What is Agricultural Economics? Chapter 1. Impact of reduced wheat supply on world wheat prices in...
-
date post
20-Dec-2015 -
Category
Documents
-
view
224 -
download
3
Transcript of What is Agricultural Economics? Chapter 1. Impact of reduced wheat supply on world wheat prices in...
What are the benefits vs. the costs of using the above vaccine that could prevent the spread of salmonella?
Discussion Topics
Scope of economicsDefinition of economicsDefinition of agricultural economicsWhat do agricultural economists do?
General Overview
Agricultural economics studies agriculture and the food industry in its many dimensions
The agricultural economist is concerned with the entire food and fiber systemPurchased and non-purchased inputs usedProduction of primary productProcessing into final productDistribution to final consumption pointConsumption of the final product
General Overview
Study of agricultural economics covers much more than activities of farmers or ranchers.Some economists deal with issues of resource
conservation, pollution control, and water management.
Others study the agribusiness sector as purchasers, processors, and distributors of food and fiber products.
General Overview
The objective of any scientific inquiry is to:Observe and describe a particular set of
phenomenaOrganize those observations into
recognizable patternsFormulate laws where sufficient regularity
warrants The laws give scientist a basis on which to
make predictions
General OverviewEconomics is a social science, and social
scientists must deal with the laws of human nature Humans are not consistent in their behavior
→ the laws of the social scientist are less reliable than hard sciences
→ more open to exception than those of physical/biological scientists.
Nevertheless, economic behavior of most persons is generally consistent, and thus, predictable to some degree Certainty varies across phenomena
Definition of Economics
“…a social science concerned with how consumers, producers, and societies choose among alternative competing uses of scarce resources in the process of producing, exchanging, and consuming goods and services”
Page 5
Definition of Economics
Page 5
The study of economics rests on three foundations:Self-interestScarcity and Choice
Without scarcity, there would be no need for an allocation system
Definition of Economics
Page 5
Choice is important because without choices there is no decision to be made.Since economics is about decision making &
allocation without choices there would be no need for economics
Self-interest Drives the consumer to purchase more at a
lower priceIt also drives the producer to produce as
efficiently as possibleAll economic activity is driven by self-interest
Scarce Resources
Pages 2-3
Resources describes anything tangibleWheat, barbed wire, hamburgers, water,
labor, clean air
Every resource is relatively scarce→ availability of every resource is insufficient
to satisfy all of its potential users
Scarcity creates need for a system to allocate resources among potential usersNeed a theory by which allocation takes place
Scarce ResourcesNatural and biological resources
3.5 million square miles of land surface954 million acres of land in farmsLimited supply of crude oil/natural gas
reservesHuman resources
141.1 million people in U.S. civilian labor force
Manufactured resources3.9 million miles of highways121.4 million tons of steel making capacity
Pages 2-3
Making ChoicesResource scarcity forces consumers and
producers to make choicesOpportunity cost – an implicit cost associated
with economic decisions often not reflected in the market
Specialization – comparative advantage and the basis for trade between countries
Individual decisions – maximization of consumer utility and producer profits
Societal decisions – production possibilities given existing resources (solar technology subsidies vs. carbon tax)
Pages 3-4
Relative strengths of Kansas:Strong in wheat production
Relative strengths of Kansas:Strong in wheat production
Page 4
Surplus of WheatShortage of OrangesShortage of Potatoes
Kansas
Specialization Example
Page 4
Shortage of WheatShortage of OrangesSurplus of Potatoes
Relative strengths of Idaho:Strong in potato production
Relative strengths of Idaho:Strong in potato production
Idaho
Specialization Example
Page 4 Relative strengths of Florida:Strong in Orange production
Relative strengths of Florida:Strong in Orange production
Shortage of WheatSurplus of OrangesShortage of Potatoes
Florida
Specialization Example
Page 4
Shortage of WheatSurplus of OrangesShortage of Potatoes
Surplus of WheatShortage of OrangesShortage of Potatoes
Shortage of WheatShortage of OrangesSurplus of Potatoes
Potat
oes
Potatoes
Specialization Example
Florida
Idaho
Kansas
Whe
at
Wheat
Oranges
Oranges
Each state specializes in what it doesbest and trades with other states…
Each state specializes in what it doesbest and trades with other states…
Basis of EconomicsEvery economic system must resolve 5
basic issuesWhat to produceHow to produce itHow much to produceWhen to produceFor whom to produce
Every society must answer these questionsInstitutional & political systems of each
society determine the manner in which these decisions will be made
Basis of Economics
Pages 5-6
One allocation mechanism lies in the free market or price systemIndividual producer and consumers,
restricted only by financial resources, are free to choose what, how, how much, and when to produce or consume. Financial resources of each consumer resolves the
“for whom” question
Another mechanism is the command systemAll decisions are made by a central planning
agency or individual
Basis of EconomicsAdvantage of the price system is consumer
sovereignty and freedom The price system is an efficient mechanism
for the what, how, how much, and when decisions
There are some shortcomings:The old adage, that the rich get richer and the
poor get poorer, has some validityThere are a number of resources that a price
system cannot efficiently allocate. Frequently called public or nonmarket goods i.e., education, national defense, fire protection,
wilderness areas, clean air, etc.
