Agriculture Reference
In-Depth Information
Assume that the fi rm starts at point A in
Figure 3.2,
intending to supply 30,000 cases
of cereal at $35 per case. However, at that price, realized demand is only 23,000 cases. The
result of charging a price that is too high is the fi rm would soon notice that inventory
had started to accumulate. At point C, the fi rm encounters the opposite problem. If they set
the price at $25 per case, they will face a shortage because demand is 27,000 when only
20,000 cases are supplied. Only when the fi rm operates near point B would one conclude
that they must be near market equilibrium because they neither faced shortages nor are they
building accumulations of inventory. Thus, inventory build-ups or persistent shortages are
signs that markets are out of adjustment. Firms may raise or lower prices, or adjust produc-
tion levels as they seek to move towards equilibrium. In short, fi rms clearly understand
market equilibrium and constantly make choices with it in mind, even when they don't have
complete supply and demand graphs.
The supply and demand curves presented in
Figure 3.1
are drawn with the assumption of
ceteris paribus
, which means “with other things the same.” However, several factors can act
to shift an entire demand or supply curve. The smart agribusiness manager understands that
the world is constantly changing. He or she makes it part of their job to read the business and
trade press for their industry to stay informed about such changes. Farmers read trade maga-
zines or follow web pages from publications like Farm Journal, Grainnet, or Precision
Agriculture, while a grocer would read Supermarket News. Yet that is not enough; they both
need to read a general business magazine or newspaper like the
Wall Street Journal
or
Bloomberg-BusinessWeek
to stay apprised of general business and economic trends. The
key is to identify factors that might shift supply and demand curves, and then consider what
that change means for equilibrium prices and quantities. Therefore, the best agribusiness
managers anticipate the future by constantly looking for factors that might shift demand or
supply curves in their respective industry.
The amount of product that a company is willing to supply depends heavily on marginal
cost. Thus, agribusiness managers watch for changes in factors that affect their cost structure
and the location of a supply curve. A change in one of these factors can cause a supply curve
to shift to the right or to the left. The position of the supply curve in
Figure 3.1
is fi xed
because of the assumption of
ceteris paribus
, meaning that the supply shifters are stable.
When supply increases from S to S2, the entire curve shifts to the right (
Figure 3.3)
. In this
case, costs have fallen and the fi rm is now willing to provide a greater quantity (Q
2
) at the
same price (P
1
). If costs rose, the supply curve would shift to the left to S3, and the fi rm
would only be willing to provide Q
3
.
Known as determinants of supply or simply supply shifters, six factors can shift a supply
curve. Examples of how these factors cause the supply curve to shift include:
1.
Change in technology
: The development of new seed increases yield (shifts supply to
the right).
2.
Change in the price of inputs
: Rising diesel fuel prices raise the cost of production
(shifts supply to the left).
3.
Weather
: Poor weather conditions, such as a severe drought, cause crop shortages which
shift the supply curve to the left, while favorable weather conditions lead to bumper
crops and shifts the supply curve to the right.
4.
Changes in the price of other products that can be produced
: An increase in the price of
corn causes farmers to shift acres to corn (shifts to the right) and away from other crops
such as soybeans, wheat or cotton (shifts supply to the left).
