What is Agricultural Economics?

1. What isAgriculturalEconomics? Chapter 1

2. Impact of reduced wheat supply on world wheat prices in the U.S.

5. How can a value be placed on wildlife not part of a commercial harvest?

6. What are the benefits vs. costs of using the vaccine that could prevent the spread of salmonella?

7. What are the income and employment impacts on other industries and on government revenues?

8. Discussion Topics • Scope of economics • Definition of economics • Definition of agricultural economics • What do agricultural economists do?

9. 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 system • Purchased and non-purchased inputs used • Production of primary product • Processing primary product into final product • Distribute final product to final consumption point • Consumption of the final product

10. 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.

11. General Overview • Agricultural Economics a subfield of Applied Economics • Applied Economics: Application of economic theory to actual events • Examples of economic specialization: labor, education, health, monetary, public, history, environmental, renewable resources, non-renewable resources, industrial organization, etc • Typically involves a reduction in the level of abstraction of core theory • Depict actual characteristics of economic problem of concern

12. General Overview • The objective of any scientific inquiry is to: • Observe and describe a particular set of phenomena • Organize those observations into recognizable patterns • Formulate theories or models where sufficient regularity is sought • Theory give scientist a basis on which to make predictions • i.e., theory of supply and demand

13. General Overview • Economics is a social science and social scientists must deal with the laws of human nature • Humans are not consistent in their behavior • → social science theory are less reliable than hard science based (i.e., 2 molecules of hydrogen and 1 molecule of oxygen required for H20, water) • → 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

14. 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

15. Definition of Economics • The study of economics rests on three foundations: • Self-interest • Scarcity and • Choice • Without scarcity, there would be no need for an allocation system Page 5

16. Definition of Economics • 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 or economists • Self-interest • Drives the consumer to purchase more at a lower price • It also drives the producer to produce as efficiently as possible to maximize profits • A majority of economic activity is driven by self-interest Page 5

17. Scarce Resources • Resources describes anything tangible • Wheat, 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 allocateresources among potential users • Need a theory by which allocation takes place Pages 2-3

18. Scarce Resources Natural and biological resources 3.5 million square miles of land surface in U.S. 954 million acres of land in farms in U.S. Limited supply of crude oil/natural gas reserves Human resources >155 million people in U.S. civilian labor force Manufactured resources 3.9 million miles of highways 121.4 million tons of steel making capacity Pages 2-3

19. Making Choices • Resource scarcity forces consumers and producers to make choices • Opportunity 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/or producer profits • Societal decisions – how can we impact production possibilities given existing resources (solar technology subsidies vs. carbon tax) Pages 3-4

20. An Example ofSpecialization

21. Specialization Example Kansas • Surplus of Wheat • Shortage of Oranges • Shortage of Potatoes Relative strengths of Kansas: Strong in wheat production Page 4

22. Specialization Example • Shortage of Wheat • Shortage of Oranges • Surplus of Potatoes Idaho Relative strengths of Idaho: Strong in potato production Page 4

23. Specialization Example Florida • Shortage of Wheat • Surplus of Oranges • Shortage of Potatoes Relative strengths of Florida: Strong in orangeproduction Page 4

24. Specialization Example • Surplus of Wheat • Shortage of Oranges • Shortage of Potatoes Kansas Oranges Wheat Wheat Potatoes Florida Potatoes Idaho Oranges • Shortage of Wheat • Shortage of Oranges • Surplus of Potatoes • Shortage of Wheat • Surplus of Oranges • Shortage of Potatoes Each state specializes in what it does best and trades with other states… Page 4

25. Basis of Economics • Every economic system must resolve 5 basic issues • Whatto produce • How to produce it • How muchto produce • Whento produce • For whomto produce • Every society must answer the above questions • Society’s institutional and political systems determine the manner in which these decisions are made

26. Basis of Economics • One allocation mechanism lies in the free market or price system • Individual 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 system • All decisions are made by a central planning agency or individual Pages 5-6

27. Basis of Economics • Advantage of the price system is consumer sovereignty and freedom • The price system is an efficient mechanism for 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 validity as there is no consideration of income distribution • There are a number of resources that a price system cannot efficiently allocate. • Publicor nonmarketgoods (i.e., education, national defense, fire protection, wilderness areas, clean air, clean water, viable fish population, etc.) Pages 5-6

28. Basis of Economics • Advantages of a command system are that it is very effective in allocating public goods • Can be quite egalitarian in for whomdecisions • Consider distributional effects • Disadvantage of command system is the loss of individual freedom in economic decisions • Inherent inefficiencies of central planning agencies Pages 5-6

