AAEC 2305AAEC 2305Fundamentals of Ag Fundamentals of Ag

EconomicsEconomics

Chapter 5 - ContinuedChapter 5 - Continued

Factors that Shift the Factors that Shift the Demand CurveDemand Curve

Population Population • The more buyers, ceterus paribus, the greater The more buyers, ceterus paribus, the greater

is demand.is demand. Tastes - Tastes -

• Age, environment, and other geographic & Age, environment, and other geographic & cultural factors can change tastes.cultural factors can change tastes.

• New information about the health New information about the health characteristics of a productcharacteristics of a product

• Advertising & changes in fashionAdvertising & changes in fashion• Technological changeTechnological change

(continued)(continued) Income - Income -

• Normal good - increase in income Normal good - increase in income shifts demand curve outward (& vice shifts demand curve outward (& vice versa)versa)

• Inferior good - increase in income Inferior good - increase in income shifts demand curve inward (& vice shifts demand curve inward (& vice versa)versa)

(continued)(continued) Price of Related Goods -Price of Related Goods -

• Substitutes - increase in the price of a Substitutes - increase in the price of a substitute, the demand curve for the substitute, the demand curve for the related good shifts outward (& vice related good shifts outward (& vice versa)versa)

• Complements - increase in the price of Complements - increase in the price of a complement, the demand curve for a complement, the demand curve for the related good shifts inward (& vice the related good shifts inward (& vice versa)versa)

(continued)(continued) Expectations-Expectations-

• Expectations about future prices, Expectations about future prices, product availability, and income can product availability, and income can affect demand.affect demand.

Factors that Shift the Factors that Shift the Supply Curve Supply Curve

Resource Prices-Resource Prices-• Increase in input prices results in an Increase in input prices results in an

inward shift of the supply curveinward shift of the supply curve TechnologyTechnology

• Technological improvements allow Technological improvements allow producers to produce more of a good producers to produce more of a good with the same amount of inputswith the same amount of inputs

(continued)(continued) Taxes & Subsidies- Taxes & Subsidies-

• Taxes are treated as costs - increase in taxes Taxes are treated as costs - increase in taxes results in an inward shift of the supply curve.results in an inward shift of the supply curve.

• Subsidies - reduce costs and cause outward Subsidies - reduce costs and cause outward shift in supply curveshift in supply curve

Prices of other Goods-Prices of other Goods-• Increase in the price of a another good Increase in the price of a another good

would result in an inward shift of the supply would result in an inward shift of the supply curve of the related goodcurve of the related good

(continued)(continued) Expectations- Expectations-

• Expectations about future prices can Expectations about future prices can affect supply today.affect supply today.

Number of sellers-Number of sellers-• The supply curve shifts outward as The supply curve shifts outward as

new firms enter an industry (& vice new firms enter an industry (& vice versa)versa)

4 Types of Markets4 Types of Markets Pure CompetitionPure Competition Monopolistic CompetitionMonopolistic Competition OligopolyOligopoly MonopolyMonopoly

In this chapter, we are going to focus In this chapter, we are going to focus on perfectly competitive markets.on perfectly competitive markets.

Pure CompetitionPure Competition Up to this point, we have assumed Up to this point, we have assumed

perfect competition and will discuss perfect competition and will discuss perfect competition in more detail in perfect competition in more detail in this chapter. We begin with perfect this chapter. We begin with perfect competition because it is basic to competition because it is basic to understanding of the economic system understanding of the economic system and a benchmark against which other and a benchmark against which other market forms may be compared.market forms may be compared.

Characteristics of Characteristics of Pure CompetitionPure Competition

Many Buyers & SellersMany Buyers & Sellers Homogenous ProductHomogenous Product Freedom of Entry & Exit (i.e. there Freedom of Entry & Exit (i.e. there

are no barriers to entry)are no barriers to entry) Perfect InformationPerfect Information

Long-Run Costs of Long-Run Costs of ProductionProduction

In the short-run, market price In the short-run, market price determines the quantity of production determines the quantity of production as firms make decisions on the basis as firms make decisions on the basis of output price (MR) and MC. In the of output price (MR) and MC. In the long run the opposite occurs. long run the opposite occurs.

The The long-run cost of productionlong-run cost of production determines the price of a product or determines the price of a product or service.service.