Exam 1

Chapter 1

1/21/2014 9:50:00 PM

Ag Econ: an applied social science dealing with how humans choose to use technical knowledge and scarce productive resources such as land, labor, capital and management to produce food and fiber and distribute it for consumption to various members of society over time. -Goes from input, buyer, farm, to product. W.M. Hays and Andrew Boss, University of Minnesota First ag economists were actually trained agronomists. Established a route system for collecting cost and input data such as labor costs as well as management practices from a number of farmers. H.C. Taylor, University of Wisconsin and T.N. Carver, Harvard Created first ag econ book. Agribusiness: The sum total of all operations involved in the manufacture and distribution of farm supplies; production operations on the farm; and the storage, processing, and distribution of farm commodities, and items made by them. Scarcity: The condition created when society (individual) has unlimited wants or needs but limited resources in order to satisfy these wants or needs. Opportunity Costs: The costs of alternative opportunities foregone or sacrificed. (If you have a dollar and you spend it on candy, you cant spend it on ice cream.) You give up one thing for another thing. Law of Diminishing Marginal Utility: The principle that the more of a good we have, the less we value an additional (marginal) unit of it because we receive less satisfaction for each addition unit of a good we consume. The satisfaction (utility) we receive from consuming the 1st ice cream cone is greater compared to the satisfaction from consuming the 10th ice cream cone (after already consuming 9 cones earlier)

Microeconomics: Field of econ that studies the decision making of a single economic entity. A consumer or a producer. Producer wants to produce more so they can have more money, and a consumer wants to own, do, ect more things. Macroeconomics: Field of economics that studies the larger economic system and the impact that changes in policy have on the major aggregate economic variables of the economies such as employment, unemployment, and national income (GDP). Economic Model: A simplification of reality where assumptions are made to explain or predict economic behavior. Economic models may be simple ifthen statements, a word description, a diagram or graph relating two variables, or a complex mathematical equation. Uses price and quantity, and finds the relationship between them. Could be simple as if the number of teachers decrease at LSU, the number of students in classes will increase. Positive Economics: What is or what can be. Looks specifically at numbers, and says if this happens, then this will happen. Doesnt have any value judgment; looks at data. Normative Economics: What ought to be or what should be done. Has to deal with someones value judgment. Obama would be someone who would say Healthcare will benefit the people, and that they should have it (based on his opinions). Dependent Variable: A variable in which its magnitude is reliant upon one or more independent variables. Independent Variable: A variable which influences or impacts the magnitude of the dependent variable in an economic model. The amount of studying you do will depend on how many courses you are taking. Dependent= amt of studying Independent= # of courses. Ceteris Paribus: all other things remaining equal or constant.

Used by economists a lot because they just look at models, or at things that have happened historically. Trying to keep everything constant. Parity: keeping everything constant. o The way it works in the NFL, the teams that do well during the season, get low talented members while the not so well teams get the higher talented members so that the playing field is even.

Chapter 2
**pick a parish and go to the USDA website and write information about it. Family Farms Family farms are incorporated for 3 reasons A corporate form of organization can be used to transfer farms to others (father to son) at a lower cost than other forms of business organization. Employee benefits such as social security and unemployment insurance are tax deductible for the corporation, but not an individual proprietorship. A corporation can separate management from ownership in or to reduce liability of both management and owners. (you can separate things so if you get sued for one thing, it wont affect the others.) Classifying farms by value of farm products sold. Sales >$100,000 (expanding class) produce 82% output, received 62% of government support payments, off-farm income $37,392 per farm. Sales between $20,000 and $99,000 only produce 14% output, receives 26% of government payments, off-farm income is $63,396 per farm. Sales less than $20,000 is considered a Non-commercial class. Offfarm income $49,678.

Vertical Coordination: the linking of successive stages in the marketing and production of a commodity in one decision entity. (Vertical Integration)

Cooperatives: A business that is organized, capitalized, and manages for its member patrons furnishing or marketing goods and services to the patrons at cost. Member patrons receive patron dividends which are a return of the profits or net savings of the cooperative. They are often returned based on the magnitude of transaction made between the cooperative and the farmer. The most common types of cooperatives are supply and marketing cooperatives. Trends in Farm Characteristics and Output Number of farms decreasing, but much larger. Farm workers have declined due to ag productivity increases.

