NEGATIVE SUPPLY RESPONSE AND THE ROLE OF PRICE EXPECTATIONS IN A 2-PERIOD MODEL OF CATTLE PRODUCTION

This paper incorporates a representation of producers' price expectations (ARIMA) in a two‐period production process to characterise short‐run cattle supply. The model provides a framework for examining the role of biological factors and changing expectations of future cattle prices in generating a negative short‐run supply response. The biological link between cattle generations requires the farmer to make a decision between production today and production tomorrow. This decision is based on a trade‐off between the possibilities of increasing current profit levels by increasing current output weighted against the possibilities of increased future profit by maintaining animals in inventory under the expectation of future price increases. Application of the model to Canadian data for the period 1978‐81 shows that the necessary condition for a negative supply response exists, but that the total supply elasticity remains positive. Copyright © 1990, Wiley Blackwell. All rights reserved