Agricultural economics I. Karcagi-Kováts, Andrea Kuti, István Agricultural economics I



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Agricultural economics I.

Karcagi-Kováts, Andrea

Kuti, István

Agricultural economics I.

írta Karcagi-Kováts, Andrea és Kuti, István

TÁMOP-4.1.2.A/1-11/1-2011-0009

University of Debrecen, Service Sciences Methodology Centre

Debrecen, 2013.

Tartalom

Tárgymutató 7

Contents 8

1. Preface 8

1. 1. What is agricultural economics? 9

1. 1.1. Agricultural economics: a brief intellectual histo 9

2. 1.2 Agricultural economics: an applied field of economics 10

3. Review questions 10

2. 2. Theory of consumer behaviour 11

1. 2.1. Demand and demand function 11

2. 2.2. The analysis of consumer choice 12

2.1. 2.2.1. Total and marginal utility 12

2.2. 2.2.2. Indifference curves 13

2.3. 2.2.3. The consumer equilibrium 14

3. 2.3. Impact of changes in income level and prices 15

4. 2.4. Consumer behaviour as policy questions 17

5. Review questions 18

3. 3. Demand and supply analysis, market equilibrium 19

1. 3.1. Market demand function and market demand curve 19

1.1. 3.1.1. Market demand curve 19

1.2. 3.1.2. Change in quantity of demand versus change in demand 19

2. 3.2. Market supply function and market supply curve 20

2.1. 3.2.1. Market supply curve 20

2.2. 3.2.2. Change in quantity of supply and change in supply 21

3. 3.3. Market equilibrium 21

4. 3.4. Factors and trends in global food demand and supply 23

5. Review questions 25

4. 4. Measurement and interpretation of elasticities of demand 26

1. 4.1. Elasticities of demand 26

2. 4.2. Cross price elasticity and income elasticity 27

3. 4.3. Effect of elasticity on revenue and tax 28

4. 4.4. Some empirical examples 29

5. Review questions 31

5. 5. Business organization 32

1. 5.1. Characteristics of business firms 32

2. 5.2. Forms of business organizations 32

3. 5.3. Business organizations in agriculture 33

4. Review questions 34

6. 6. Introduction to production and resource use 35

1. 6.1. The production function 35

2. 6.2. Total, avarage and marginal product 35

3. 6.3. Isoquants 38

4. 6.4. Optimal input combination 39

5. 6.5. Factors of production in agriculture 40

6. Review questions 40

7. 7. Costs in agricultural production 42

1. 7.1. Basic concepts of production costs 42

2. 7.2.Cost functions 43

3. 7.3. Factors and trends of production costs in agriculture 46

4. Review questions 48

8. 8. Market equilibrium and product price: perfect competition 49

1. 8.1. Characteristics of perfect competition 49

2. 8.2. Supply behaviour of competitive firms 49

3. 8.3. Supply behaviour in competitive market 52

4. 8.4. Producer surplus 52

5. 8.5. Agriculture and the purely competitive market model 54

6. Review questions 54

9. 9. Monopoly and imperfect competition 55

1. 9.1. Monopoly 55

1.1. 9.1.1. The profit maximization condition 55

2. 9.2. Oligopoly 57

3. 9.3. Monopolistic competition 59

4. 9.4. Quantitative metrics to describe the structure of a market 59

5. Review questions 60

10. 10. Government intervention 61

1. 10.1. Forms of government interventions 61

2. 10.2. Taxes 62

2.1. 10.2.1. Incidence of a tax 62

3. 10.3. Subsidies 64

4. 10.4. Government interventions and agriculture 65

5. Review questions 68

11. 11. National output and agriculture 69

1. 11.1. National output and gross domestic product 69

1.1. 11.1.1. Production approach 70

1.2. 11.1.2. Expenditure approach 71

1.3. 11.1.3. Income approach 71

2. 11.2. GDP versus GNI 72

3. 11.3. Difference between the concept of gross and net 72

4. 11.4. Agricultural output 72

5. 11.5. Performance of agriculture in the world 74

6. Review questions 76

12. 12. Consequences of business fluctuations in agriculture 77

1. 12.1. Fluctuations of macroeconomic activity 77

2. 12.2. Business cycles 77

3. 12.3. Fluctuations, business cycles and economic theory 79

4. 12.4. Economic fluctuations, business cycleand agriculture 79

5. Review questions 81

13. 13. Agriculture and international trade 82

1. 13.1. Production possibility frontier 82

2. 13.2. Comparative advantage and international trade 82

3. 13.3.The Heckscher–Ohlin model 83

4. 13.4. The effects of trade protection 85

5. 13.5. Global agricultural trade policy and evolving world production and trade patterns 86