ERS County Typologies Farming Dependent o 15% or more of earnings from farming or 15% or more of residents in farming occupations between 1998-2000 (440 total counties, 403 rural counties) Mining Dependent o 15% or more of earnings from mining activities between 1998-2000 (128 total counties, 113 rural counties) Manufacturing Dependent o 25% or more of earnings from manufacturing activities between 1998-2000 (905 total counties, 585 rural counties) Federal/State Government Dependent o 15% or more of earnings from government activities between 1998-2000 (381 total counties, 222 rural counties) Service Dependent o 45% or more of earnings from service activities (retail trade, finance, insurance, real estate and other services) between 1998-2000 (340 total counties, 114 rural counties) Non-specialized o All counties that do not fall in the other classifications between 1998-2000 (948 total counties, 615 rural counties)

Farm Production by Commodity Type

Livestock Farmers are greatest in number. They account for 35% of farms with sales of $5000 or more. Cash Grain is the second highest in number. Other large producing commodity types include Other Field Crops and Dairy.

Agribusiness: Agribusiness includes not only commodity production but includes value-added commodity processing, marketing, transport, and wholesale/retail activities. Agribusiness Sector Cattle Farmer Sugar Cane Farmer Crawfish Farmer Cargill ADM Mc Donalds International Paper JB Hunt Agribusiness Agricultural commodities are a growing export for the US from 7.25 billion in 1970 to 51.83 billion in 1998. Simultaneously, increase in imports from 5.77 billion in 1970 to 37.07 billion in 1998. Much of the increased exports and imports due to increasing level of free and lower-cost trade of agricultural commodities from free trade agreements. Trade major impact on agriculture with 23% of all farm income derived from agricultural products exports.

Gross National Product: Total value of all finished goods and services produced in the economy of a country in a given time period by all businesses headquartered in this country whether these goods and services were produced in the United States or overseas. Gross Domestic Product: Total value of goods and services produced within the United States by either foreign or domestic resources. US Headquarters

o o Rest o

Raising Canes- (US) GDP & GNP Dell- (US) GDP & GNP (other country) GNP of World headquarters Toyota- (US) GDP

Calculating GDP Expenditure Approach Summing up the value of all purchases made by final consumers (households). Income Approach Summing up all the incomes earned in the factor markets including wages and salaries, interest, rents, and profits minus business taxes, capital consumption, and US income earned overseas. -profit and labor inputs= GDP for the income approach -The difference between the total output and household spending (GDP) is the double counting. For the expenditure approach, the double counting is the sum of purchases made by producers from other producers in the marketplace. Monetary policy: Influences economic activity in the system through the governments actions in managing the money supply and interest rates. Fiscal policy: Influences economic activity through the governments exercising of its taxing and spending activities. http://www.ers.usda.gov/StateFacts/ Average farm size (acres) 2007- 269 acres Top commodity 2007- Rice Top Parish 2007- Union Parish (for Louisiana) These 3 questions will be on the quiz. Chapter 3 Utility: the satisfaction consumers get from consumption. Marginal: additional utility you get. Marginal Utility: Additional satisfaction from consumption. Laws of Economics

Law of Diminishing Marginal Utility: When someone consumes an additional amount of a good, assuming the consumption of all other goods remains unchanged, satisfaction from the consumption of that additional good decreases. Ordinality of Utility While it may be helpful to think of how many more utils you feel by consuming an additional amount of the good, no one person measure utils in the same way. As a result, we measure utility by its order or ranking. Understanding Ordinality Example Beauty Pageant o We may know who the winner is and 1st runner up and 2nd runner up, but we dont know how much the winner beat the first runner up and the second runner up by. Consumer Choice In microeconomics, we desire to understand how consumers choose to purchase one bundle of goods and over an alternative bundle. The tool we used to measure how consumers choose among two different bundles of goods is known as an indifference curve. Indifference Curve: A line that represents all the different combinations of two goods that are consumed that provide the consumer with the same level of utility. Properties of Indifference curve Downward sloping to the right o If a consumer gives up some amount of one good, they must be compensated with an additional amount of the other good to keep the consumer with the same level of utility. Convex to the origin o The marginal rate of substitution decreases (in absolute value) as one moves along the indifference curve from top left to bottom right. Indifference curves do not intersect o Indifference curves above (below) a given indifference curve represent bundles of two goods that provide higher (lower) utility to the consumer. Marginal Rate of Substitution (MRS)

MRS is the slope of the indifference curve. The rate at which one good is substituted for another good while maintaining the same utility. MRSab=(the change in) b/(the change in) a The marginal rate of substitution of good a for good b equals the total change in good b divided by the total change in good a. Its always going to be negative. A (8,10) B (16,6) MRS12= (6-10)/(16-8)=-4/8=-1/2 The consumer is willing to give up unit of good B to get one more unit of good A. Another way to think of MRS is to think of the marginal (additional) utility gained and lost moving from one bundle of consumption to another. From the last formula we can see that the Marginal Rate of Substitution is equal to the ratio of the marginal utilities. (the change in)X1MU1+(the change in)X2MU2=0 (the change in)X1MU1=(the change in)X2MU2 (the change in)X1/(the change in)X2=MU2/MU1 MRS: It is important to recognize that MRS measures the slope of the indifference curve between any two points. As a result, as we move down the indifference curve from top left to bottom right, we move from large negative MRS values to small negative MRS values. This would make sense given that at the top left of a traditional convex indifference curve, you are consuming a large amount of good 2 and a small amount of good 1 and would be willing to give up a large amount of good 2 to get one more unit of good 1. Two extreme forms of substitution between goods. o Perfect substitutes: Goods can always be substituted in the same ratio. o Perfect compliments: goods are only consumed in fixed proportions.

