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Torbjörn Jansson*. CAPRI Common Agricultural Policy Regional Impact. Connecting supply and demand. CAPRI Training Session in Warzaw, June 26-30, 2006. *Corresponding author +49-228-732323 www.agp.uni-bonn.de. Department for Economic and Agricultural Policy Bonn University Nussallee 21

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Connecting supply and demand

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Torbj rn jansson

Torbjörn Jansson*

CAPRICommon Agricultural Policy Regional Impact

Connecting supply and demand

CAPRI Training Session in Warzaw, June 26-30, 2006

*Corresponding author

+49-228-732323www.agp.uni-bonn.de

Department for Economic and Agricultural Policy

Bonn University

Nussallee 21

53115 Bonn, Germany


Reminder general model layout

Reminder – General Model Layout

Quantities

Prices

Iterations

Comparative Static Equilibrium

SupplyRegionaloptimisationmodelsPerennialsub-module

MarketsMulti-commodityspatial market model


On convergence

p

s

p0

p0

d

q

On convergence

p

s

s

d

q


Conclusions

Conclusions

  • If “demand elasticity” > “supply elasticity”, it will converge, otherwise not

  • CAPRI has to be solved iteratively

  • Elasticities are chosen bases on economic criteria not to obtain convergence

     We will likely need some mechanism promote convergence in CAPRI


Different ways of promoting convergence

Different ways of promoting convergence

  • Adjustment cost: Additional production cost for deviating from the supply in the previous step

  • Price expectation: Supply uses weighted average of prices in several previous step. Used in CAPRI

  • Partial adjustment: Supply only moves a fraction of the way towards the optimum in each step

  • Approximate supply functions used in market instead of fixed supply. Used in CAPRI


Approximation of supply functions

Approximation of supply functions

  • The implicit supply function is unknown

    • Difficult to derive for CAPRI

    • Has non-differential points (corners)  difficult to solve together with market model

  • Assume “any” simple supply function that approximates the supply model

  • Calibrate the parameters in each step so that the supply response of last step is reproduced


Approximating supply

Assume the “explosive situation”…

p0

Approximating supply

p

s

s

d

q


Approximating supply1

Supply function is unknown (supply is a black box)

Assume any supply function

Starting with some price, compute supply

Calibrate the assumed supply function to that point

Solve supply + demand simultaneously for new price

Iterate…

s’

s’

p0

q0

Approximating supply

p

s

s

d

q


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