1. CAPRI Connecting supply and demand Torbjörn Jansson* *Corresponding author +49-228-732323 www.agp.uni-bonn.de Department for Economic and Agricultural Policy Bonn University Nussallee 21 53115 Bonn, Germany CAPRI Training Session in Warzaw, June 26-30, 2006 CAPRI Common Agricultural Policy Regional Impact

2. CAPRI CAPRI Training Session at JRC-IPTS, Sevilla, May 16-20 2005 2 Supply Supply Regional optimisation models Perennial sub-module Markets Markets Multi-commodity spatial market model Prices Reminder – General Model Layout Quantities Iterations Comparative Static Equilibrium

3. CAPRI CAPRI Training Session at JRC-IPTS, Sevilla, May 16-20 2005 3 On convergence d s q p p0p0 p0p0 q p s d s

4. CAPRI CAPRI Training Session at JRC-IPTS, Sevilla, May 16-20 2005 4 Conclusions If “demand elasticity” > “supply elasticity”, it will converge, otherwise not CAPRI has to be solved iteratively Elasticities are chosen bases on economic criteria not to obtain convergence  We will likely need some mechanism promote convergence in CAPRI

5. CAPRI CAPRI Training Session at JRC-IPTS, Sevilla, May 16-20 2005 5 Different ways of promoting convergence Adjustment cost: Additional production cost for deviating from the supply in the previous step Price expectation: Supply uses weighted average of prices in several previous step. Used in CAPRI Partial adjustment: Supply only moves a fraction of the way towards the optimum in each step Approximate supply functions used in market instead of fixed supply. Used in CAPRI

6. CAPRI CAPRI Training Session at JRC-IPTS, Sevilla, May 16-20 2005 6 Approximation of supply functions The implicit supply function is unknown –Difficult to derive for CAPRI –Has non-differential points (corners)  difficult to solve together with market model Assume “any” simple supply function that approximates the supply model Calibrate the parameters in each step so that the supply response of last step is reproduced

7. CAPRI CAPRI Training Session at JRC-IPTS, Sevilla, May 16-20 2005 7 Approximating supply p0p0 q p s d s Assume the “explosive situation”…

8. CAPRI CAPRI Training Session at JRC-IPTS, Sevilla, May 16-20 2005 8 Approximating supply p0p0 q p s d s s’ q0q0 Supply function is unknown (supply is a black box) Assume any supply function Starting with some price, compute supply Calibrate the assumed supply function to that point Solve supply + demand simultaneously for new price Iterate…