Budget Line Line on a graph showing all combinations of the consumption of two goods given prices for the two goods and a level of income of the consumer.

It shows the maximum amount a consumer can consume of two goods given their budget constraint. Constructing a Budget Line Step One: Identify price of two goods to be consumed. o Good 1: Raising Canes Chicken Fingers $5 Combo Good 2: Izzos Super Burrito $10 Combo o Indentify consumers income (weekly or monthly or yearly) Step Two: Create two points in the top right quadrant of the graph. o Calculating point 1- income of consumer divided by price of good 1 $100 income/ $5box Raising Canes=20 Label horizontal axis as Raising Canes and vertical axis Izzos and place point 1 at (20,0). o Calculating point2- Income of consumer divided by price of good 2 Step Three: Connect two points. We have now introduced two lines. Indifference Curve (Equal Satisfaction Line): A line identifying all combinations of two goods that give us equal utility or satisfaction. Budget Line (Equal Affordability Line): A line identifying all combinations of two goods that we can consume given our budget constraint. When we put the two line together, we can identify the level of consumption of the two goods that maximizes our utility or satisfaction given the constraints on our budget. Point of Tangency: Where the consumers utility is maximized given a budget constraint. Consumer Equilibrium We can also represent consumer equilibrium mathematically. o MRS Equal to the ratio of the marginal utility of the two goods. MU1/MU2=(the change in)X1/(the change in)X2 o Consumer equilibrium occurs where the ratio of the marginal utilities for two goods equals the ratio of the price of the two goods. (P=price) also shows slope of MU MU1/MU2=P1/P2

Another way to think of consumer equilibrium is that the marginal utility we receive per dollar of good one equals the marginal utility we receive per dollar of good two. Effect of Price Change To find a consumer equilibrium, we assume a given price for each of the two goods and an income in order to calculate a budget line. What happens if the prices for the two goods change? If Canes raises their price, our budget will decrease, so we will have to draw another budget line. But because the price of chicken fingers has gone up, they will have to decrease their consumption of fingers, and the consumption of burritos will increase. Substitution effect o The price of fingers has become relatively higher than the price of burritos before the price change. The result is the consumer shifts away from the higher priced product to the lower priced product. Income effect o The real income of the consumer has decreased. o The $100 now will buy only 15 boxes of chicken fingers as

compared to 20 boxes before the price increase. o The inflation has resulted in the consumer having less real income to purchase goods. Demand Curve: Shows the quantities of a good that an individual consumer will buy at different prices for that good at a point in time, everything else is unchanged. Market Demand Curve: Shows the quantities of a good that all consumers will buy at different prices for that good at a point in time, everything else unchanged. Demand Curves Demand curves are downward sloping because each individual consumer receives less additional utility for each additional amount of a good consumed; hence the price of the good must fall in order for the consumer to purchase more of it. Price Elasticity of Demand: Measures the responsiveness of quantity demanded to changes in price, ceteris paribus.

The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price. We sometimes call the price elasticity of demand the own price elasticity of demand because the elasticity value calculated is based on the change in the price of the good from which we are calculating the elasticity. Calculating Own Price Elasticity of Demand E(d)=[(Q1-Q2)/(Q1+Q2)]/[(P1-P2)(P1+P2)] Q1- quantity of first observation Q2-quantity of second P1-Price of first observation P2-Price of second E(d)-Price Elasticity of Demand Categories of Price of Elasticity If the demand for a good is price inelastic, for a one percent increase (decrease) in price, there is a less than equal one percent decrease (increase) in quantity demanded. If the demand for a good is price elastic, for a one percent increase (decrease) in price, there is a greater than one percent decrease (increase) in quantity demanded. If the demand for a good is price unitary elastic, for a one percent increase (decrease) in price, there is a one percent decrease (increase) in quantity demanded. influencing Price Elasticity Greater number of substitute products higher elasticity. Greater number of uses of a product higher elasticity. More important the expenditure a product is in a consumers total budget, higher elasticity

Factors

Changes in Demand When the price of a good increases (decreases), the quantity demanded of a good decreases (increases), other factors constant (ceteris paribus) o Results from the price change. However, when the price of a good is held constant and other factors change we have a shift in the demand curve.

o Results from the change of everything else (preference, budget, ect) Shifts in the Demand Curve What drives a shift in the demand curve? o Increase in demand for goods from an increasing population. o Decrease in demand from tastes and preferences of consumers. Donut demand decrease due to Atkins craze. Income Elasticity of Demand: measures the responsiveness of the quantity of good demanded with changes in income, holding all other factors constant. Engel Curve: A curve showing how quantity demanded changes given changes in a consumers income.

