Consumer Demand

1. Consumer Demand • Various quantities of a commodity that an individual is willing and able to buy as the price of the commodity varies holding all other factors constant.

2. Consumer Demand • Demand begins with individual consumer • Inverse relationship between quantity and price • Two dimensional, Price and Quantity

3. Downward sloping demand • Begin with individual’s utility function and a budget constraint • Substitution effect • consumers buy what’s cheaper • Income effect • “income” increases if prices fall

4. Per Capita Consumption in Pounds

5. Per Capita Consumption in Pounds

6. Market or Aggregate Demand • Add individual demand curves • Horizontally across consumers • http://www.aaec.vt.edu/rilp/Demand%20Changes-2000.pdf (Pages 1-10)

8. Demand is a function of • Price of substitutes • Price of complements • Consumer income • Taste and preferences • IS NOT FUNCTION OF THE GOOD’S OWN PRICE

9. Change in Demand orin Quantity Demanded Moving from A to B due to a price decline is a change in quantity demand. Px A A shift of the demand curve from D1 to D2 is a change in demand. B C D2 D1 Qx

10. Factors effecting aggregate demand for a product • Exports • New product development • Advertising • New information • Product differentiation

11. Income effect on food demand • Food is normal good • Income demand • Particularly important for meats • Emerging economies • Services are a normal good • Income services

12. Inverse Demand • Price is a function of quantity • P = f(Q) • Important in agriculture • Short run supplies are relatively fixed • Prices change to clear the market

13. Supply • The amount of a given commodity that will be offered for sale per unit time as the price varies, other factors held constant.

14. Supply • Derived from cost function • Production function • Input - output relationship • Assume that firms seek to • Maximize profits • Minimize costs • Supply starts will individual firm

15. Production Function Output Total Product Decreasing returns to the input Increasing returns to the input Input

16. Opportunity cost • The opportunity cost of commodity A is income forgone by not producing commodity B. • Measures of opportunity cost • Market value of input • Expected return over other cost of not producing commodity B.

17. Cost Curves • Average variable cost = AVC • Total variable cost / Q • Variable costs change with Q • Average fixed cost = AFC • Total fixed cost / Q • Fixed costs do not change with Q • Average total cost = ATC = AVC+AFC

18. Cost Curves • Marginal cost = MC • Change in total cost by producing 1 more • TC / Q

19. Cost curves Cost MC ATC AVC Q

20. Supply curve • MC curve above AVC curve • Upward sloping curve • Optimal output @ MC = MR • MR = Price => Optimal at MC=Price • The last unit of input just pays for itself

21. Profit • Profit = total revenue - total cost • TR= P x Q • TC = ATC x Q • Profit per unit = Profit/Q • = TR/Q - TC/Q • = P - ATC • Profit maximizing Q • MC=MR=P • Profit/Q = P-ATC at optimal Q

22. Optimal Q at P=MC Cost MC P2 ATC AVC P1 Q1 Q2 Q

23. Market or Aggregate Supply • Combination of individual supply schedules • Add horizontally across firms • Flattens with time • More time to adjust supply

24. Market supply curves SLong run SShort run Px Qx

25. Cost curves and supply • Shut down if P < AVC • Lose on every unit produced • P>AVC make some payment to fixed cost • In the long run everything is variable • Short run defined by having fixed cost • Long run supply curve for individual • Low point on ATC curve

26. Market supply curves S1 Move from A to B is a change in quantity supplied due to a price decline. Px S2 A B C Move from B to C is a shift in supply. Qx

27. Supply Shifts from Change • in input prices • in returns for competing enterprises • in technology on yields or costs • in price of joint products • in yield and/or price risk • institutional constraints

28. Additional references • Reading room Agricultural Product Prices, Tomek & Robinson Chpts 2 and 4.