Basis of EconomicsAdvantages of a command system are that it
is very effective in allocating public goodsCan be quite egalitarian in for whom decisions
Disadvantage of command system is the loss of individual freedom in economic decisionsInherent inefficiencies of central planning
agencies
Scope of Economics
Pages 5-6
Economics can be divided into three parts:MicroeconomicsMarket economicsMacroeconomics
As the level of aggregation changes economic tools may also changeWhat makes sense for decision-making by
the individual may not necessarily be valid for a group or an entire economy
Level of aggregationdiffers
Scope of Economics
Pages 5-6
Microeconomics concerned with the economics of individual producers and consumers.
The microeconomics of production examines the economics of individual producers or firms How does a firm acquire resources and
combine them in the production process? What is the difference between cost
minimization and profit maximization
Scope of Economics
Pages 5-6
Production management decisions impacting firm profit include:Which inputs to purchase
Multiple inputs to choose from Should this choice depend on input prices?
What production technique to use Multiple production technology Technology determines input utilization
Which product to produce Multiple products to choose from
How much of each product to produce Should this depend on product prices?
When to produce them
Scope of Economics
Pages 5-6
Another branch of microeconomics concerned with the individual consumer behaviorThe microeconomics of consumption
The consumer is faced with the economic problem of deciding what to purchase with limited resourcesMoney and time are two such resources
Scope of Economics
Pages 5-6
The individual consumer must make a number of consumption decisions over time May not be the product of conscious
deliberation May be habitual or impulsive
The consumer must decide what to buy and what not to buy
Consumer must also decide when to consume
Scope of Economics
Pages 5-6
Each consumer faces the inevitability of scarcity in the form of a limited budgetGiven this scarcity, each consumer uses
his/her sovereignty to resolve the for whom allocative decision
Scope of Economics
Pages 5-6
A market is established when potential buyers and sellers interact to negotiate prices and exchange goods
Market versus a marketplace.Former (i.e., Market) refers to
interaction of buyers and sellersThe latter (i.e. Marketplace) refers to a
physical location
Scope of Economics
Pages 5-6
Market economics encompasses the study of the dealings in a particular commodity Interaction of all potential buyers and sellers
In the neoclassical model, each participant in a market is a price taker Collective decisions of all participants in a
market determine the price An individual consumer has no impact on
price
Scope of Economics
Pages 5-6
As a price taker the only decision each producer/consumer can make is a choice of whether or not to sell/buy at the market priceAs the number of yes votes changes, in
aggregate, the price will also change
Scope of Economics
Pages 5-6
Four characteristics of a commodity that are impacted by the marketing of a good from producer to final consumerTimePlaceFormPossession
Scope of Economics
Pages 5-6
It is a complex system that transforms a Minnesota farmer’s August wheat harvest to a New York banker’s toast in JanuaryForm of the wheat must be changed to
bread The place moves from MN to NYTime changes from August to JanuaryPossession changes from farmer to banker
Scope of Economics
Pages 5-6
Macroeconomics concerned with the entire economic systemCity, state, national or international level
Questions considered What are the linkages within the
economic system as a whole? What are the economy-wide impacts of
changes in policies or institutions? What impacts the unemployment and
inflation rates, the balance of payments, and the Federal deficit?
Scope of Economics
Pages 5-6
Economic system performance at the macro level is important to agricultural producers and consumers Micro management decisions are
predicated on existing macro-economic conditions i.e., Do I expand my cheese plant given low
interest rates?