Chapter 4
Land: All the physical characteristics of this input to yield a product including the soil and the natural environment it is contained within. Labor: The physical act or effort of performing a task by humans. Management: Humans who are responsible for decision making. Includes entrepreneurial functions of Risk bearing Organizing resources Resource decision choice Capital: the physical or tangible resources used to aid Production Function: the particular set or combination of resources (inputs) used to produce a given level of product (output). Formula for production function- Y=f(X1,X2..) Y: product (output) X1..: each of the resources (inputs) used to produce the given product (output). Production Function Example If we want to grow more than 3 lbs of tomatoes, we can adjust the resources (inputs) in one of two ways

Constant Proportion Increase When output (Y) doubles when all inputs are doubled, this relationship is know as constant returns (if we change the inputs by some percent, we will have the same percent of change in the output.) Changing proportion Increase Changing only one variable while everything else remains unchanged. o Y=f(X3|X1,X2) The variable before the line is the one being changed. Graphing the Production Function We can graph the relationship between inputs and output from the production function. Output depicted on the graph is known as Total Physical Product (TPP) (THERE IS A DIFFERENCE IN MAXIMIZING PRODUCT AND PROFIT.) Total Physical Product Output is measured on the vertical axis Inputs are measured on the horizontal axis GRAPH A REPRESENTS THE CONSTANT RETURNS CASE. The shape of graph B indicates that the law of diminishing returns is in effect. Law of Diminishing Returns: As successive amounts of a variable input are combined with a fixed input in a production process, the total physical product will increase, reach a maximum and eventually decline. Marginal Physical Product (MPP): an amount added to total physical product when another unit of the variable input is added. MPP=delta (change in) TPP/delta (change in) X1 OR deltaY/delta X1 MPP= (245-75)/(20-10) o As long as MPP is positive, the TPP is increasing. Average Physical Product (APP): Stage 1 (irrational): from zero to where MPP and APP intersect. Stage 2 (rational): from the MPP and APP intersection, to where MPP reaches zero. (maximum product) Stage 3 (irrational): not smart to produce here.

Where MPP intersects with zero, TPP is at its maximum. Where MPP=APP, APP is maximized. Where TPP curve switches from a convex shape to a concave (inflection point) is where MPP is maximized. Technical vs Economic TVP (Total Value Product): the number of the product produced times its price. AVP (Average Value Product): APP times price. MVP (Marginal Value Product): MPP times price. MFC (Marginal Factor Cost): MFC= the price of it. Choosing Optimum The optimum is reached where one more unit of the input adds to the revenue just what it costs. MVP=MFC (profit= revenue- cost) Net Revenue=Total Revenue-Total cost Total revenue=TVP Calculating Optimum Input Levels from MVP, MFC table Optimum level occurs right before MFC is greater than MVP. Changes in Optimal Quiz 4 -Rational stage=Stage 2 -Irrational= Stage 1 and 3 -The boundary between stages 1 and 2 of productions is at the point where MPP is equal to APP-True -The boundary between stages 1 and 2 of production is at the point where MPP is maximized-false -The boundary between Stages 2 and 3 of production is at the point where MPP equals 0-true -Stage 1 of productions is irrational because additional units of input will cause TPP to decrease-false -Stage 2 of production is irrational because additional units of input will cause APP to decrease-false -Stage 3 of production is irrational because additional units of input will cause TPP to decrease-true

-Profit maximization occurs at the point where Marginal Revenue=Marginal Cost and Marginal Value Product=marginal factor cost. Key Points for Test Do questions at the end of each chapter. Chapters 3 and 4 -Construct budget line, importance of budget line. (formula) Represents maximum quantity of goods given a specific income. -Interpret and describe indifference curve, indifference curves do not cost. downward sloping -definition of marginal rate of substitution. -Change in demand is a shift in the demand curve (income change) change in quantity demanded (change in product price) -calculate elasticity of demand -know which stage is rational and irrational, know everything dealing with the stages. What occurs at boundaries. -know all the MPP, APP, ect. -know material from quiz 4. Chapters 1 and 2 -Know difference between positive and normative economics. -understand difference between independent/dependent variables. -understand ceterus parabis, law of diminishing marginal utility, trends in ag industry recently (increase in # of farms, less # of farmers, dont need as much labor due to machines) -scarcity refers to a condition created when society/individual has an unlimited want and need. (society has unlimited wants, but limited resources) -know opportunity cost, ag business, cooperative -agriculture is extremely dependent on the world market because we produce more food than we can consume. -dont need to know avg size of farm, top commodity, ect.

