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DECOMPOSING THE VARIANCE OF GROSS REVENUE INTO DEMAND AND SUPPLY COMPONENTS

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Abstract

Some recent analyses relating to gross revenue instability have used a procedure for decomposing the variance of gross revenue into components attributable to price variability, quantity variability and interaction between these. This paper offers some criticisms of the procedure and outlines an alternative procedure which divides the variance of gross revenue into components due to demand variability, supply variability and interaction between these. The procedure is used to investigate the causes of instability in quarterly beef revenues in the Australian beef industry. Since demand and supply variability are both important contributors to beef revenue instability, direct market intervention to stabilise beef industry revenues would be a complex and risky task.

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