AED Economics 200
Principles of Food and Resource Economics
Winter, 2003

 

2.  Supply, Demand and Price - Theory and Applications

 
Demand - Relationship between quantity demanded of good and:

Price of good
Income
     Normal good
     Inferior good
Preferences
Price of related goods
     Substitutes
     Complements
Number of buyers
Price expectations
Supply - Relationship between quantity supplied of good and:

Price of good
Price of relevant resources (and other goods)
Technology
Number of sellers
Price expectations
Taxes and subsidies
Government restrictions
Slope of Demand - reflects diminishing willingness to pay

Slope of Supply - reflects diminishing marginal returns (or increasing marginal costs)

Equilibrium - intersection of supply and demand

-  price at which buyers and sellers trade voluntarily
-  all that is produced is consumed; no shortage or surplus

 
Changes in Supply and/or Demand (Exhibit 3-19)

Disequilibrium

Surplus (Exhibit 3-21)
Shortage (Exhibit 3-20)
Examples of supply-demand analysis

  1. Increased input price (e.g. fuel) in output market (e.g. electricity)

  2. Technological improvements

  3. Population and income increases

  4. Government regulations

  5. Excise tax on beer

  6. Rent control

  7. Support price for milk

  8. Conservation Reserve Program for grains

  9. Tobacco quotas

  10. Import quotas for autos

  11. Minimum wage

  12. Freeway congestion

  13. University enrollment

  14. Ticket scalping
Non-price Rationing Devices for Shortages
  1. lines (queues)
  2. allocation based on "merit"
  3. black markets
  4. payments or bribes
Handling Surplus
  1. Destroy
  2. Store
  3. Move to another market
Economic Welfare Using Demand and Supply Curves

Consumer Surplus - area illustrating difference between max. willingness to pay and price

Producer Surplus - area illustrating difference between price and min. willingness to sell
Power of the Market (Forster)

-   enables people to cooperate peacefully while pursuing their self interest.  Noble goals (altruism, selflessness, etc.) are not needed. A workable system evolves that depends on the less laudable, but more realistic side of human nature (greed).
-   transmits information
-   provides incentives
          to adopt new methods of production
          to use resources frugally
          to produce products that are highly valued by consumers
-   determines distribution of income
Markets:
Product markets
Resource or input markets
Market Participants
Consumers
Producers (firms)
Resource owners
Speculators
Government
Efficient Markets
Prices reflect all available supply and demand information
Performance of "experts"
Earning above "normal" profits
Role of speculator
Agricultural Producers Typically Face These Markets:

Cash or sport markets
Futures markets
Options markets
          put options
          call options

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