Exam 2
Chapter 5

1/21/2014 9:50:00 PM

Understanding Producer Decisions In many cases, a producer faces the decision of varying multiple inputs to produce a given output. (farmers using round-up on plants) Factor-Factor relationship. Two Variable Production Function As the TPP curve was the representation of one factor, and isoquant shows 2. Isoquant: a curve that shows all combinations of the two variable inputs that can be used to produce a given quantity of output. (isoquant=equal value) An isoquant is the graphical equivalent in production economics to what the indifference curve is to consumption economics. Increase in production when moving towards top right, decrease moving towards bottom left. Resource Substitution: the technical relationship that occurs when one input can be substituted for another in production while yielding the same level of output. Perfect Substitutes: where one input can be exactly substituted for another in production. Perfect Compliments: where two inputs can only be used in production in a fixed ratio and cannot be substituted for one another. (as we add one more unit of this resource, we have to add on more unit of another resource). Imperfect Substitutes: where larger and larger amounts of a second variable resource (input) are required to replace.. Marginal Rate of Substitution: the number of units of X2 that X1 can replace without changing output. This is analogous to the indifference curve where we choose different consumption bundles but the level of utility is held constant. Calculating the MRS along an isoquant is the slope of the curve. (rise over run) If you take part of production out, you have to add production somewhere else to keep the same level of output. (if you decrease X2, you have to increase X1 to keep output equal)(If you just reduce X2 and not X1, you would have to refer to a lower isoquant.) When we reduce the use of one input without increasing the other input in production, we reduce the level of output by the Marginal

Physical Product (MPP) of the reduced input multiplied by the magnitude change of that reduced input. Delta Y=MPP1xDeltaX1 As we move along an isoquant, the reduced level of output resulting from decreased use of X2 is compensated by increased output from the use of X1. o (DeltaX2/DeltaX1)=(MPPX1/MPPX2) Isocost Curve: Similar to the budget line. The isocost curve identifies all the combinations of the two given inputs that can be afforded to produce a given level of output. Three pieces of info required-price of input X1 (Px1), prices of input X2 (Px2), and the total amount of money to be spent on inputs. Combining Enterprises Agricultural commodity producers often have to decide what is the optimal combination of commodities to produce maximum profit and how much of each good should they produce? Production Possibilities Curve: shows all possible combinations of two products that can be produced given the set of resources in the firms control. Given the combination of two goods that can be produced for a given enterprise and the prices per unit of the goods sold, we can identify the optimal levels of production of the two goods to maximize profit. Marginal Rate of Product Substitution: (MRPS) Measures the differing rates at which either product will replace (substitute for) the other along the production possibilities curve. Isorevenue Line: Shows all possible combinations of two products sold that will bring the same total revenue. Optimizing Output The optimal combination of the two products to produce (this is the level that maximizes profits) is to produce where the Marginal Rate of Production Substitution is equal to the ratio of the output prices. Different prices on the production possibility curve have different revenue lines tangent to their point. Expansion Path: Show the revenue (and profit) maximizing proportions of Y1 as the firm expands or contracts.

For example in ag, the expansion path would trace the profit maximizing combinations of two commodities to produce given increasing or decreasing farm size.

Chapter 6 Explicit Costs: Costs that have been incurred when money is spent to hire labor, repair machinery, buy seed, ect. Tangible; obviously see. Implicit Costs: A cost that has been incurred in using any resource for which there is not direct cash outlay during the period the resource was being used. Depreciation costs of equipment such as tractors or other machinery. Opportunity Costs: The cost borne by the producer when a resource that is currently being used for one activity is used in its next most valuable (profitable) activity. An opportunity cost is another type of implicit cost. Represents the true costs of production. Giving up more sorghum beans to produce more green beans due to profit increase in green beans. Bookkeeping Profit: Revenues minus expenses. (only explicit) Economic (pure) Profit: Revenues minus explicit and implicit (opportunity) costs. Economic profit is the amount by which net earnings exceed payment required to attract it to (or keep it in) its present use. Variable Costs: Costs that increase or decrease as output changes. Fixed Costs: Costs incurred for resources that do not change as output is changed. Length of Run: A planning concept that defines the level of flexibility in how resources (inputs) can be changed in the production process. Immediate Short Run: a span of time so short that no resources (input) changes can be made in the production process. (farmer planting a seed for the next year, cant change the seed until after this year) Ultimate Long Run: a span of time long enough that all resources (inputs) are considered variable. No inputs can be considered fixed. Length of Run

In many cases, farmers face management decisions between the long run and short run where some inputs are fixes and others are variable. Example: farmer plants a crop (short run) but varies the use of pesticides, fertilizers, ect. (long run)

