Economic Tidbits

Supply & Demand Indices Applied to Beef Markets

Annual Change in Producer and Consumer Surplus Fed Cattle

Prices for goods and the quantities supplied or demanded change in markets. The changes could represent movements along supply/demand curves or shifts in supply/demand.

Movements along curves mean underlying demand or supply relationships have not changed. A shift in demand/supply occurs when the underlying relationships in a market change. For example, consumers will demand more of a good at the same price (i.e. preferences change); or suppliers will provide more of a good at the same price (i.e. productivity improves).

Jayson Lusk and Glyn Tonsor, researchers at Purdue University and Kansas State University respectively, have developed supply and demand indices to examine markets and analyze structural adjustment patterns over time. Demand indices isolate changing consumer preferences; supply indices measure changes in productivity and supply. To demonstrate the value of such indices, Lusk and Tonsor used them to examine the demand, supply, and welfare in the fed cattle sector as part of their research. For purposes of their analysis, producers of fed cattle included feedlots, stockers, and cow-calf operators. Consumers included packers, retailers, and final consumers.

Lusk and Tonsor found that “demand indices indicate demand for beef cattle is higher in 2018 than in 1980” and that the marginal costs of producing fed cattle in 2018 was 77 percent lower than in 1980. Further, the authors found both producer and consumer surpluses, a measure used by economists to gauge producer and consumer welfare, had increased since 1980 (Figure 3). Lusk and Tonsor state, “On average, from 1980 to 2018, producer surplus increased $2.7 billion each year and consumer surplus increased $0.58 billion each year.” In short, Lusk and Tonsor found supply and demand improvements in fed cattle have resulted in welfare gains for both producers and consumers.

Figure 3. Annual Change in Producer and Consumer Surplus, Fed Cattle

Annual Change in Producer and Consumer Surplus Fed Cattle

Source: Supply and Demand Indices and Their Welfare Implications, Jason L. Lusk and Glynn T. Tonsor, January 24, 2020

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