Market for Irish Cattle---Change in Quantity Supplied vs Change in Supply

One of the most frustrating things to teach AND learn in a basic microeconomics class is the difference between a change in Quantity Demanded and/or Supply and a change in Demand and/or Supply---whether we move along the respectived curve or the curve shifts entirely in one direction or the other.

This very short article from a website that reports on agricultural issues in Ireland provides a nice example on the supply side to illustrate the difference:

The number of prime cattle slaughtered at Department of Agriculture approved beef export plants has jumped 10% in the space of a week. 

Figures from the Department show that the throughput of young bulls, steers and heifers increased by just over 2,200 head last week compared to the week before. 

Towards the end of last week and into this week, factory buyers were willing to pay an extra 5c/kg on top of the base price in order to secure stock.And this move appears to have worked, as an additional 2,285 cattle were presented for slaughter during the week ending August 14.

Here are some slides that will help explain the difference. Hope it helps!

Corn prices down. My graphs showing how this affects the farmer (AP Micro)

A current event gives me an opportunity to create a series of graphs to illustrate what happens to "Economic Profits"in a market that is considered "Perfectly Competitive" when there is a price decrease AND the cost structure remains relatively constant.

Higher supply, costs cut Ohio farmers' profits (HT: Big Picture Agriculture)

Ohio corn farmers might be producing more crops, but the boom in supply and higher expenses are driving down profits this year. 

Most farmers are reporting they are producing more bushels this year, but the price they're able to get for the commodity has been roughly cut in half compared to last year. 

Western Ohio farmer Tom Tullis said he regularly saw corn prices as high as $6.50 or $7 per bushel as late as last year. But prices this year have been closer to $3. At the same time, operating costs such as machinery and fertilizer have remained high. (Note: I read that "constant")

"It's about half price or below what it was last year," Tullis told the Dayton Daily News (http://bit.ly/1uwu8jN ). "And our inputs are staying pretty much in the same place as far as fertilizer, chemicals and everything else. It's going to be a tough one." 

Most farmers will have enough assets to withstand a tough year or two, said Matt Roberts, an agricultural economist for Ohio State University Extension. The majority of farmers across the state will likely break even this year, Roberts said, although there will be some who lose money."

In the graphs below, I use $7.00 as last years price and $3.50 as this years price.  I use $3.50 as the Average Total Cost (ATC) of producing because it is suggested in the article that farmers are either making a small profit at that level or might even be losing money at that cost. In other words, it is the rough "break-even" point.

Economic vs Accounting Profit: Corn or Soybean? That is the question--answered here.

Using data from the US Dept of Agriculture Economic Research Service (USDA-ERS) I made the following two charts (I am in the infant stages of learning Excel, excuse the poor formatting!).

They show the "Accounting Profit"(RED) and "Economic Profit" (BLUE) for Corn and Soybeans in 2013. The distinction between the two is important in AP Microeconomics.

When tallying costs, accountants only care about explicit money costs paid for resources.  When calculating economic costs, economists include implicit Opportunity Costs in addition to money costs.

Economic costs are ALWAYS going to be more than accounting costs, hence economic profits are ALWAYS going to be less than accounting profits. Repeat that until it clicks!

As a recent transplant to the mid-West (Illinois, now Ohio) I have quickly learned that Corn and Soybean require very similar resources to grow---the Opportunity Cost of switching from one to the other is apparently quite low.

Simple observation:  Growing Corn in the "Northern Great Plains" does not seem like a good idea. Soybean returns a higher accounting and economic profit.  Growing Soybean in the "Heartland" seems like a GREAT idea--accounting AND economic profits are high.

Note this data are for 2013.  I drive around Central Ohio quite a bit.  I notice many more fields that had corn last year are now teeming with soybean. Why?

Economic theory (and apparently practice if I can believe my lying eyes!) suggests in a "perfectly competitive" market, the presence of economic profit(s) induces producers to enter that market.

Use these graphs as you wish.  Hope it helps with the concept.

Here are the agricultural regions (SOURCE USDA-ERS):

My take-down of a Wall Street Journal article. It helps with understanding the difference between a Giffen and a Veblen Good AND a market reaction. They confuse ALL three!

In today's Wall Street Journal there is an article on the state of the world wide luxury goods market.

