FARE 1300 Test 2 Chapter 7 Readings

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University of Guelph
Food Agricultural and Resource Economics
FARE 1300
Julio Mendoza

FARE Readings Chapters 7 and 8 CHAPTER 7: Lecture 7 & 8 Demand  Downward sloping curve  How much of a good the person wants to consume and different prices  Shows the max amount per unit the person is willing to pay for ALL the different amounts of a good  Downward slope means that as the price of a good falls, a consumer will want to consume more of that goo Supple  Upward sloping curve  How much of a good the producer will produce at all different prices  The minimum amount per unit that the person will require to produce at each of the different levels of production  Demand curve slopes DOWN to diminish marginal utility o As yield increases, there are diminishing marginal returns to costs  Supply curve slopes UPWARD to diminish marginal product o Experience diminishing returns to successive inputs  Diminishing marginal products lead to increasing marginal costs o With each additional unit of yield from our hectare of land, we have to spend somewhat more on our bundle of variable costs  Marginal cost curve is the price schedule at which the producer is willing to produce various amounts of goods for the market Aggregate Supply and Demand  Aggregate demand o Add up the quantities demanded by individual consumers to obtain aggregate demand curve  Aggregate supply o Mixture of individual supply curves  Market Equilibrium o Point at which the aggregate supple and demand curves intersect show the equilibrium price and aggregate quantity  If price above this equilibrium price, producers want to sell a GREATER quantity than consumers want to buy  If the price falls below the equilibrium price, some buyers will be unable to buy the quantities they want and the price will increase FARE Readings Chapters 7 and 8 Own Price Elasticity of Demand Elasticity= measures the percentage change in quantity supplied or demanded in response to a 1 percent change in price or income  Negative slopes  Price elasticity of demand: measure the steepness of the demand curve: how much does quantity demanded fall as price increases as we move along a demand curve E= % change in quantity demanded/% change in price  Elastic good: E> 1  Inelastic good: E<1  Giffen good: E>0 Price Elasticity of Supply  Price elasticity of supply: measures the steepness of the supply curve: how does quantity supplied change in response to a change in price as we move along the supply curve  E= % change in quantity supplied/ % change in price  Elastic good: E>1  Inelastic good: E<1 Equilibrium Supply and Demand  Each producer produces at the point that gives the highest profits o By producing units only as long as the received price exceeds the additional costs of production, and by refusing to produce any additional units o Producers and consumers act in their own selves interest  Results in allocation of goods Changes in Demand for Food  Population growth o Shifts aggregate demand curve OUTWARD o The effect is to increase the price, and the higher the price induces farmers to produce more food so equilibrium quantity increases  Growth in incomes o Person with low income will have a demand curve that reflects low quantities o If person has more income to spend, demand curve will shift up and to the right o If rich, shift will be small  Changes in tastes  Changes in prices of non-food Normal good: increase in demand as income increases Inferior good: decline in demand as income increases FARE Readings Chapters 7 and 8 Income and Demand for Food  Engel’s Law o As income increases consumers spend a diminishing proportion of their income on food  Bennett’s Law: o As income increases the ratio of expenditure on starchy staples relative to other foods declines Food Demand Responses of the Very Poor  Income elasticity of staples typically less then one…implies that do not use all of any gains in income on reducing undernutrition  If poor person suffers 1 percent decrease in income, might decrease consumption by half  If wealthy person suffers 1 percent decrease in income, might not change their rice consumption at all  Studies in Javanese as income increases, they spend smaller proportion of food budget and more on other items o Ratio of starchy foods fall as incomes increase  Why? o Food demand constrained by non-discretionary expenditure o Trade-up to more palatable foods o Increase consumption of non-foods o Uncertain returns to improved diet Changes in Tastes for Food  Urbanization  Education  Media  Advertising  Metabolic changes Changes in Supply of Food  Changes in availability of productive resour
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