Introduction to Production and Resource Use

What isAgriculturalEconomics?Chapter 1Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.

Impact of reduced wheat supply on world wheat prices in the U.S.Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.

How can a value be placed on wildlife not part of a commercial harvest?Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.

What are the benefits vs. costs of using the vaccine that could prevent the spread of salmonella?Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.

What are the income and employment impacts on other industries and on government revenues?Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Discussion TopicsScope of economicsDefinition of economicsDefinition of agricultural economicsWhat do agricultural economists do?Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.General OverviewAgricultural 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 primary product into final productDistribute final product to final consumption pointConsumption of the final productIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.General OverviewStudy 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.Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.General OverviewAgricultural Economics a subfield of Applied EconomicsApplied Economics: Application of economic theory to actual eventsExamples of economic specialization: labor, education, health, monetary, public, history, environmental, renewable resources, non-renewable resources, industrial organization, etcTypically involves a reduction in the level of abstraction of core theoryDepict actual characteristics of economic problem of concernIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.General OverviewThe objective of any scientific inquiry is to:Observe and describe a particular set of phenomenaOrganize those observations into recognizable patternsFormulate theories or models where sufficient regularity is soughtTheory give scientist a basis on which to make predictionsi.e., theory of supply and demandIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.General OverviewEconomics is a social science and social scientists must deal with the laws of human natureHumans 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 degreeCertainty varies across phenomenaIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Definition of Economicsa 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 servicesPage 5Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Definition of EconomicsPage 5The study of economics rests on three foundations:Self-interestScarcity and Choice

Without scarcity, there would be no need for an allocation systemIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Definition of EconomicsPage 5Choice 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 priceIt also drives the producer to produce as efficiently as possible to maximize profitsA majority of economic activity is driven by self-interestIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scarce ResourcesPages 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 placeIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scarce ResourcesNatural and biological resources3.5 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 reservesHuman resources>155 million people in U.S. civilian labor forceManufactured resources3.9 million miles of highways121.4 million tons of steel making capacityPages 2-3 Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Making ChoicesResource scarcity forces consumers and producers to make choicesOpportunity cost an implicit cost associated with economic decisions often not reflected in the marketSpecialization comparative advantage and the basis for trade between countriesIndividual decisions maximization of consumer utility and/or producer profitsSocietal decisions how can we impact production possibilities given existing resources (solar technology subsidies vs. carbon tax)Pages 3-4 Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.An Example ofSpecializationIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.

Relative strengths of Kansas:Strong in wheat productionPage 4 Surplus of WheatShortage of OrangesShortage of PotatoesKansasSpecialization ExampleIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Page 4 Shortage of WheatShortage of OrangesSurplus of Potatoes

Relative strengths of Idaho:Strong in potato productionIdahoSpecialization ExampleIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Page 4

Relative strengths of Florida:Strong in orange productionShortage of WheatSurplus of OrangesShortage of PotatoesFloridaSpecialization ExampleIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Page 4

Shortage of WheatSurplus of OrangesShortage of PotatoesSurplus of WheatShortage of OrangesShortage of Potatoes

Shortage of WheatShortage of OrangesSurplus of PotatoesPotatoesPotatoesSpecialization ExampleFloridaIdahoKansasWheatWheatOrangesOrangesEach state specializes in what it doesbest and trades with other states Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Basis of EconomicsEvery economic system must resolve 5 basic issuesWhat to produceHow to produce itHow much to produceWhen to produceFor whom to produceEvery society must answer the above questionsSocietys institutional and political systems determine the manner in which these decisions are madeIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Basis of EconomicsPages 5-6One 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 thefor whom question

Another mechanism is the command systemAll decisions are made by a central planning agency or individualIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Basis of EconomicsAdvantage of the price system is consumer sovereignty and freedom The price system is an efficient mechanism for what, how, how much, and when decisionsThere 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 distributionThere are a number of resources that a price system cannot efficiently allocate.Public or nonmarket goods (i.e., education, national defense, fire protection, wilderness areas, clean air, clean water, viable fish population, etc.)Pages 5-6Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Basis of EconomicsAdvantages of a command system are that it is very effective in allocating public goodsCan be quite egalitarian in for whom decisionsConsider distributional effects