6. Review questions: 88

14. 14. Agriculture and environment 90

1. 14.1. Externalities 90

2. 14.2. Theoretical solutions to internalisation of externalities 92

3. 14.3.Agriculture and environmental taxation 93

4. 14.4. Policy options for incorporating environmental values into economic decisions 94

5. Review questions 95

15. 15. Developing countries and agriculture 96

1. 15.1. The notion of developing countries 96

2. 15.2. Population growth 97

3. 15.3. Resources of development 97

4. 15.4. Agriculture in developing countries 99

5. Review questions: 101

16. Bibliography 102

Az ábrák listája

2.1. Figure 2.1. Demand curve 11

2.2. Figure 2.2. Total and marginal utility 13

2.3. Figure 2.3. Indifference curves 13

2.4. Figure 2.4. Optimal choice: maximising utility under budget constraint 14

2.5. Figure 2.5. The effects of changes in income on consumption 16

2.6. Figure 2.6. The effects of changes in price of a good on consumption 16

2.7. Figure 2.7. Food subsidy 17

3.1. Figure 3.1. Change in quantity of demand and change in demand 20

3.2. Figure 3.2. Change in quantity of supply and change in supply 21

3.3. Figure 3.3. Market equilibrium 21

3.4. Figure 3.4. Shift in demand and supply and equilibrium 22

3.5. Figure 3.5. Simultaneous shifts of the demand and supply curves 23

6.1. Figure 6.1. Production function and derived functions 36

6.2. Figure 6.2.The firm’s input equilibrium condition 39

6.3. Figure 6.3.The marginal rate of substitution 39

7.1. Table7.1. Concepts of costs 42

7.2. Figure 7.1. Cost functions 43

7.3. Figure 7.2. Average and marginal cost functions 44

7.4. Figure 7.3. Deriving long-run average and marginal cost functions from the long-run total cost function 45

7.5. Figure 7.4. Economies and diseconomies of scale for a typical real-world average cost function 45

8.1. Figure 8.1. Profit maximizing output of a price taking firm 50

8.2. Figure 8.2. Operating at a loss in short run 51

8.3. Figure 8.3. Individual supply function of a profit-maximizing competitive firm 51

8.4. Figure 8.4. Producer surplus of a firm 53

8.5. Figure 8.5. Economic efficiency in competitive market 53

9.1. Figure 9.1.Profit maximization by a monopolist 55

9.2. Figure 9.2.The change in total revenue when monopolist increases output 56

10.1. Figure 10.1. Impact of an excise tax 63

10.2. Figure 10.2. Incidence of a tax 63

11.1. Figure 11.1. The circular flow model 69

11.2. Figure 11.2.Evolution of agriculture’s share of GDP in various countries (1961 to 2008) 74

11.3. Figure 11.3.Evolution of agriculture’s share of employment in various countries(1961 to 2008) 75

12.1. Figure 12.1. Phases of the business cycle 78

13.1. Figure 13.1.Production possibility frontier 82

13.2. Figure 13.2.Price equalization 84

13.3. Figure 13.3.The effects of a tariff 85

14.1. Figure 14.1. Negative externalities and the optimum 91

15.1. Table 15.1. List of least developed countries 96

A táblázatok listája



4.1. Table 4.1. Own-price elasticity for food groups (UK, 2001-2009) 29

Tárgymutató



Contents

1. Preface

Agricultural economics combines the technical aspects of agriculture with the business aspects of management, marketing and finance. Students are prepared for a wide variety of exciting careers in the marketing of commodities sold and inputs purchased by agricultural producers; agricultural finance; and management of agribusinesses, farms and ranches. In addition, many graduates pursue successful careers in government service, economic development, commodity promotion and agricultural policy analysis.

