Introduction to Agricultural Economics

by Penson, John B.; Capps, Oral; Rossen, C. Parr

• ISBN13: 9780130195722
• ISBN10: 0130195723
• Edition: 3rd
• Format: Hardcover
• Copyright: 2002-01-01
• Publisher: Prentice Hall

Summary

For Introduction to Agricultural Economics courses at the freshman/sophomore undergraduate level. This jargon-free text provides beginning agriculture students with a readable, systematic understanding of the basic concepts and issues in economics as they relate to the food and fiber industrya major segment of the U.S. economy. Covering the entire scope of key economic principles and their application to the food and fiber system, it traces major microeconomic, macroeconomic, and global forces influencing the decisions of producers and consumers of food and fiber products, and focuses on the leading problems and issues confronting this important industry today.

Table of Contents

PART I Introduction	1	(52)
What is Agricultural Economics?	3	(17)
Scope of Economics	4	(4)
Scarce Resources	5	(1)
Making Choices	6	(2)
Definition of Economics	8	(2)
Microeconomics versus Macroeconomics	8	(1)
Positive versus Normative Economics	9	(1)
Alternative Economic Systems	9	(1)
Definition of Agricultural Economics	10	(1)
What Does an Agricultural Economist Do?	10	(1)
Role at the Microeconomic Level	10	(1)
Role at the Macroeconomic Level	11	(1)
Marginal Analysis	11	(1)
What Lies Ahead?	11	(1)
Summary	12	(1)
Definition of Key Terms	13	(1)
References	14	(1)
A Review of Graphical Analysis	14	(5)
Constructing a Graph	14	(1)
Slope of a Linear Curve	15	(2)
Slope of a Nonlinear Curve	17	(2)
Exercises	19	(1)
The U.S. Food and Fiber Industry	20	(33)
Indices	21	(2)
What Is the Food and Fiber Industry?	23	(3)
Employment	23	(1)
Output	24	(2)
Changing Complexion of Farming	26	(10)
Physical Structure	26	(4)
Productivity	30	(2)
Profitability	32	(1)
Financial Structure	33	(3)
Other Sectors in the Food and Fiber Industry	36	(11)
Farm Input Suppliers	36	(3)
Food Processors, Wholesalers, and Retailers	39	(2)
Value Added Process	41	(3)
Fiber Manufacturers	44	(2)
Shippers and Handlers	46	(1)
Importance of Export Markets	46	(1)
Summary	47	(1)
Definition of Key Terms	48	(2)
References	50	(1)
Exercises	50	(3)
PART II Understanding Consumer Behavior	53	(68)
Theory of Consumer Behavior	55	(19)
Utility Theory	56	(4)
Total Utility	56	(2)
Marginal Utility	58	(2)
Law of Diminishing Marginal Utility	60	(1)
Indifference Curves	60	(2)
Concept of Isoutility	60	(1)
Marginal Rate of Substitution	61	(1)
The Budget Constraint	62	(5)
Summary	67	(1)
Definition of Key Terms	68	(1)
References	69	(1)
Exercises	69	(5)
Consumer Equilibrium and Market Demand	74	(26)
Conditions for Consumer Equilibrium	75	(2)
Changes in Equilibrium	77	(5)
Changes in Product Price	77	(3)
Changes in Other Demand Determinants	80	(2)
The Law of Demand	82	(3)
Market Demand	82	(2)
Interpretation of Market Demand	84	(1)
Tastes and Preferences	85	(4)
Composition of the Population	86	(1)
Attitudes toward Nutrition and Health	86	(1)
Food Safety	86	(1)
Lifestyles	87	(1)
Technological Forces	88	(1)
Advertising	88	(1)
Consumer Surplus	89	(1)
Summary	90	(1)
Definition of Key Terms	91	(1)
References	92	(1)
Advanced Topics	92	(1)
Extension of Conceptual Framework	92	(1)
Exercises	93	(7)
Measurement and Interpretation of Elasticities	100	(21)
Own-Price Elasticity of Demand	101	(4)
Income Elasticity of Demand	105	(1)
Cross-Price Elasticity of Demand	106	(1)
Other General Properties	107	(9)
Some Real-World Examples	111	(3)
Applicability of Demand Elasticities	114	(2)
Summary	116	(1)
Definition of Key Terms	117	(1)
References	117	(1)
Exercises	118	(3)
PART III Business Behavior and Market Equilibrium	121	(146)
Assessing Business Performance	123	(18)
Annual Business Reports	126	(7)
Business Balance Sheets	126	(2)
Business Income Statements	128	(2)
Use in Business Planning	130	(3)
Cost of Doing Business	133	(2)
Explicity versus Implicit Costs	133	(1)
Costs in Short Run versus Long Run	134	(1)
Measuring Business Revenue	135	(1)
Assessing Profit	136	(1)
