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Agricultural Microeconomics Lesson 3: Cost Considerations

Agricultural Microeconomics Lesson 3: Cost Considerations.

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Agricultural Microeconomics Lesson 3: Cost Considerations

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  1. Agricultural MicroeconomicsLesson 3: Cost Considerations This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

  2. What are the costs of running a small farm? • Operating (Variable) Expenses • Fixed Expenses • Capital Expenditures • Opportunity Costs

  3. How much does a car cost?

  4. How much does a car cost? • Purchase price • Interest Expense • Fuel Expense • Maintenance and Repair Expense • Insurance Expense • Taxes and Registration Fees • Depreciation Expense

  5. An Depreciation Example Depreciation Expense = (Purchase Price – Residual Value) (Useful life of the equipment) ($20,000 - $4,000) 10 Depreciation Expense = $1,600

  6. A Closer Look at Piedmont Farm • What types of expenses does the farm have? • What are the farm’s variable costs? • What are the farm’s fixed costs? • What types of capital expenditures might they have in the future? • Are there any opportunity costs not included in the farm’s revenue and expense statement?

  7. Discussion Question #1 Market price sensitivity – What happens to the retail price of beef if Piedmont Farm increases the price per pound sold to grocery stores? How might customers react to the change in price?

  8. Discussion Question #2 Changes in Supply - If more grass-fed beef is available from other farms, what happens to Piedmont Farm’s revenue? What might the owners do to reduce the impact to Piedmont farm?

  9. Discussion Question #3 Competition - How do Piedmont Farm’s prices compare with what you can find in a conventional grocery store? If the farm’s prices increase, will it still have the same amount of revenue (in other words, would it still sell the same amount of beef?). Why or why not?

  10. Discussion Question #4 Type of Operation – What might happen if the farm went back to traditional grain-fed beef in the winter months? What would this do to the farm’s revenue from the sale of beef? What would happen to costs?

  11. Discussion Question #5 Scale of Operation – What happens to the farm’s operating costs if it increases the number of cattle on the ranch? How much more acreage does it need? How much more hay? How much more labor?

  12. Discussion Question #6 Fixed Costs – What happens if the farm’s sales (revenue) decrease? Which expenses can it change?

  13. Discussion Question #7 Owner’s Salary – Is the net farm income enough to cover the owner’s salary? Why or why not? How would you make changes?

  14. Discussion Question #8 New Equipment – What would happen if the farm needed to replace a piece of farm equipment? What would you do to cover the costs of this new expense?

  15. Next Class: Subsidies and Incentives This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

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