We focus on teaching and instilling in students a desire to think, use logic and reason, solve problems rather than simply memorize and recite the subject matter and learn. This book is intended for English speaking foreign students arriving mostly from developing countries to study agricultural economics at the University of Debrecen, Faculty of Applied Economics and Rural Development.

The first part of this textbook (Agricultural economics I. — Micro- and macroeconomic bases) intends to provide students with knowledge of economic principles for the study of agricultural economicsencouraging them to develop an understanding of and capability to use the tools of economic analysis in solving a broad spectrum of problems in economics. Understanding is developed through coursework in economic theory, agricultural marketsconcentrating mainly on micro- and macroeconomic basis of agricultural economics.

Coursework is supplemented through collaborative work with a wide variety of research topics available. Students are trained to be decision makers through course work and practical experience in agriculture, analytical and communication skills, team building, economic theory and agricultural policy.The motivation for the first part of this book is mainly to serve as an undergraduate textbook in agricultural economics so it is useful especially for those students who are less familiar with economic analysis. For those who have previously taken an introductory course in economics it can serve for refreshing their knowledge in agricultural economics.

Agricultural economics today includes a variety of applied areas, having considerable overlap with conventional economics. The field of agricultural economics has transformed into a more integrative discipline which covers farm management and production economics, rural finance and institutions, agricultural marketing and prices, agricultural policy and development, food and nutrition economics, and environmental and natural resource economics.

The second part of the textbook (Agricultural economics II.) is primarily focused on students studying agricultural economics on a wide range of degree and professional programmes, at both undergraduate and graduate levels. It contains a common core of classes introducing students to policies important to agriculture: global agricultural economy, food-, energy- and environmental security;agricultural environment and resources; consumption and food supply chains; risk and uncertainty; prices and incomes; market structures; plant biotechnology; trade and development.

With increasing competition for limited land, water and other natural resources throughout the world, as well as growing concern about environmental degradation of various sorts, there is a growing need for professionals who can assist in the process of balancing economic and environmental tradeoffs, of understanding market structures, price volatility, plant biotechnology, risk and uncertainty andof developing international trade.

Prof. Dr. Jozsef Popp

Dr. Andrea Karcagi-Kováts

Dr. István Kuti

1. fejezet - 1. What is agricultural economics?

In the Introduction of one of the most important synthetic works, Handbook of Agricultural Economics, the editors, Gardner and Rausser say that the subject matter of agricultural economics has both broadened and deepened in recent years. They summarize that subject matter in the following way: “The field originated early in the twentieth century with a focus on farm management and commodity markets, but has since moved into analysis of issues in food, resources, international trade, and ulinkages between agriculture and the rest of the economy. In the process agricultural economists have been pioneering users of development in economic theory and econometrics. Moreover, in the process of intense focus on problems of economic science that are central to agriculture – market expectations, behaviour under uncertainty, multimarket relationships for both products and factors, the economic research and technology adoption, and public goods and property issues associated with issues like nonpoint pollution and innovations in biotechnology – agricultural economists have developed methods of empirical investigation that have been taken up in other fields.” (Gardner – Rausser, 2001) As we can see, the field of agricultural economics is vast. Other textbooks share this view. For example, Chauan stress that agricultural economics “covers all the four branches of economic life of the agricultural community, production, exchange, distribution and consumption”. But he continues: agricultural economics studies “what to produce, how to produce and how much to produce; what to sell, where to sell and at what price to sell; what to distribute, among whom to distribute and on what basis to distribute; what to consume and how much to consume” (Chauan, 1952) These are the main questions of general economics, micro- and macroeconomics. The questions so the subject matter of general and agricultural economics are frequently the same but their approach differs.

