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AGEC 429: AGRICULTURAL POLICYLECTURE 7: CONSUMER ANDPRODUCER BEHAVIOR I
AGEC 429 Lecture #7CONSUMER AND PRODUCER BEHAVIOR IAgricultural policies generally achieve their objectives by changinghow consumers and producer behave – that is, by changing howmuch consumers consume and producers produce.We represent CONSUMER BEHAVIOR with a curveand PRODUCER BEHAVIOR with a curve.priceSupplyDemandquantity
What Determines How Much Consumers Consume?Market Demand Determinants: Priceof the good itself (PX) - Called the “ ” Priceof related goods (PO) Substitutes Complements Consumers’ Thenumber of consumers (population) (N) Consumer Theincomes (Y)tastes and preferences (T)range of goods available to consumers (R)
What Determines How Much Consumers Consume?Changes in the price of any good result in The demand curve isdownward sloping MovementsP1which means that Price andQuantity Demanded areNEGATIVELY related ALONGP2TheP3P4P5or, in other words, aDECREASE in priceDemandresults in an INCREASEin Quantity DemandedCurve and vice versa.DemandQ1Q2Q3Q4Q5
What Determines How Much Consumers Consume?A change in ANY OTHER demand determinant results in a SHIFT of the demand curve to the Right at a given price or to the Left at a given price.P1DemandDemand DemandQ3Q1Q2
What Determines How Much Producers Produce?Market Supply Determinants: Priceof the good itself (PX) - Again, the “ ” Priceof related goods (PG) Substitutes Complements Technology (State of) (T) Priceof Resources or Inputs (PI) Numberof Sellers or Producers (N) Sellers’ PriceExpectations (E)
What Determines How Much Producers Produce?Changes in the price of any good result in Supply or, in other words, anINCREASE in priceCurveresults in an INCREASEIn Quantity SuppliedSupplyand vice versa.P5P4P3TheP2which means that Price andQuantity Supplied arePOSITIVELY related ALONGP1MovementsQ1Q2Q3The supply curve isupward sloping Q4Q5
What Determines How Much Producers Produce?A change in ANY OTHER supply determinant results in SupplySupplySupplyA SHIFT in the supplycurve to the Right ata given price P1 or to the LEFT at agiven price.Q3Q1Q2
Supply and Demand Interact to DetermineEquilibrium Market Price and QuantitySupplyPeDemandQe
How Does Policy Change Market Supply and Demand?Let’s say a policy mandates a minimum market priceabove the current market equilibrium.What happens when the price increases?And a market surplus results!SupplyPminThe quantitysuppliedINCREASESThe quantitydemanded PeDECREASESDemandQdQeQs
How Does Policy Change Market Supply and Demand?Let’s say a policy mandates a minimum market priceabove the current market equilibrium.What happens when the price increases?What will happen to the market price?What could the government do to keep that from happening?Government Surplus PurchasePminSupplyThe quantitysuppliedINCREASESThe quantitydemanded PeDECREASESDemandQdQeQs
Measuring Economic Welfare:Consumer and Producer SurplusConsumer Surplus: The difference between what consumers arewilling to pay and what they actually pay for a good.P1P2P3P4P5P6P7P8P9P10P11What consumers areWILLING to payPeDemandQ1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11Qe
Measuring Economic Welfare:Consumer and Producer SurplusConsumer Surplus: The difference between what consumers arewilling to pay and what they actually pay for a good.P1P2P3P4P5P6P7P8P9P10P11The Surplus – what consumersDON’T pay that they would beWILLING to payPeWhat consumersACTUALLY payDemandQ1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Qe
Measuring Economic Welfare:Consumer and Producer SurplusProducer Surplus: The difference between the actual revenue thatproducers receive for a good and the revenue they would be willingto accept for that good.SupplyPeP11P10P9P8P7P6Revenue producersACTUALLY receiveP5P4P3P2P1Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Qe
Measuring Economic Welfare:Consumer and Producer SurplusProducer Surplus: The difference between the actual revenue thatproducers receive for a good and the revenue they would be willingto accept for that good.SupplyThe Surplus – revenueproducers receive inexcess of what theywould be WILLINGto take.PeP11Revenue producersare WILLING to takeP10P9P8P7P6P5P4P3P2P1Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Qe
How Does Policy Change ProducerAnd Consumer Welfare?Again, let’s say a policy mandates a minimum marketprice above the current market equilibrium.SupplyConsumerSurplusConsumer Surplus Producer SurplusPeTotal WelfareProducerSurplusDemandQe
How Does Policy Change ProducerAnd Consumer Welfare?What happens to producer and consumer DemandQdQeQs
How Does Policy Change ProducerAnd Consumer Welfare?What happens to producer and consumer surplus?What happens to Total Welfare?SupplyConsumerSurplusPminadbCSTotalWith policyPeProducerSurplusPS- Before policyChangecConsumersProducersDemandQdQeQsNetin TotalWelfare
Producer and Consumer WelfareAnalysis Example Problems1. If price increases from P0 to P1, in the graph below, what is the CHANGE inconsumer surplus?SupplyP1aCSdbAt P1- At P0P0ChangecDemandQdQeQs
Producer and Consumer Welfare Analysis Example Problems (continued)2. If price decreases from P1 to P0, in the graph below, what is the CHANGE inproducer surplus?SupplyP1aPSdbAt P0- At P1P0ChangecDemandQdQeQs
Producer and Consumer Welfare Analysis Example Problems (continued)3. At P1, what is (are) the area(s) representing: (1) producer revenue?(2) production cost? (3) producer surplus? (4) consumer willingness to pay?(5) consumer expenditures? (6) consumer surplus?ProducerS revenue P1 * Q2 P1Production cost abdcP0ifeProducer surplus producer revenue - cost Consumer WTP jhDgQ1Q0Q2Consumerexpenditure Consumersurplus Consumer WTP-expenditure
Producer and Consumer Welfare Analysis Example Problems (continued)4. If the demand curve shifts out to the right so that the new market price is P1,by how much does producer surplus CHANGE?SP1abdcP0ifeChange in PS jhDgQ1Q0Q2D’
Producer and Consumer Welfare Analysis Example Problems (continued)5. If the supply curve shifts out to the left so that the new market price is P1,by how much does consumer surplus CHANGE?S’P1SabdcP0feChange in CS ijhDgQ1Q0Q2
and PRODUCER BEHAVIOR with a _ curve. AGEC 429 Lecture #7. CONSUMER AND PRODUCER BEHAVIOR I. Agricultural policies generally achieve their objectives by changing how consumers and producer behave - that is, by changing how much consumers consume and producers produce. We represent . CONSUMER BEHAVIOR. with a _ curve. Supply. Demand. price
