% 15% 8%
3-5 79% 16% 5%
% 13% 9%
% 12% 11%
% 5% 5%
% 5% 0%

6. US Pork Sector Study Stay in price until 2003 (%)
1000 hd $36 $39 $42 $45 $48

7. Processing cost curves
Specialized plants
High fixed cost
Cost
SRATC Q

8. So what??? Short run price implications Supply chain management
Open market or contract
Packing plants
Ethanol plants
Soybean processing
Biodiesel

10. Externalities and cost curves
Cost curve exhibiting increasing economies of scale Q

11. Externalities and cost curves
Cost curve with external cost internalized to the firm Q

12. Supply and Demand summary
Demand originates with individual consumer’s utility and budget constraint
Supply originates with individual firm’s marginal cost curve

13. Consumption is not demand
Beginning stocks + production + imports
– exports – ending stocks
Government reports of inventory
Per capita consumption =
consumption / population

15. Equilibrium P and Q
Equilibrium price is where Qs = Qd. P S Pe D Qe Q

16. Supply and Demand AnalysisPe Qe

17. Price elasticity
A measure of responsiveness of the quantity supplied or demanded to changes in prices.
Percentage change in quantity for a 1% change in price.

18. Elasticity of demand Ep = Ep = Ep = Q / Q P / P Q P Q Px P Q
Q0 - Q P0 + P1
Ep = x
Q0 + Q P0 - P1

19. Price elasticity and curves
Ep changes along a sloping demand or supply curve
Special exceptions

20. Relative measures |Ep| > 1 elastic |Ep| = 1 unitary elastic
|Ep| < 1 inelastic

21. Price elasticity & total revenue
TR = P x Q
Elastic demand
P and TR inversely related
Inelastic demand
P and TR directly related

22. Price elasticity & total revenue
Inelastic Q

23. So what????
Where are you on the demand curve? P 60 55 20 15 7 10 11 Q 6

24. Income elasticity
Percentage change in quantity for a 1% change in income
Positive for most food items
Relatively small i.e., 0.2 Q I
Ei = x I Q

25. Cross-price elasticity
Percentage change in quantity for a 1% change in price of a substitute or complement
Positive or negative
Much smaller than Ep Qk Pj
Epj = x Pj Qk

26. Examples of Ag elasticities
Ep Ei
Beef
Pork
Chicken
Milk
Grapes
Lettuce

27. Own and Cross Price Elasticities
Ep of demand for beef
Beef
Pork
Lamb
Chicken .06
Other
Income

28. Net change in quantity
Net effect of changes in own price, cross price, and income multiplied by the appropriate elasticities.
Addresses the fact that not all else is equal.

29. Elasticities at various markets
The greater the number of substitutes the more elastic the demand.
For a given Q, look at % P
More elastic at retail level

30. Elasticities at market levelsP
Hy-Vee T-bone in Ames
Hy-Vee T-bone
All T-bone
All meat
All beef
All food Q

31. Derived Demand
The demand for inputs that are used to produce the final products.
Examples:
Flour => wheat
Soybean meal => soybeans
Fed cattle => feeder cattle

32. Derived Demand P Retail pork chop demand Wholesale pork demand
Farm level demand for hogs
Demand for corn to feed hogs
Demand for inputs to produce corn Q

33. Elasticities at retail and farm
Dd = f (Dd, M) S P PR M PF
DRetail = Primary
DFarm = Derived Q Qe

34. Elasticity Summary Relationship between Q and P
Changes along demand curve
Elasticity and total revenue
Cross-price and income elasticities
Relative size
Own, cross, and income
Farm v. retail