1. 1.1. Agricultural economics: a brief intellectual histo

Agricultural economics arose in the late 19th century, combined the theory of the firm with marketing and organization theory, and developed throughout the 20th century largely as an empirical branch of general economics. This emphasis was due to the historical importance of agriculture, and in the United States was made possible by the rich data compiled by the U.S. Department of Agriculture (USDA) beginning in the mid-19th century. The discipline was closely ulinked to empirical applications of mathematical statistics and made early and significant contributions to econometric methods. In the 1960’s and afterward, as agricultural sectors in the OECD countries contracted, agricultural economists were drawn to the development problems of poor countries, to the trade and macroeconomic policy implications of agriculture in richer countries, and to a variety of issues in production, consumption, environmental and resource economics. This ramified the subject and enlarged its international focus, at the same time that its microeconomic, empirical and policy orientation distanced it from developments in general equilibrium theory, macroeconomic modelling, game theory and axiomatic social choice, which preoccupied many departments of economics throughout the late 20th century. (Runge, 2006)

Agricultural economics in the United States derived from two intellectual streams. The first was neoclassical political economy and the theory of the firm applied to farm production. The second, borne of an economic crisis in American agriculture in the late 19th century, focused on strategies for organized marketing of agricultural commodities through collective bargaining and cooperatives. The first stream may be traced to the 18th century enlightenment and a preoccupation with land as a factor by the French Physiocrats. Francois Quesnay’s “tableau economique” (1758) organized a logical explanation of the conversion of land inputs to agricultural outputs and profit, anticipating modern production economics, input-output analysis and general equilibrium theory. His emphasis on surplus production was a touchstone of classical economics and exercised a direct influence over Adam Smith. Many pages of the Wealth of Nations (1776) dealt with agricultural questions, including the differential capacity for specialization and routinization of agriculture versus industry and the arts of husbandry at the microeconomic level. Echoing the Physiocrats, Smith emphasized the central role of agriculture as a store of national wealth. It was the neoclassical developments of the late 19th century, however, that provided the main foundations for agricultural economics. Marshall’s Principles (1890) first clearly established the ulink from diminishing marginal utility in exchange to decreasing marginal productivity on the supply side. Veblen (1900) dubbed Marshall’s work “neoclassical” to distinguish it from classical labour theories of value. The elaboration of Marshall’s theory of the firm, and attempts to measure and statistically validate the relationship between input costs, output prices, and farm profits distinguished agricultural economics well into the 20th century, and ulinked it firmly to the neoclassical syntheses of Hicks (1939) and Samuelson (1947). (Runge, 2006)

We mention that environmental and resource issues became a significant focus of the profession in the 1970’s and beyond, partly in recognition of the pollution and species losses resulting from modern agricultural systems. In the 21st century, the profession has continued to reach beyond the agricultural sector, expanding its scope through numerous applications of relevant economic theory.

2. 1.2 Agricultural economics: an applied field of economics

General economics is a theoretical discipline. Economists make assumptions because assumptions can simplify the complex world and make it easier to understand. They use models (graphs, equations, or verbal models) to examine various economic issues and all models are built with assumptions. All models—in physics, biology, and economics—simplify reality to improve our understanding of it. Economics—being a theoretical discipline—works on high abstraction level. In contrast, agricultural economics is an applied discipline.



Applied economics is the application of economic theory and analysis.

While applied economics is not a field of economics, it is typically characterized by the application of economic theory and econometrics to address practical issues in a range of fields including demographic economics, labour economics, business economics, industrial organization, development economics, education economics, health economics, monetary economics, public economics, economic history, and agricultural economics. The process often involves a reduction in the level of abstraction of this core theory. There are a variety of approaches including not only empirical estimation using econometrics, input-output analysis or simulations but also case studies, historical analogy and so-called common sense or the “vernacular”.

The field of economics is traditionally divided into two broad subfields. Microeconomicsis the study of how households and firms make decisions and how they interact in specific markets. Macroeconomicsis the study of economywide phenomena. Microeconomics and macroeconomics are closely intertwined. Because changes in the overall economy arise from the decisions of millions of individuals, it is impossible to understand macroeconomic developments without considering the associated microeconomic decisions. Despite the inherent ulink between microeconomics and macroeconomics, the two fields are distinct.

An agricultural economist is, first, an economist, in that an agricultural economist knows economic theory intimately. However, an agricultural economist is also an economist with a specialization in agriculture. The primary interest is in applying economic logic to problems that occur in agriculture.