Disadvantage of command system is the loss of individual freedom in economic decisionsInherent inefficiencies of central planning agenciesPages 5-6Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Economics 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 economyAggregationlevels differIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Microeconomics concerned with the economics of individual producers and/or consumersThe microeconomics of production examines the economics of individual producers or firmsHow 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?Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Production management decisions impacting firm profit include:Which inputs to purchaseMultiple 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 useMultiple 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)Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Production management decisions impacting firm profit include:Which product to produceMultiple products to choose from (i.e., how much of my land to devote to corn vs. soybeans)How much of each product to produceShould this depend on product prices (i.e., corn costs more/acre to grow than soybeans) When to produce themMarginal benefit versus costs of waiting a week to plant so that the soil is more dryEconomics of storageIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Another branch of microeconomics concerned with individual consumer behaviorMicroeconomics of consumption

The consumer is faced with the economic problem of deciding what to purchase with limited resourcesMoney and time are two such limited resourcesIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6The individual consumer must make a number of consumption decisions over timeMay not be the product of conscious deliberationMay be habitual or impulsiveThe 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 consumePurchase off-season at discounted pricesIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Each 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 decisionIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6A market is established when potential buyers and sellers interact to negotiate prices and exchange goodsMarket versus a marketplaceMarket refers to interaction of buyers and sellersMarketplace refers to the physical location where market participants interactIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Market economics encompasses the study of the dealings in a particular commodityInteraction of all potential buyers and sellers

P*Q*Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6In the neoclassical model of the marketEach participant in a market (buyer or seller) is a price takerCollective decisions of all participants in a market determine the priceAn individual consumer has no impact on market priceIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6As 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 changeIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Four characteristics of a commodity that are impacted by its marketingThat is, moving the commodity from point of production to final consumerTimePlaceFormPossessionIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6It is a complex system that transforms a Kansas farmers August wheat harvest to a New York stock brokers toast in JanuaryForm of the wheat must be changed:wheat kernels wheat flour bread The place moves from KS to NYTime changes from August to JanuaryPossession changes from farmer to bankerIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Macroeconomics concerned with the entire economic systemCity, state, national or international level

Questions consideredWhat 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?Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6

Macroeconomics ExampleIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Economic system performance at the macro level is important to agricultural producers and consumersMicro management decisions are predicated on existing macro-economic conditionsi.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?Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6Macroeconomics deals with the economic impacts of public policiesFood stamps, pesticide use restrictions, dairy product price support system, etc.These policies can impact a particular sector of the economy as well as the the entire economy

The macroeconomist also concerned with international issuesIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6U.S. agricultural sector: International markets are increasingly importantForeign buyers are one of the most important market for U.S. crop production40% of cropland used to produce food & fiber that is exportedOther sectors becoming increasingly dependent on foreign export marketsProductivity growth rate higher than domestic demand expansion.Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6

Dairy ExportsDairy Imports% of Dairy SolidsDramatic DropIn Milk PricesIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6U.S. agricultural sector: International markets are increasingly importantImportsparticularly petroleumare important in the cost structure of U.S. farmers, food processors, and distributorsWe share a humanitarian concern for worlds population that lives in hungerIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Scope of EconomicsPages 5-6

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.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 6Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Economic ModelsEconomists like to abstract from the complexity of the real world via the use economic modelsSimplification of and abstraction from observed data

Model of MarketSupply and DemandMarket clearing priceMarket clearing quantityP*Q*PQ1Q2Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Economic ModelsAn economic modelIs a theoretical construct developed via logical reasoningRepresents economic processes and includeVariables that describe the systemLogical and/or quantitative relationships between these variablesi.e., Unemployment rate and mortgage lending ratesSimplified framework used to illustrate complex processesSometimes, but not always, based on mathematical techniquesIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Economic ModelsSimplification is important for economic models given enormous complexity of economic processes

Complexity arises from diversity of factors determining economic activityIndividual/cooperative decision makingResource limitationsEnvironmental & geographical constraintsInstitutional and legal requirementsPurely random fluctuations (i.e. weather)Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Economic ModelsWhen developing an economic model the economist must make a reasoned choice:Which variables are relevantWhich relationships between these variables are relevantWhich ways of analyzing and presenting this information are usefuli.e., model type/structureIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Economic ModelsEconomic models when properly constructedRemove extraneous informationIsolate useful approximations of key relationshipsMore can be understood about relationships in question than by trying to understand entire economic processIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Economic ModelsA common economic model: Perfect Competition a number of assumptions about the firm and its environmentThe firm is small relative to the market and its actions will not impact the marketFirm manager tries to maximize profits given resource endowment

