Agriculture, Economics and Nature

Week 1
Agricultural production and prices, and agriculture’s reliance
on natural resources

Segment 3
Agricultural products’ supply
Winthrop Professor David Pannell
University of Western Australia (Heath 2001) (CC BY)
 AGRICULTURE, ECONOMICS AND
NATURE WEEK 1
AGRICULTURAL PRODUCTION AND PRICES, AND AGRICULTURE’S RELIANCE ON
NATURAL RESOURCES

SEGMENT 3
AGRICULTURAL PRODUCTS’ SUPPLY
• Agricultural prices depend
both supply and demand
• This time we’re looking at
supply
• By supply, I mean how much of
a product producers choose to
produce and sell at a
particular price
(Pannell 2006)
• When the farmer decided to grow this crop of canola,
the expected price was around $430/T But if the price
had been only $250 per tonne, the farmer would have
decided to grow wheat instead of canola in this field.
• Lower price, less supply
• Today I’m going to use canola as my example
agricultural product, but the same principles apply to
any product
• Clearly, the quantity of canola
produced depends on the
price that farmers expect.
• The reason is that the more
canola a farmer tries to
produce, the more it costs
them per unit of output
• The next graph shows the total
cost for an agricultural product
 Total Cost
$ Total Cost

Quantity

Total cost: increases at an increasing rate (steeper slope) as

quantity increases
Slope = marginal cost
 Marginal Cost
$ Marginal Cost

Quantity

Marginal cost: how much it costs to produce one more unit of

output
Choosing output level
• To maximise profit, the farmer should
grow the quantity of canola at which the
marginal cost (MC) equals the expected
price of canola

$ Marginal Cost

Price

Q* Quantity
• Why is that?
• If the farmer chooses to grow less canola than Q*,
there is an opportunity to make more money by
increasing production, because the sale price is
greater than the marginal cost
• If the farmer chooses to grow more canola than Q*,
there is a chance to avoid some losses by reducing
production, because the price received is less than
the marginal cost
• 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
Marginal cost curve = Supply curve

• MC curve indicates the

amount produced at a given
price
• Supply curve represent the
amount produced at a given
price
• MC curve corresponds to
the Supply curve
 Supply
$ Supply

Quantity

The higher the price, the more product

farmers produce and sell
 Summary
• Total cost increases at an increasing
rate with higher quantities of
production
• Marginal cost = slope of total cost
curve – increases with quantity
• Marginal cost curve indicates
optimal level of production at
different prices
• Corresponds to supply curve
• Supply curve is upward-sloping