Agricultural Products Supply

Agric4Profits April 24, 2023May 23, 2023 0 Comments General Agriculture

Agricultural prices depend on both supply and demand, and this time we’ll be looking at supply. By supply, I mean how much product producers will choose to produce and sell at a particular price. When the farmer decided to grow this crop of canola, the expected price was around $430 per ton. But if the price had been only $250 per ton, the farmer would’ve decided to grow wheat in his field instead of canola. Lower price, less supply.

Today, I’m going to use canola as my example agricultural product, but the same principles apply to any product. The quantity of canola produced depends on the price that farmers expect to receive.

And the reason for that is that the more canola a farmer tries to produce, the more it costs them per unit of output. This graph shows the total cost for an agricultural product as the quantity produced changes. So the total cost, as you can see, typically increases at an increasing rate. In other words, the slope gets steeper as we go to higher quantities of production.

Economists refer to this slope of this line as the marginal cost. So the marginal cost is the slope. It tends to increase as you go into higher quantities of production. So let’s graph that. Let’s graph the marginal cost. It’s increasing, and there it is.

So the marginal cost tells us how much it costs to produce one more unit of output, and it typically is upward sloping like this. Now, the marginal cost is relevant because it helps us to decide how much output should be produced.

To maximize profit, the farmer should grow the quantity of canola at which the marginal cost equals the expected price of canola. So in this graph, I’ve drawn in the price the world price, or the market price of canola and at the point where that crosses the marginal cost curve, I’ve drawn a dashed line down to the quantity axis. And you can see Q. Q is the optimal quantity of canola to produce if the farmer wishes to maximize profit.

So why is that? Why does Q* maximize profit? It’s because if the farmer chooses to grow less canola than Q, there’s an opportunity to make more money by increasing production. After all, the sale price is greater than the marginal cost.

On the other hand, if the farmer chooses to grow more canola than Q, there’s a chance to avoid some losses by reducing production because the price received is less than the marginal cost. He’s losing money at the margin.

So a profit-minded farmer will always aim for Q. They don’t always know where Q is exactly, because they can’t predict the weather or the market price, but they can have a good guess.

So the marginal cost curve equals the supply curve is the point of this slide. The marginal cost curve indicates the amount produced at a given price. But earlier on, I said pretty much that that was the definition of the supply curve. The supply curve represents the amount produced at a given price.

So the marginal cost curve corresponds to the supply curve. If you know the marginal cost curve, then you’d know the supply curve. In this graph, I’ve just renamed that curve to the supply curve. And it shows us that the higher the price, the more of the product that the farmer will choose to produce and sell.

So in summary, total cost increases at an increasing rate with higher quantities of production. And the marginal cost equals the slope of the total cost curve, and it increases with quantity because the slope does.

Now, the marginal cost curve indicates the optimal level of production at different prices, and that corresponds to the supply curve. So all of that adds up to mean that the supply curve is upward sloping.