29. Scope of Economics • Economics can be divided into three parts: • Microeconomics • Market economics • Macroeconomics • As the level of aggregation changes economic tools may also change • What makes sense for decision-making by the individual may not necessarily be valid for a group or an entire economy Aggregation levels differ Pages 5-6

30. Scope of Economics • Microeconomics concerned with the economics of individual producers and/or 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 vs. profit maximization in terms of resource use? Pages 5-6

31. Scope of Economics • Production management decisions impacting firm profit include: • Which inputs to purchase • Multiple inputs to choose from (i.e., should I rent cropland versus purchasing) • Should this choice depend on input prices (i.e., what is the annual rental rate vs. ownership costs)? • What production technique to use • Multiple production technologies (i.e., conventional tillage, minimum tillage, no-till) • Technology determines input utilization (i.e., no-till requires less energy inputs and water use) Pages 5-6

32. Scope of Economics • Production management decisions impacting firm profit include: • Which product to produce • Multiple products to choose from (i.e., how much of my land to devote to corn vs. soybeans) • How much of each product to produce • Should this depend on product prices (i.e., corn costs more/acre to grow than soybeans) • When to produce them • Marginal benefit versus costs of waiting a week to plant so that the soil is more dry • Economics of storage Pages 5-6

33. Scope of Economics • Another branch of microeconomics concerned with individual consumer behavior • Microeconomics of consumption • The consumer is faced with the economic problem of deciding what to purchase with limited resources • Money and time are two such limited resources Pages 5-6

34. Scope of Economics • 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 (i.e., full-fat vs. reduced fat milk) • Consumer must also decide when to consume • Purchase off-season at discounted prices Pages 5-6

35. Scope of Economics • Each consumer faces the inevitability of scarcity in the form of a limited budget • Given this scarcity, each consumer uses his/her sovereignty to resolve the for whom allocative decision Pages 5-6

36. Scope of Economics • A market is established when potential buyers and sellers interact to negotiate prices and exchange goods • Marketversus a marketplace • Marketrefers to interaction of buyers and sellers • Marketplacerefers to the physical location where market participants interact Pages 5-6

37. Scope of Economics • Market economics encompasses the study of the dealings in a particular commodity • Interaction of all potential buyers and sellers P* Q* Pages 5-6

38. Scope of Economics • In the neoclassical model of the market • Each participant in a market (buyer or seller) is a price taker • Collective decisions of all participants in a market determine the price • An individual consumer has no impact on market price Pages 5-6

39. Scope of Economics • 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 price • As the number of yes votes changes, in aggregate, the price will also change Pages 5-6

40. Scope of Economics • Four characteristics of a commodity that are impacted by its marketing • That is, moving the commodity from point of production to final consumer • Time • Place • Form • Possession Pages 5-6

41. Scope of Economics • It is a complex system that transforms a Kansas farmer’s August wheat harvest to a New York stock broker’s toast in January • Form of the wheat must be changed: • wheat kernels → wheat flour → bread • Theplacemoves from KS to NY • Timechanges fromAugust to January • Possession changes from farmer to banker Pages 5-6

42. Scope of Economics • Macroeconomics concerned with the entire economic system • City, 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? Pages 5-6

43. Scope of Economics Macroeconomics Example Pages 5-6

44. Scope of Economics • 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., the Federal Reserve guaranteed low interest rates for the next two years. • Cheese plant manager: Do I expand my cheese plant given these low interest rates? • With 15 year mortgages @ 3.5% should I refinance? Pages 5-6

45. Scope of Economics • Macroeconomics deals with the economic impacts of public policies • Food stamps, pesticide use restrictions, dairy product price support system, etc. • These policies can impact a particular sector of the economy as well as the theentire economy • The macroeconomist also concerned with international issues Pages 5-6

46. Scope of Economics • U.S. agricultural sector: International markets are increasingly important • Foreign buyers are one of the most important market for U.S. crop production • 40% of cropland used to produce food & fiber that is exported • Other sectors becoming increasingly dependent on foreign export markets • Productivity growth rate higher than domestic demand expansion. Pages 5-6

47. Scope of Economics % of Dairy Solids Dramatic Drop In Milk Prices Dairy Exports Dairy Imports Pages 5-6

48. Scope of Economics • U.S. agricultural sector: International markets are increasingly important • Imports—particularly petroleum—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 Pages 5-6

49. Scope of Economics Pages 5-6

50. 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