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Montana State University 



Bozeman, Montana 59717 



Department of Agricultural Economics & Economics 



October 6, 1986 



Tom Gomez, Staff Researcher 

 Interim Agriculture Committee 

 Montana Legislative Council 

 State Capitol, Room 138 

 Helena, MT 59620 



Dear Tom: 



After the Interim Agriculture meeting of September 19, 1986, I 

 promised the following brief discussion on technology and producer 

 income (surplus) . First I will summarize some rather general implica- 

 tions of technology and then discuss some specific considerations 

 relative to the particular concern of the committee. 



A technological advancement in production of a particular commodity 

 results in a shift downward and to the right of the supply curve. 

 Figure 1 features a hypothetical supply curve. 



FIGURE 1 



Supply 1 



Supply 2 



Demand 



Quantity /Time 



Assume that production is at point "a" on Supply 1. A technologi- 

 cal advancement which decreases costs from "a" to "b" (same quantity) 

 moves the supply curve to Supply 2, which is similar to an advancement 

 in technology which increases production from point "a" to point "c" at 

 a given cost — also resulting in a supply shift to Supply 2. Therefore, 

 differentiating between technology which is cost-reducing for some level 

 of output and increases output for the same level of cost (or some 

 combination in between) is not very useful since both shift the supply 

 curve down and outward resulting in higher equilibrium quantity and 

 lower price. 



The effect of a supply shift (caused by technological change) on 

 producer surplus depends upon the form of the supply shift as well as 

 the supply and demand curve. Figures 2a, 2b, and 2c present a demand 

 curve and a shift in supply caused by a technological advancement. The 