Are the assumptions valid? If not, model results may not be validIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.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 problemsThey force the economist to reason in a systematic, logical and deductive mannerIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Ceteris ParibusCeteris 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 samei.e., Impact of a price change on sales given income does not changeUse of ceteris paribus gives economics much of the logical rigor required in a scientific inquiryIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Opportunity CostOpportunity cost: Important termAll economic resources have valueValue usually determined in a marketplace where resource user pays prevailing price Sometimes resources have economic value but those resources not purchased in a market In this last case economists use opportunity costs to determine the resources economic valueThough there is no market priceIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Opportunity CostOpportunity cost is the economic value of a resource in its highest valued alternative use

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Opportunity CostOpportunity cost of a choice is what you gave up to get itChoose between purchasing either an apple or an orange If you choose the apple, then your opportunity cost is the orange you could have chosen but didn't. You gave up the opportunity to take the orange in order to choose the appleIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Opportunity CostCommon mistake: Price vs. CostPrice is a per-unit concepti.e., What is the price of a gallon of gasoline?Cost refers to the concept of prices times quantity purchasedi.e., What did it cost to fill up your car? Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Opportunity CostThe study of economics is all about economic valuescosts vs. returnsWhen 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 valuesReturns can be measured in terms of $ or in terms of satisfaction (or utility)Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.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 ratei.e., A diminishing increase in corn yield with respect to increasing amount of applied fertilizerIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Diminishing ReturnsConsumer side: Law of diminishing marginal utility Marginal utility: The additional utility (satisfaction) associated with one additional unit of a good being consumedceteris paribus Amount of utility gained from consuming a good eventually increases but at a decreasing rateAssuming consumption of everything else stays constantIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.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 decreasei.e., If you add additional units of fertilizer to a fixed amount of land, eventually response per unit of fertilizer continues to increase but at a decreasing rateCan eventually turn negativeToo much fertilizer can burn a crop, yieldIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Diminishing Returns

Source: Yates, F. & Boyd, D. A. (1949). Agric. Progr. 24, 14.S.E. = starch equivalentIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.MarginalityOne of the greatest contributions of economics is the concept of marginalityMarginal refers to an additional or incremental unit of something

Most economic analyses deal not with marginal value of production or consumptionHowever, it is on the margin where the economic decisions are madeIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.MarginalityThe consumers relevant economic question:Is the marginal utility associated with purchasing an additional unit of a good greater than the marginal cost of acquiring that additional unit? Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.MarginalityRegardless of current total satisfaction (utility) level If the marginal utility is greater than the marginal cost the consumer can increase total utility by consuming this marginal unit as benefit > cost

The same basic principle applies to productionIf marginal value of output is greater than the marginal cost of production then produce that marginal unitIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Marginality Marginal returns (MR) per lb of fertilizer as application rate , ceteris paribusMarginal Costs and ReturnsQuantity of Fertilizer/Acre0.200.150.10Q1Q2Q3Marginal cost (MC) of obtaining additional fertilizer is constant and equals fertilizer priceEconomical input useoccurs at the margin$/lb fert.ABCBetween A & B: Cost/lb of fert. < MR fert. useBetween B & C:Cost/lb of fert. > MR fert. useIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.MarginalityUsing marginal analyses one can determine the behavior that will maximze profit, minimize cost, maximize utility or maximize social welfareOne can ignore total costs or returns Concentrating only on marginal costs and returns

From the economists perspective, everything happens on the marginIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.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 Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Logical FallaciesCorrelation-Causation FallacyCorrelation refers to two events that share some sort of mutual relationship in a regular and predictable mannerCausation refers to two events in which there is a cause-and-effect relationship between two eventsIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Logical FallaciesWhen two events have a causal relationship, they also have a correlationFallacy is assuming that if two events are correlated they must be related in some sort of causative mannerFrequently, events that are correlated behave in a mutual relationship because they are both related in a causative fashion to some 3rd event

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Logical FallaciesZero-Sum Game FallacyCommon in economics: If someone gains, someone else must loseThis is the heart of the nearly universal suspicion that both producers and consumers are repeatedly exploited by middlemenOften expressed by the question: Who got the better part of the deal?Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Logical FallaciesThe basis of economics is exchangeUsually 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 hadIf they werent better off they would never have traded in the first placeIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Logical FallaciesA completed economic transaction with no coercion is a winwin situationRather than a winlose situation as suggested by this fallacy

As a result of the exchange, perceived value controlled by each is increasedIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.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 caseIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.In SummaryResource scarcity - natural, human and manufactured forces individuals and societies to make choicesComparative advantage leads to tradeMicro vs. MacroeconomicsReviewed scope of economicsDefinition of agricultural economicsIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.Chapter 2 presents an overview of the U.S. food and fiber industryIntroduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. All Rights Reserved.