Chapter 3: Introduction
U.S. Agriculture: Why Does It Receive Government Subsidies?
This chapter further develops demand and supply analysis. The demand curve is interpreted as giving both the quantity demanded for a given price and the demand price for a given quantity. The latter is the maximum price that a consumer will pay for one more unit, leading to the idea of consumer surplus and preparing the student for the efficiency analysis presented in the appendices to Chapters 3 and 4.

The supply curve is interpreted as giving both the quantity supplied for a given price and the supply price for a given quantity. The latter is the minimum price a producer would accept in return for one more unit, leading to the idea of producer surplus presented in the appendices. By presenting the supply curve as a curve of minimum acceptable prices, we can more easily interpret it as the industry marginal cost curve. This is an innovation for an "issues" book; it allows us to present and analyze important policy issues without developing the full cost-curve apparatus. In a one-semester "issues" course, it is costly to develop cost curves; either it takes too much time, or it is done too sketchily. We avoid these traps while developing the necessary tools for analysis. In short, supply conditions are developed for a competitive industry without the necessity of a thorough development of the theory of the firm. We develop both the demand and supply curves as long-run curves. In a one-semester issues course, some concepts must be sacrificed. We believe that the theory of the firm and the distinction between short- and long-run supply are concepts that can be deemphasized. In Chapters 3 and 4, however, we introduce some of the important distinctions between short- and long-run analysis.

The traditional analysis of changes in demand and supply compared with changes in quantity demanded and supplied is followed by an analysis of equilibrium price and quantity. The terms excess supply and excess demand are used rather than surplus and shortage so that the student avoids confusion between surplus meaning excess supply and other meanings of surplus. All of the demand and supply examples are discussed in the context of agriculture.

The rest of the chapter discusses agriculture programs. The purpose of agriculture programs is discussed in the context of market analysis. We invite the student to consider whether agriculture programs are designed to achieve the conventional goals of reducing farm poverty and saving the family farm. We present rent-seeking as an alternative explanation for the existence of agriculture programs.

Although we believe that agriculture and agriculture policy provide an excellent vehide for introducing demand, supply, and policy analysis, other vehicles may come more naturally to some students. If the instructor wishes, this unit could stop at the section entilted "Politics, Government, and the Farm Problem."

Instructional Objectives

After completing this chapter, your students should know:

1. The distinction between a change in demand and a change in quantity demanded, and three factors that cause the demand curve to change.
2. The distinction between a change in supply and a change in quantity supplied, and three factors that cause the supply curve to change.
3. The effect of changes in demand and supply on equilibrium price and quantity exchanged.
4. The avowed purpose and the actual effects of U.S. agriculture programs.
5. The types of risks faced by farms and some ways to deal with these risks.
6. The effects of and distinctions among price support programs, target price programs, and output constraint programs.
7. The concepts of economic and political rent-seeking and their importance.

Terms from Previous Chapters

You may wish to review the terms in this section at the beginning of your discussion of the chapter.

opportunity cost (Chapter 1)
demand schedule (Chapter 1)
demand price (Chapter 1)
law of demand (Chapter 1)
supply schedule (Chapter 1)
supply price (Chapter 1)
law of supply (Chapter 1)
excess demand (Chapter 1)
excess supply (Chapter 1)

Key Terms

These terms are introduced in this chapter:

decrease in demand substitute
increase in demand
normal good
inferior good
increase in supply
decrease in supply
economic profit
price support
target price
political rent-seeking
economic rent-seeking

Additional References

In addition to the references in the text, instructors may wish to read or assign one or more of the following:

1. Cletus C. Coughlin and Kenneth C. Carraro, "The Dubious Success of Export Subsidiesfor Wheat," Federal Reserve Bank of St. Louis, Review 70 (November/December 1988), pp. 38-47.
2. Mark Drabenstott and Alan D. Barkema," U.S. Agriculture Charts a New Course forthe 1990s," Federal Reserve Bank of Kansas City, Economic Review (January/February 1990), pp. 32-49.
3. Bruce Gardner, ed., U.S. Agricultural Policy: The 1985 Farm Legislation (Washington,D.C.: American Enterprise Institute for Public Policy Research, 1985).
4. Public Agenda Foundation, The Farm Crisis: Who~ in Trouble, How to Respond,National Issues Forum (Dubuque, Ia.: Kendall/Hunt Publishing Company, 1989).
5. Richard T. Rogers, "Broilers: Differentiating a Commodity," in Larry L. Duetsch, ed., Industry Studies (Englewood Cliffs, N.J.: Prentice Hall, 1993), pp. 3-32.
6. Daniel B. Suits, "Agriculture," Chapter 1 in Walter Adams, ed., The Structure of American Industry, 8th ed. (New York: Macmillan, 1990), pp. 1-40.
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