Total Variable Cost: (TVC) total spending for the variable input. (things you can change in the time period you are working with.) Total Fixed Cost: (TFC) The total costs of all other inputs that do not change as output changes. (where land or machinery is fixed, you cant sell it in one day or week) Total Cost: (TC) Sum of TVC and TFC. Total Revenue: (TR) Synonym of TVP in chp 5; calculated as price per unit of output multiplied by total output level. Pure Profits: Total Revenue (TR) minus total costs (TC). Average Variable Costs: amount spent on the variable input per unit of output. AVC=TVC/Y y represents the level of output for all slides in chp 6. Average Fixed Costs: the cost of fixed resources (inputs) per unit of output. AFC=TFC/Y Average Total Costs: total costs of all the resources (inputs) per unit of output produced. Marginal Cost: the change in total cost when output is changed by one unit. MC=deltaTC/deltaY or deltaTVC/deltaY Marginal Revenue: (MR) the amount added to total revenue when an additional unit of output is produced and sold. MR=deltaTR/deltaY=Py Py is the price of the output Y Relationship Between Production and Variable Costs If we remember the TPP curve from chp 4 where output changes with incremental Curve has 3 regions During the convex proportion of the TPP curve, the input is more productive in producing output. As a result, the marginal cost of producing an additional unit of output declines Marginal costs continue to decline until one reaches the of the convex portion of the TPP curve, which is the inflection point.

During the concave portion of the TPP curve, the productivity of inputs being converted to outputs declines Hence, the marginal costs of producing an additional unito of output in this area of the production function increases. These costs continue to increase until the TPP is maximized (MPP=0). At that point, the MC curve becomes vertical. Inflexion point, where the graph goes from convex to concave, is where MPP is maximized and MC are minimized. Maximizing profit is where Marginal Revenue=Marginal Cost The more you produce, the lower and lower AFC will get because

you are dispersing it over more products. AVC is minimized where it crosses MC. ATC is minimized where it crosses MC. Profit Maximizing Output The profit maximizing level of output (the optimum output level) is found where marginal revenue is equal to marginal cost or MR=MC. The total cost curve has equal but opposite relationships to the TPP curve. o At low levels of input TPP curve is convex o At low levels of output TC curve is concave o At high levels of input TPP curve is concave o At high levels of output TC curve is convex Profit= TR-TC Short Run Supply Curve of Firm The profit maximizing point is based on the relationships between the level of the output price, the ATC, and the AVC. If the output price Py is greater than the minimum cost point on the ATC curve at the point where MR=MC, then the firm is generating economic profit. o Economic Profit: occurs where the revenue made from selling the product exceeds both the explicit costs of the variable inputs used to produce the product and the implicit costs of the fixed inputs used to produce the product. If the output price (Py) is less than the minimum cost point on the ATC curve but greater than minimum point on the AVC curve at the point where MR=MC, then the firm is incurring an economic loss

o At this price of the output, the firm can pay the variable costs of production but cannot cover the fixed costs of production. The firm will continue to produce until the value of the fixed input (resource) is completely depreciated If the output price (Py) is less than minimum point on the AVC curve but where MR=MC, then the firm cannot pay for the variable costs of production o At this price of the output, the firm is better off shutting down and simply incurring the costs associated with the sunk fixed costs rather than continuing to lose more money as more of the output is produced. o The point where output price is equal to the AVC is known as the shutdown point. The economic profit occurs in the shaded area which is simply the difference between the cost per unit of the output where MR=MC and the cost per unit of the output = ATC. Economic profits in the short run become a signal for other potential producers. o As more producers enter the market, two impacts occur The price of the output declines as more output floods the market from additional producers and drives down price The price of the variable and fixed inputs increase as more producers bid up the price of inputs The effect of the downward pressure on the output price shifts the MR curve downward The effect of the upward pressure on input prices results in an upward shift of the AVC, AFC, ATC, and MC curves.

The result of both shifts reduces the economic profits and can even eliminate the Supply Curve: (for the individual firm) The amount of a good or services producers are willing to offer for sale at different prices, ceteris paribus. Graphically, occurs where the marginal cost curve equals different prices of the output, (Py) (i.e. different marginal revenue curves) The individual firms supply curve starts at the minimum of the AVC curve (shutdown point)