Scope of Economics
Pages 5-6
Macroeconomics deals with the economic impacts of public policiesi.e., food stamps, pesticide usage
restrictions or agricultural price supports On each sector of the economy individually
and the entire economy collectively
The macroeconomist also concerned with international issues
Scope of Economics
Pages 5-6
U.S. agricultural sector: International markets are increasingly importantForeign buyers are one of the most
important market for U.S. crop production 40% of cropland used to produce food & fiber
exportedImports—particularly petroleum—are
are important in the cost structure of U.S. farmers, food processors, and distributors
We share a humanitarian concern for world’s population that lives in hunger
What is Agricultural Economics?
“…an applied social science that deals with how producers, consumers, and societies use scarce resources in the production, processing, marketing, and consumption of food and fiber products”
Page 6
Economic Models
Economists like to abstract from the complexity of the real world via the use economic models Simplification of and abstraction from
observed data
Economic ModelsAn economic model
Is a theoretical construct developed via logical reasoning
Represents economic processes Variables that describe the system Logical and/or quantitative relationships
between these variables• i.e., Unemployment rate and mortgage lending rates
Simplified framework used to illustrate complex processes
Sometimes, but not always, based on mathematical techniques
Economic ModelsSimplification is important for economic
models given the enormous complexity of economic processes
Complexity arises from diversity of factors that determine economic activity Individual/cooperative decision making Resource limitations Environmental & geographical constraints Institutional and legal requirements Purely random fluctuations (i.e. weather)
Economic ModelsWhen developing an economic model the
economist must make a reasoned choice of: Which variables are relevant Which relationships between these
variables are relevant Which ways of analyzing and presenting
this information are useful i.e., model type/structure
Economic ModelsEconomic models when properly
constructed Remove extraneous information Isolate useful approximations of key
relationships More can be understood about
relationships in question than by trying to understand entire economic process
Economic ModelsA common economic model: Perfect
Competition → a number of assumptions about the firm and its environment The firm small relative to the market and
its actions will not impact the market Firm manager tries to maximize profits
given a particular resource endowment
Are the assumptions valid? If not, results may not be appropriate
Economic ModelsIdeally, economic models approximate
reality in a manner that enhances ones ability to conceptualize and understand real world eventsModels provide the economist with an
internally consistent mechanism for conceptualizing problems
They force the economist to reason in a systematic, logical and deductive manner
Ceteris Paribus
Ceteris paribus: is a Latin phrase that roughly translates: everything else being equal An economic principle is valid only when
all other external factors remain the same
Use of ceteris paribus gives economics much of the logical rigor required in a scientific inquiry
Opportunity CostOpportunity cost: Important termAll economic resources have value
Value usually determined in a marketplace where resource user pays prevailing price
Sometimes resources have economic value, butthose resources are not purchased in a market
In this last case economists use opportunity costs to determine the resource’s economic value Though there is no market price
Opportunity Cost
Opportunity cost is the economic value of a resource in its highest value alternative use
Common mistake: Price vs. CostPrice is a per-unit concept
i.e., What is the price of a gallon of gasoline?Cost refers to the concept of prices times
quantity purchased i.e., What did it cost to fill up your car?
Opportunity CostOpportunity costs cannot be
measured directly Can only be estimated indirectly We will review some of these methods
later
Opportunity CostThe study of economics is all about
economic values—costs vs. returns When available, we use market prices
to determine economic value. When market prices are not available,
we use the concept of opportunity cost to estimate those values
Returns can be measured in terms of $ or in terms of satisfaction (or utility)
Diminishing ReturnsIn models of the economics of
production and consumption the concept of diminishing returns is keyAs you increase the amount of something,
ceteris paribus you will eventually reach a point where you increase at a decreasing rate i.e., Diminishing returns with respect to
amount of labor used to produce a crop
Diminishing ReturnsConsumer side: Law of diminishing
marginal utility Marginal utility: The additional utility
(satisfaction) associated with one additional unit of a good being consumed—ceteris paribus
→ Amount of utility gained from consuming a good eventually increases but at a decreasing rate Assuming consumption of everything else
stays constant
Diminishing ReturnsProduction side: Law of diminishing
marginal product If you add a certain level of an input to
fixed amounts of other inputs, the additional production from this extra input will eventually decrease i.e., If you add additional units of fertilizer
to a fixed amount of land, eventually response per unit of fertilizer begins to increase but at a decreasing rate
Can eventually turn negative Too much fertilizer can burn a crop, ↓yield
MarginalityOne of the greatest contributions of
economics is the concept of marginality Marginal refers to an additional or
incremental unit of something
Most economic analyses deal not with marginal value of production or consumption However, it is on the margin where the
economic decisions are made
MarginalityThe consumer’s relevant economic
question:Is the marginal utility associated with
purchasing one additional unit of a good greater than the marginal cost of acquiring that unit?
