We will begin with the last four slides shown under Oct. 23.

Price floors (minimums)
Sellers can not sell at a price less than what the government has established as the minimum price (also known as the support price or price floor). The government sets the minimum price above the equilibrium level to try to raise sellers' income. Examples: agricultural price supports, minimum wage

Reasons for Agricultural Price Supports

Year to year, suppply varies a lot due to weather. US farmers are affected by changes in other countries as well as markets are world-wide. Demand is price inelastic. Changes in supply cause much larger changes in price. Large harvests result in lower prices and revenues. Demand is income inelastic. Therefore, demand for food grows as population does but doesn't increase much due to income growth. Productivity has incerased as a more rapid rate. Thus over time relative farm prices fall. Small farms are at a disadvantage. Incomes on farms which increase in size andproductivity rise.

Effects of price supports

Surpluses develop because an above-equilibrium induces sellers to increase the quantity supplied and buyers to decrease the quantity demanded. The surplus can't be sold without undermining the support price. The government then buys what the market won't and then stores the goods or gives them to those unlikely to be in the market. lets suppliers sell for whatever price they can get, with the government making up the difference between the market price and the target or support price. tries to cut the surplus with production controls or conservation measures.

Efficiency Declines
Production take place even though the value of the additional units to consumers (QeEDQs) is less than the opportunity cost ofproducing them (QeEBQs). Some units may never reach consumers but merely rot away. Resources remain in agriculture instead of being shifted to alternative uses. Additional resources are used to store the excess.

Who Benefits?

Consumers pay more for the product. Tax payers bear the costs of purchasing and storing the excess. Most of the additional revenue goes to the large producers who have many units to sell and above-average incomes. Over time, the price of agrciultural land will be bidup to reflect the higher revenues that can be earned. Ther original owners benefit in high prices for land while new farmers earn only normal returns.

Competitive vs. Concentrated Markets

Competitive markets have many buyers and sellers. To understand why some markets do not and what the consequences are of imperfact competition, we need to examine the behavior of firms more closely. Firms may be large corporations or small proprietorships. All types of firms try to maximize profits. Profit is income to the firm's owners (individual or stockholders). Profits are also a measure of a manager's ability and a source of funds. Without profits, managers lose their jobs, expansion plans fail, and eventually the firm will go out of business. Firms maximize profits by following the marginal principle: increase output as long as the marginal benefit (marginal revenue) is greater than the marginal cost.

Production Function
The production function is a technological relationship which shows the maximum attainable quantity of a specific good given varying amounts of inputs, with technology fixed. Q = F(labor, resources, capital, technology). The production function plus the price of the inputs determines the firm's costs.

The Short Run

Is defined as a time period in which at least one input is fixed (can't be changed within that time period). The number of calendar days in the short run is different in different production processes. Firms must decide how much to produce by combining its fixed capital (factory, etc.) with varying amounts of labor and materials. A manufacturer must decide whether or not to hire additional hours of labor (schedule overtime) in an existing factory.

The long run
is defined as a period in which all inputs can be changed. While the firm is deciding how much to produce with its existing plant and equipment (short-run) it is also deciding whether or not to enlarge and add more equipment (more capital). It may make these decisions now but they aren't implemented until more time has passed.

Law of Diminishing Returns

It says that as one input increases while the other inputs are fixed in quantity, output will increase but at a diminishing rate. The marginal product of labor is the change in output that results from adding one additional unit of labor. The law of diminishing returns can also be stated as: the marginal product of labor will eventually begin to decrease in size as more workers are employed in production. LDR results from more and more workers sharing the same quantity of capital. Each has less capital to work with.