Market Supply Curve: The horizontal summation of all individual firms supply curves for a product or commodity. Graphically, it is the horizontal summation of all individual firms marginal costs curves above their minimum AVC. Changes in Market Supply There are two types of changes in market supply: Change in quantity supplied and change in supply. Change in quantity supplied o Movement along a supply curve that shows the changing levels of the product or commodity supplied given changes in the price of the product or commodity o Analogous to movement along a demand curve when one has a change in quantity demanded to a change in the price of the good consumed Change in Supply o A shift in the entire supply curve (supply schedule) o Factors shifting the supply curve include good/bad growing conditions (ample rain/drought), improvement in production technology, reduction/increase in input prices,

reduction/increase in relative prices of other products or commodities, changes in institutional constraints such as changes in acreage allotments under a farm program. Price Elasticity of Supply: A measure of the percentage change in quantity supplied in response to a percent change in price, ceteris paribus. Calculating Price Elasticity of Supply Es=[(Q1-Q2)/(Q1+Q2)]/[P1-P2)/(P1+P2)] Price elasticities are highest in ag commodities where production adjustments are easiest and lower where they are not. Price Determination the point where the demand curve and the supply curve intersect determines the equilibrium quantity of the product sold in the marketplace and the equilibrium price of the quantity sold Market Equilibrium In market equilibrium, the quantity demanded by consumers equals the quantity supplied by producers No shortages or surpluses occur at this market equilibrium price

No tendency to move away from equilibrium as long as there are no changes in demand or supply (supply and demand shifters) o When a market is at equilibrium, there is equality between production and consumption at a specific price. Market Disequilibrium Market disequilibrium occurs when prices are not allowed to change to market forces of supply and demand Results in market shortages or surpluses Price ceilings (keeps price low) create shortages while price floors create a surplus (keeps price high). Quiz 1 1. minimizing the resource cost of producing a particular commodity is referred to as the least cost combination. 2. The line which shows the amounts of two resources that can be bought for a given amount of money is referred to as the isocost line. 3. The line representing all possible combinations of two products sold that will bring the same TR is referred to as the isorevenue line. 4. The line showing the revenue and profit maximizing proportions of two products as the firm expands or contracts output is the expansion path. 5. The full range of feasible allocations for a firm is referred to as its production possibilities. 6.The line showing all combinations of inputs that result in the same quantity of an output is referred to as the isoquant. 7. The slope of the production possibilities curve is the marginal rate of product substitution. 8. The slope of an isoquant is the marginal rate of substitution. CALCULATE MARGINAL RATE OF PRODUCT SUBSTITUTION= delta Y2/delta Y1 TOTAL REVENUE= (P1xY1)+(P2xY2) PROFIT MAXIMIZING POINT IS Py1/Py2 AND FIND MARGINAL RATE OF PRODUCT SUBSTITUTION THAT COORESPONDS WITH IT. Quiz 2 TABLE WITH TVC; TFC; TC; AVC; AFC; ATC; MC TC=TVC+TFC (figure out total cost first)

AVC=TVC/output AFC=TFC/output (as output goes up, AFC continuously declines) ATC=TC/output MC=deltaTC/delta output Setting MC to MR(price) [answer choice will be the output] Quiz 3 1-4 Identify the curves [from top to bottom, its MC, ATC, AVC, AFC] Adding average fixed cost to average variable cost will give you average total cost. Marginal Revenue curve would be a line straight across the graph. 6. The shutdown point is where marginal cost intersects average variable cost. 7. The lowest point on the firm level supply curve is the shut-down point. 8-9 Calculating price elasticity [(Q1-Q2)/(Q1+Q2)]/[(P1-P2)/(P1+P2)] 10. A Supply Elasticity that is equal to 1.0 is referred to as Unitary Elastic. 11. A Supply Elasticity that is greater than 1.0 is referred to as Elastic. 12. A Supply Elasticity that is less than 1.0 is referred to as Inelastic. 13. The government fixing the price of a commodity at some level below the equilibrium price will result in a shortage. 14. The government fixing the price of a commodity at some level above the equilibrium price will result in a surplus. 15. If the supply curve for rice shifts to the left due to weather conditions, the equilibrium price will increase. BONUS WILL BE RELATED TO MATERIAL.

Exam 3

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Chapter 7 Function of Price In a free enterprise economy, the market is decentralized. No centralized forces such as government determining allocation decisions (how much to produce or what inputs to use) Prices determine allocation of resources in a market-oriented economy. When a good becomes more scarce relative to the demand for it, the price of the good increases. This relative price increase is a market signal o Higher prices signal consumers to purchase less of the good and purchase more of available substitutes. o Higher prices signal producers to increase production to take advantage of increase revenue opportunities. o Helps to find equilibrium. Price allows the market to be an efficient allocation of resources. Classification of Markets Two extreme classifications o Pure (perfect) Competition o Pure Monopoly Pure Competition Properties of a market with pure competition o Many firms in an industry Output of firm is such a small percentage of the overall output of entire industry that firm has no influence on price. o Homogeneous product The product sold has either uniformity in all physical characteristics or the market has a common standard or grading procedure to make similar products homogeneous in classification. The market cannot discriminate through the pricing mechanism to prefer one firms homogeneous product over the other. Examples might include corn, eggs, USDA Choice beef. o Freedom of entry and exit