MarginalityRegardless of current total
satisfaction (utility) level if the marginal utility is greater than the
marginal costthe consumer can increase total utility
by consuming this marginal unit
The same basic principle applies to productionIf marginal value of output is greater
than the marginal cost of production then produce that marginal unit
Marginality
↓ Marginal returns (MR) as fertilizer amount ↑ ceteris paribus
Mar
gin
al C
osts
an
d R
etu
rns
Quantity of Fertilizer/Acre
20
15
10
Q1 Q2 Q3
Marginal cost (MC) of obtaining additional fertilizer is constant and equals fertilizer price
Economical input useoccurs at the margin
$/lb fert.
MarginalityUsing marginal analyses one can
determine the behavior that will maximze profit, minimize cost, maximize utility or maximize social welfareIgnoring total costs or returns &
concentrating on marginal costs and returns
From the economist’s perspective, everything happens on the margin
Logical FallaciesMany economists go astray because
they fall into one of four logical traps Known to snare large numbers of
agricultural economics studentsI have fallen into some of these
The Four TrapsCorrelation-CausationCompositionPost Hoc Zero-Sum Game
Logical Fallacies
Correlation-Causation FallacyCorrelation refers to two events that
share some sort of mutual relationship in a regular and predictable manner
Causation refers to two events in which there is a cause-and-effect relationship between two events
Logical Fallacies
When two events have a causal relationship, they also have a correlation
Fallacy is assuming that if two events are correlated they must be related in some sort of causative manner
Logical Fallacies
Frequently, events that are correlated behave in a mutual relationship because they are both related in a causative fashion to some 3rd event
Logical FallaciesFallacy of Composition
Asserts that what is true of a part is, therefore, true of the whole
In many situations, it is perfectly valid to reason that what is true for the individual must also be true for the group
A farmer who attempts to maximize profits also provides food at the lowest possible price If each farmer freely attempts to do what is in
his/her best interest both farmers and consumers benefit
Logical FallaciesThere are instances where individual
self-interest may not be in the group’s best interest Fallacy of composition example
Basketball spectator can improve his view of a game by standing. By so doing he is better off Society as a whole is worse off because he
destroys the view for others
Logical Fallacies
In making the fallacy of composition the spectator would declare: If I stand up, I can see better → → If everyone stood up, everyone could
see better In fact this would not be the case
Logical FallaciesPost Hoc Fallacy: post hoc, ergo
propter hoc (Latin) Translation: After this, therefore
because of this Fallacy is the belief that because one
event precedes another, the first causes the second i.e., the rooster, convinced that his crowing
causes the sun to rise is guilty of this fallacy
Logical FallaciesZero-Sum Game Fallacy
Common in economics: If someone gains, someone else must lose
This is the heart of the nearly universal suspicion that both producers and consumers are repeatedly exploited by “middlemen”
Often expressed by the question: Who got the better part of the deal?
Logical FallaciesThe basis of economics is exchange
Usually a good/service exchanged for $
A skeptic: In a transaction the buyer and seller are equally worse offTo the contrary, both are better off, for
each has acquired something he wanted more than what he had If they weren’t better off they would never
have traded in the first place
Logical FallaciesA completed economic transaction
with no coercion is a win–win situationRather than a win–lose situation as
suggested by this fallacy
As a result of the exchange, perceived value controlled by each is increased
Logical FallaciesAs long as transactions
Are conducted without coercion nor constraint
→ an ↑ in the value held by one participant does not necessarily have to be the result of a ↓ in the value held by the other
Usually both should be better off
Fact, Beliefs and ValuesEconomics is concerned with the
value system of individuals and society
Important to distinguish between facts, beliefs and valuesFacts are what we know to be the caseBeliefs are what we think to be the caseValues are what we think should be the
case
In SummaryResource scarcity - natural, human
and manufactured – forces individuals and societies to make choices
Comparative advantage leads to trade
Micro vs. MacroeconomicsReviewed scope of economicsDefinition of agricultural economics