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Agricultural prices depend on both supply and demand, and this time we'll be looking at supply. By
supply, I mean how much of a product producers will choose to produce and sell at a particular price.
When the farmer decided to grow this crop of canola, the expected price was around $430 per ton. But if
the price had been only $250 per ton, the farmer would've decided to grow wheat in his field instead of
canola. Lower price, less supply. Today, I'm going to use canola as my example agricultural product, but
the same principles apply to any product. Clearly, the quantity of canola produced depends on the price
that farmers expect to receive. And the reason for that is that the more canola a farmer tries to produce,
the more it costs them per unit of output. This graph shows the total cost for an agricultural product as
the quantity produced changes. So, the total cost, as you can see, typically increases at an increasing rate.
In other words, the slope gets steeper as we go to higher quantities of production. Economists refer to
this slope of this line as the marginal cost. So, the marginal cost is the slope. It tends to increase as you go
into higher quantities of production. So, let's graph that. Let's graph the marginal cost. It's increasing, and
there it is. So, the marginal cost tells us how much it costs to produce one more unit of output, and it
typically is upward sloping like this. Now, the marginal cost is relevant because it helps us to decide how
much output should be produced. To maximize profit, the farmer should grow the quantity of canola at
which the marginal cost equals the expected price of canola. So in this graph, I've drawn in the price-- the
world price or the market price of canola--and at the point where that crosses the marginal cost curve,
I've drawn a dashed line down to the quantity axis. And you can see Q*. Q* is the optimal quantity of
canola to produce if the farmer wishes to maximize profit. So why is that? Why does Q* maximize profit?
It's because if the farmer chooses to grow less canola than Q*, there's an opportunity to make more
money by increasing production because the sale price is greater than the marginal cost. On the other
hand, if the farmer chooses to grow more canola than Q*, there's a chance to avoid some losses by
reducing production because the price received is less than the marginal cost. He's losing money at the
margin. So, a profit-minded farmer will always aim for Q*. They don't always know where Q* is exactly,
because they can't predict the weather or the market price, but they can have a good guess. So the
marginal cost curve equals the supply curve is the point of this slide. The marginal cost curve indicates the
amount produced at a given price. But earlier on, I said pretty much that that was the definition of the
supply curve. The supply curve represents the amount produced at a given price. So, the marginal cost
curve actually corresponds to the supply curve. If you know the marginal cost curve, then you'd know the
supply curve. In this graph, I've just renamed that curve to the supply curve. And it shows us that the
higher the price, the more of the product that the farmer will choose to produce and sell. So, in summary,
total cost increases at an increasing rate with higher quantities of production. And the marginal cost
equals the slope of the total cost curve, and it increases with quantity because slope does. Now, the
marginal cost curve indicates the optimal level of production at different prices, and that corresponds to
the supply curve. So all of that adds up to mean that the supply curve is upward sloping.

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