Tom Gomez 

 October 6, 1986 

 Page -3- 



Figure 2c features a supply curve with a parallel shift. A parallel 

 supply shift always results in an increase in producer surplus (for 

 legitimate supply curves) unless the demand curve is vertical or totally 

 inelastic. Producer surplus will not change if the demand curve is 

 vertical and the supply shift is parallel. Therefore, the effect of 

 technological change upon producer surplus depends upon: (1) the shape 

 of the demand curve, (2) the shape of the supply curve, and (3) how the 

 supply curve shifts. 



FIGURE 2c 



Price 



Qi Q2 



Quantity /Time 



The question arises as to what type shift in supply will occur 

 through technological change and can research be directed in a manner to 

 ensure a desirable shift. The literature does not provide any informa- 

 tion on this topic. However, it is my opinion that the most likely 

 shift resembles a pivotal shift. Most technological changes which 

 enhance the production of a commodity enhance the productivity of other 

 inputs. The enhancement is likely to be roughly proportional to the 

 level of input use which implies a pivotal type shift in supply. Most 

 of the time very little is known a priori about the effect of a partic- 

 ular research project on supply. Therefore, it would be difficult to 

 choose projects which are most likely to shift supply in a producer 

 surplus Increasing manner. 



I will illustrate these points using examples from my discussion in 

 Billings. For simplicity, I will use linear supply and demand curves, 

 with a pivotal supply shift. Remember that the demand curve facing 

 Montana producers (or producers in any state) is very elastic, but the 

 entire market demand is inelastic relative to supply. Furthermore, I 

 will assume that producers close to the geographical source of the 

 innovation adopt before those further away. 



The 40% increase in milk production efficiency will probably be a 

 technology which will eventually be widely adopted, with the earliest 