An individual firm or farmer can enter or leave the market based on what the costs and returns might dedicate without restrictions or encouragement. Government regulations such as acreage allotments for specific commodities can be a barrier to entry or exit for farmers. Price Taker: A firm must take the market price of a commodity thus having no influence on the price per unit that the firm sells. Firms in a perfectly competitive market are price takers. An individual that is a price taker faces the perfectly elastic demand curve (horizontal MR curve). Pure Monopolist Properties of a market with pure monopolist o An individual firm is the only firm producing the product therefore the individuals supply curve is the market supply curve. The product is often considered a fully differentiated product having no effective substitutes. (only firm producing in that market; o The pure monopolist faces a perfectly inelastic demand curve. (by choosing the level of supply the firm will sell to the market, the individual firm can determine the market price of the product) o There are measurable barriers of entry and exit Monopolist firm owns or controls inputs to produce product. High initial fixed costs in capital Pure Monopoly # of firms-one Product differentiation-total Freedom of entry and exit-none Pure Competition # of firms-many Product differentiation-none Freedom of entry and exit-complete

Normal profits: Profits that occur to the firm because each resource in the firm is earning a return that is neither greater nor less than its next-best employment possibility (its opportunity cost). Sometimes referred to as market equilibrium. No firm is encouraged to enter or leave the industry because earnings are neither better nor worse than they would be elsewhere in the system. Producing at no profit, but basically getting a return to the resources used. Where MR, MC, ATC intersects. Zero profit, equilibrium. Economic rent: surplus earnings made by the firm. Economic rent and economic profits are synonyms. (firms come in to the market driving the price down) MR (P) curve will decrease. -Profit margin is the difference between the price being sold at and what the total cost is (point where MC and P intersect and corresponding point on ATC curve) Negative economic rent: when the firm incurs losses. Negative economic rent and economic loss are synonyms. (firms will leave the market driving the price up) MR (P) curve will increase. -profit margin is the difference between the point on ATC curve and MC curve. Efficiency of Pure Production Normal profits for the firm occur when firm receives a price that covers all variable and fixed costs of production but does not generate economic profits. Normal Profits occur where MR=MC at the minimum of the ATC curve. This point is also the long-term equilibrium price for the product. Effects of Disequilibrium on the Market Two forms of disequilibrium cause the market to make structural changes when a firm generates positive economic rents and negative economic rents. Positive Economic Rents When a firm receives positive economic rents, other firms enter the market producing the product and lowering the market price, all firms bid up the input price resulting in upward shifts of the MC

and ATC curves, and a new long term equilibrium occurs where P=MC at the minimum of the ATC curve. Negative Economic Rents When a firm receives negative economic rents, other firms leave the market reducing the product on the market and raising the market price, fewer firms purchasing input to produce the output resulting in lower input prices and downward shifts of MC and ATC curves, and a new long term equilibrium occurs where P=MC at the minimum of the ATC curve. Disequilibrium Conclusion When either positive or negative economic rents occur, the market eliminates the rent by adding or removing firms and increasing or decreasing input prices. The end result is a long-term market equilibrium whether the remaining firms receive normal profits. Length of Run and Market Supply Previously stated, in the short run, all variables affecting the output are fixed and in the long run, all variables affecting the output are variable. Hence, in the short run, all individual firms supply curves are inelastic; meaning that no increase in the output price will result in increased output supplied to the market. (no matter what price you put on the output (high or low), the same amount of output will be produced) But in the long run, the firm can adjust all inputs to increase output resulting in a perfectly elastic market supply. (change in price will result in a change in output; vice versus) Chapter 8 Comparing Marginal Revenue between Competition and Monopoly Perfect Competition: because there are so many firms in the industry, an individual firm cannot affect price, so they must take the market price (MR) as the output price. Therefore, the horizontal MR curve is the demand curve for the individual firm. Pure Monopolist: the firms individual demand curve is the same as the market demand curve. Therefore, the only way for the monopolist to increase its demand is to decrease its output price.

Hence, the marginal revenue and demand curve are two separate curves for the monopolist. Monopolist Terms Total Revenue: price of good times the number of good sold. Marginal Revenue: Change in total revenue divided by the change in output/sales. MR= deltaTR/deltaQ Profit Maximizing for Monopolist The profit maximizing output level is where MC=MR. But the MR curve is downward sloping below the demand curve. The profit per unit of output is the point on the ATC curve that corresponds with the point where MC=MR subtracted from the point on the demand curve that corresponds with the point MC=MR. HENCE the profit is driven by the demand curve.

Final
Chapter 15

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When you have excess supply, you will export your product When you have a higher demand than the amount of product youre supplying, you will import that profit from other countries.