Tom Gomez 

 October 6, 1986 

 Page -2- 



horizontal cross-hatched area is the producer surplus prior to the 

 advance and the vertical cross-hatched area the producer surplus area 

 after advancement. In Figures 2a and 2b the supply shifts are pivotal 

 (i.e., supply curve simply pivots dovmward) . In Figure 2c the supply 

 shift is parallel. 



FIGURE 2a 



FIGURE 2b 



Demand 



Price 



Supply 1 



Price 



Supply 2 



Supply 1 



Supply 2 

 Demand 



Quantity/Time 



Quantity/time 



Our literature and theory provides some information on the shape of 

 the supply and demand curve. The demand curve for the entire market of 

 most agricultural commodities is inelastic; however, since Montana 

 produces a rather small share of the total market, the demand curve 

 facing Montana is probably almost totally elastic. The supply curve is 

 quite elastic. Much less is known about how the supply curve shifts due 

 to a technological change. However, it is unlikely that the shift is 

 parallel; that is, the technological change reduces cost by the same 

 amount at every production level. 



The supply curve shift in Figures 2a and 2b are identical. (Supply 

 curves are actually truncated by the average variable cost curve. 

 However, in evaluating producer surplus, the supply curve, or more 

 correctly, the marginal cost curve below the average variable cost curve 

 must also be considered.) The demand curve in 2a is much steeper than 

 2b. In 2a the producer surplus has been decreased while the producer 

 surplus in Figure 2b has been increased by the technological change. 

 Given linear demand and supply curves and a pivotal shift in supply, it 

 can be shown that absolute values of the slopes of the supply and demand 

 curve will determine the direction of change in producer surplus. If 

 the absolute value of the slope of the demand curve is greater (less) 

 than the slope of the supply curve, a pivotal downward shift in the 

 supply curve will decrease (increase) producers' surplus. (To be 

 correct, I am referring to the slopes of the inverse supply and demand 

 curves which are the mathematical form implied by the figures.) 