3. Review questions


  1. What do agricultural economists examine?

  2. What are the main questions of general economics, micro- and macroeconomics?

  3. How does the subject agricultural economic change in the 1960’s?

2. fejezet - 2. Theory of consumer behaviour

In agribusiness, as in many other sectors, important changes are taking place. Consumers are changing lifestyles, dietetic and shopping habits, and increasingly are demanding more accommodation of these needs in supermarkets. The theory of consumer behaviour focuses on how consumers with limited resources choose goods and services.A comprehensive understanding of consumer behaviour can improve the chances of successfully facing problems generated by consumer society.In this chapter, we will explore concepts which will help us understand basic features of consumers’ decision-making, recognize how they allocate (spend) their income to attain the maximum possible level of satisfaction within their earnings.

1. 2.1. Demand and demand function

The study of demand is concerned with economic behaviour, so it should be stressed at the outset that demand is not the same as desire, wants or need. People have unlimited desires but limited income. Willingness to buy a commodity is not enough that is, the consumer must also have the ability to purchase the good.

A consumer’s demand for a commodity is the amount of it which the consumer is willing and able to buy, in a specified market, and at given prices.

Traditional economic theory does not attempt to explain the formation of preferences but asserts that a consumer’s tastes can be taken as given. It is assumed that the consumer gains satisfaction, utility or welfare from the consumption of goods and deciding how much of a commodity to purchase, he or she try obtain the greatest possible satisfaction. Given the consumer’s preferences, the demand for a commodity will be determined by the price of the product, the consumer income, the price of other products, and many other factors. This relationship is depicted by the demand function.

A consumer’s individual demand function for a particular good summarises the relationship between the quantities of that good (q) and the economic factors which influence the consumer’s decision:

q = f(pq, px, py, ... pw, I, O),

where q is the quantity of the good purchased by the consumer in a given time period, pq is the price of the good purchased, px, py, ... pw, are the prices of other consumer goods in the same market, I denotes the consumer’s income andO summarizes all other factors such as consumer’s expectations about future prices and income, advertising.

A simplified demand function, frequently calleddemand curve, is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at every possible price over the relevant range, all other factors affecting demand being held constant: q = f(pq). Anydownwardsloping (strictly decreasing) demand curve has a corresponding inverse demand curvethat expresses price as a function of quantity: pq = f(q).

A graphic representation of a typical demand curve is presented in Figure 2.1. A typical demand curve is downward sloping indicating the inverse relationship between price and quantity: the lower the price of the product, the more the consumer will buy.

2.1. ábra - Figure 2.1. Demand curve



A change in the price of the product would induce a movement along the demand curve, but change in other factors (e.g. income, price of related products) will shift the whole demand curve.

2. 2.2. The analysis of consumer choice

Consumers’ tastes can be examined based on three assumptions.(i) The consumer can rank combinations of good in order of preference, i.e. the consumer can compare any two combinations (or bundles) of goods and decide whether one bundle is preferred to the other or that he or she is indifferent between them. (ii) The consumer is consistent in his choices, i.e. we assume that the tastes of the consumer are transitive that is if the consumer states that he or she prefers basket Ato basket Band also that he or she prefers basket Bto basket C, then that consumer will prefer Ato C. (iii) We assume that more of a commodity is preferred to less that is, we assume that the commodity is a goodrather than a bad, and the consumer is never satiated with the commodity; this is the non-satiation assumption.

The central concept of any theory of consumer behaviour is utility. Goods are desired because of their ability to satisfy human wants, so utility roughly means satisfaction.

The utility is the property of a good that enables it to satisfy human wants.

There are two models describing and explaining consumer’ behaviour: cardinal and ordinal. Cardinal utilitymeans that an individual can attach specific values or numbers to the satisfaction gained from the consumption of a particular good that is, it can be measured using an absolute scale (see 2.2.1). In contrast, ordinal utilityonly ranks the satisfaction received from consuming various amounts of a good or baskets of goods (see 2.2.2). The above mentioned three assumptionsallow us to represent preferences with a utility function. A utility function represents the level of satisfaction that a consumer receives from any basket of goods.

2.1. 2.2.1. Total and marginal utility

As individuals consume more of a good per time period theirsatisfactionincreases. A cardinal utility function measures the level of satisfaction, total utilityTU(q) that a consumer receives from a certain amount (q) of a good (or basket of goods). Studying consumer behaviour, we want to know how the level of satisfaction will change in response to a change in the level of consumption(q). The response will be given by the concept of marginal utility. (In economics,the term marginal tells us how a dependent variable changes as a result of adding one unit of an independent variable.)



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