In my opinion they make LOTS of Microeconomics 101 (or AP Microeconomics) mistakes in their analysis. Read for yourself but I want to focus on how they use, or misuse, the term "Giffen Good".  Here is the relevant excerpt:

"...An economic theory holds that for certain goods, higher prices increase desirability and drive sales, rather than suppress demand as they would for ordinary products. Economists refer to such luxury products as Giffen goods, named for Scottish economist Robert Giffen, who described the phenomenon...."

First, they REALLY should have used the term Veblen Good instead of a Giffen Good.  A Veblen Good refers to luxuries ("status or pretige goods") and a Giffen Good is used generally in the context of inferior goods.

Here is a definition I found that I REALLY like and makes the concept easier for me to understand:

 "We use the term “Giffen behavior” rather than “Giffen good” to emphasize that the Giffen property is one that holds for particular consumers in a particular situation and therefore depends on, among other things, prices and wealth. Thus, it is not the good that is Giffen, but the consumers’ behavior. The Giffen phenomenon should also not be confused with prestige or Veblen goods, where consumers desire the goods precisely because the price is high, “snob appeal,” where consumers desire the good because it is rare, or situations where consumers interpret a high price as a signal of high quality. In all three cases, the goods in question are normal. Giffen behavior is a phenomenon that arises entirely within the neoclassical framework where consumers care about price only inasmuch as it affects their budget sets. If demand is Giffen the good in question must also be inferior, which rules out Veblen, snob and signaling effects". ---LINK HERE to where I got this definition.

In both cases it suggests the Market Demand Curve is UPWARD sloping, indicating there is a DIRECT relationship between Price and Quantity Demanded of a good.  In other words, we only buy MORE when the price increases (or buy less when the price decreases).  This graph illustrates this phenomena:

This is counter to the Law of Demand that indicates we buy more only when the price decreases (or less when the price decreases).

So, what is really going on in the Market for Luxury Goods that I believe maintains the integrity of the Law of Demand?  Let's go to the graphs!

Here is a downward sloping Demand Curve for Luxury Goods. I just made up some random numbers for illustration purposes and to make the math easy.

At a price of $100 assume the market quantity demanded is 100.  Total Revenue would be $10,000

Assume the price of the Luxury Good increased to $125 and following the Law of Demand the Quantity Demanded decreases to 80.  Even though price increased and quantity demanded decreases, Total Revenues stayed the same.  This could or could not happen. It depends on "Elasticity of Demand", but I am not going to include that analysis here to keep it simple and short. :)

Why do I believe this is true in "Real Life".  Well, because the article told me so, in TWO places:

(1)---One reason ultra luxury brands are raising prices is to distinguish their products from entry-level luxury goods that are fast picking up market share. 

"The more Tory Burches and Michael Kors there are, the more the Chanels and Louis Vuittons will try to price up," said Milton Pedraza, the chief executive of the Luxury Institute, a research and consulting firm. 

The unintended consequence could be that the luxury brands drive even more customers toward less-expensive rivals....

...(2)---Jamie Moore, a homemaker in Cleveland, Tenn., said that on her annual shopping sojourn to New York, she usually splurged on a Prada handbag, for which even a basic nylon model can cost $1,230. Not this year. 

"The prices have gotten so expensive that I'm not buying one," she said.

So, a switch to an less expensive brand because of a viable substitute (1) AND because it is no longer affordable (2).  Nice example of BOTH the "Substitution AND Income Effects" that explain the DOWNWARD sloping nature of a demand curve...Hmmmm...

The article introduces two variables into the equation---rising income from China which creates new entrants into the market for Luxury Goods.

"A change in Income"  and "A change in the Number of Buyers" are two determinants of demand that will shift our demand curve, either left or right.

If at the SAME TIME there is a decrease in quantity demanded (20 units) from "the West" because of an increase in price, rising incomes and more Chinese wanting Luxury Goods can off-set this decrease in quantity demanded at $125.

Point "C" represents a new Price ($125) and Quantity Demanded (100) that lies to the RIGHT of the original Demand Curve "D*" (Price $125, Quantity Demanded 80).

We can assume (Ceterus Paribus) what happened between Point "B" and Point "C" will happen at 
every other point along Demand Curve "D*.  The Demand Curve will shift to Right:

Bottom line: I THINK  I maintained the integrity of the Law of Demand within the context of the Wall Street Journal article and its suggestion there is a case of Giffen/Veblen Goods going on in the luxury goods market.

This is just one inconsistency I found in the article. I believe there are many more.  

Extra Credit if you can find them!!  :)