C6 - Supply/Demand Market Model

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C6 - Supply/Demand Market Model

• Changes in Market Conditions using
• Demand and Supply Concepts
• Analysis - elasticities

Expanded Market Framework Derived Demand and
Supply Marketing margin
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Simple Market Model

• Demand and Supply shifts

Qualitative implications for equilibrium Price
and Quantity Inferences Is S/D responsible for
change in conditions?
Quantitative analysis

• using elasticities (own, cross, income)

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Simple Market Model - Demand shifts

• P Q move in same direction

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Simple Market Model - Supply shifts

• P Q move in opposite direction

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Unterschultz, J.R., Scott R. Jeffrey and Kwamena
K. Quagrainie., Value-Adding 20 Billion by 2005
Impact at the Alberta Farm Gate., AARI Project
980842., Department of Rural Economy., University
of Alberta, 2000
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Unterschultz, J.R., Scott R. Jeffrey and Kwamena
K. Quagrainie., Value-Adding 20 Billion by 2005
Impact at the Alberta Farm Gate., AARI Project
980842., Department of Rural Economy., University
of Alberta, 2000
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Price Analysis Using Elasticities - Change in
Demand - Appendix A
From Schrimper Demand Elasticities for Beef
(-0.62 and 0.39) Price increase 30
Income increase 1
Change in demand (-0.62)(0.30) (0.39)(0.01)
- 0.182 (- 18)
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Change in Supply
From Schrimper Supply Elasticity for Corn
(0.34 to 1.59)
Price increase 30
Change in supply (0.34)(0.30)
0.102 (10) US expected
production 2013 14 Billion bu (356 Million
tonnes) 12.5 Bbu in 2010
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Change in Equilibrium Price . Demand Shifter
(change in income) Equilibrium Condition (supply
demand)
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Analysis of the Economic Importance of Changes in
Soybean Use. Nicholas E. Piggott, Michael K.
Wohlgenant, and Kelly D. Zering, North Carolina
State University January 31, 2000
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Expanded Framework

• Multiple levels of marketing system

• Derived demand
• retail (primary) gt farm (derived)
• marketing margin
• marketing activities (cost)

• links consumer and producer behaviour
• deduce how retail shifts impact farm demand

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Derived Demand Linear Marketing
Margin
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Assumptions Linear Marketing Margin

• Inputs used in fixed proportions
• Retail Price farm price marketing inputs
• constant returns - no economies of scale
  (marketing activities)

• Prices (marketing inputs)
• fixed/constant gt perfectly elastic supply
  (competitive markets)

• Implications
• fixed absolute margin
• Price elasticity - market levels

• Margin
• temporal invariance

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Elasticity and Derived Demand
Demand elasticity at retail higher than farm
level
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Shifts in demand or margin

• Shift in retail demand BSE crisis
• Farm level demand shifts down
• Marketing margin constant

P
Dr
Df
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Shifts in demand (margin)

• Increase in marketing costs (new regulations)
• Farm demand (derived) shifts downward

P
Dr
Df
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Alternative Models

• Margin varies with quantity (proportional
  markup)
• Decrease in marketing costs as output expands

Demand elasticity at retail still higher than
farm level
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Derived Supply
Farm supply (primary)
Retail supply (derived)
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Derived Supply and Demand
P
DR
SR
PR
SF
DF
PF
Q
Quantity
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Shift in Demand
DR
P
SR
DF
PR
SF
PF
Q
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Increase in Marketing Margin
P
DR
SR
PR
SF
DF
PF
Q
Q
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An Extension - Appendix B
Some commodities have alternative uses
Soybeans US output 3.1 Billion bushels (2011)
(0.9 Bbu - 1965)
Crush yields (60 lb bu) 47 lb meal (78) and
11 lb oil Demand for beans F(demand for
meal and demand for oil)
Total demand for beans (kinked demand function)
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CBOT Soybean Price (2003 2011)
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Deriving Total Demand - Kinked Demand Function
P
S
D1
P
TD
D2
Q
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