The Accountant versus the Economist	136	(1)
Why the Fuss over Profit?	137	(1)
What Lies Ahead?	137	(1)
Summary	138	(1)
Definition of Key Terms	139	(1)
References	140	(1)
Exercises	140	(1)
Introduction to Production and Resource Use	141	(31)
Conditions for Perfect Competition	142	(1)
Classification of Inputs	143	(1)
Land	143	(1)
Labor	143	(1)
Capital	143	(1)
Management	144	(1)
Important Production Relationships	144	(7)
The Production Function	144	(1)
Total Physical Product Curve	145	(1)
Marginal Physical Product Curve	146	(2)
Average Physical Product Curve	148	(1)
Stages of Production	149	(2)
Assessing Short-Run Business Costs	151	(4)
Total Costs and the TPP Curve	151	(3)
Average Costs and the APP Curve	154	(1)
Marginal Costs and the MPP Curve	154	(1)
Economics of Short-Run Decisions	155	(7)
Marginal and Average Revenue	155	(1)
Level of Output: MC = MR	156	(3)
Level of Resource Use: MVP = MIC	159	(1)
A Real-World Application	160	(2)
What Lies Ahead?	162	(1)
Summary	163	(1)
Definition of Key Terms	164	(3)
Exercises	167	(5)
Economics of Input Substitution	172	(25)
Concept and Measurement of Isoquants	173	(4)
Rate of Technical Substitution	174	(2)
A Case Example	176	(1)
The Iso-Cost Line	177	(2)
Least-Cost Use of Inputs for a Given Output	179	(3)
Short-Run Least-Cost Input Use	179	(2)
Effects of input Price Changes	181	(1)
Least-Cost Input Use for a Given Budget	182	(1)
Long-Run Expansion of Input Use	183	(4)
Long-Run Average Costs	184	(1)
The Long-Run Planning Curve	185	(2)
Economics of a Business Expansion	187	(3)
Capital Variable in the Long Run	188	(2)
Expansion Path through Isoquants	190	(1)
Summary	191	(1)
Definition of Key Terms	191	(1)
Advanced Topic	192	(1)
References	193	(1)
Exercises	193	(4)
Economics of Product Substitution	197	(15)
Concept and Measurement of the Production Possibilities Frontier	198	(3)
Production Possibilities Frontier	198	(1)
Product Substitution	198	(3)
Concept and Measurement of the Iso-Revenue Line	201	(2)
Profit-Maximizing Combination of Products	203	(3)
Choice of Products in the Short Run	204	(1)
Effects of Change in Product Prices	205	(1)
Long-Run Expansion of Production	206	(2)
Capital variable in the Long Run	206	(1)
Expansion of Production Possibilities Frontier	207	(1)
Summary	208	(1)
Definition of Key Terms	208	(1)
Exercises	208	(4)
Market Equilibrium and Product Price: Perfect Competition	212	(19)
Derivation of the Market Supply Curve	213	(3)
Firm Supply Curve	213	(1)
Market Supply Curve	214	(1)
Own-Price Elasticity of Supply	215	(1)
Producer Surplus	216	(1)
Market Equilibrium under Perfect Competition	216	(6)
Market Equilibrium	217	(2)
Total Economic Surplus	219	(2)
Applicability to Policy Analysis	221	(1)
Adjustments to Market Equilibrium	222	(2)
Market Disequilibrium	222	(1)
Length of Adjustment Period	223	(1)
Cobweb Adjustment Cycle	224	(1)
Summary	224	(2)
Definition of Key Terms	226	(1)
Exercises	227	(4)
Market Equilibrium and Product Price: Imperfect Competition	231	(36)
Market Structure Characteristics	232	(3)
Number of Firms and Size Distribution	232	(1)
Product Differentiation	233	(1)
Barriers to Entry	233	(1)
Economic Environment	234	(1)
Classification of Firms	235	(1)
Imperfect Competition in Selling	235	(13)
Monopolistic Competition	236	(4)
Oligopoly	240	(4)
Monopoly	244	(2)
Comparison of Alternative Market Structures	246	(1)
Welfare Effects of Imperfect Competition	246	(2)
Imperfect Competition in Buying	248	(4)
Monopsony	248	(4)
Oligopsony and Monopsonistic Competition	252	(1)
Market Structures in Livestock Industry	252	(2)
Governmental Regulatory Measures	254	(6)
Legislative Acts	254	(3)
Ceiling Price	257	(1)
Lump-Sum Tax	258	(1)
Minimum Price	259	(1)
Summary	260	(1)
Definition of Key Terms	260	(1)
References	261	(1)
Exercises	262	(5)
PART IV Government in the Food and Fiber Industry	267	(54)
Government Intervention in Agriculture	269	(25)
Rationale for Government Intervention	270	(1)
Farm Economic Issues	271	(7)
Defining the Farm Problem	271	(3)
Forms of Government Intervention	274	(3)
Food Safety	277	(1)
Consumer Issues	278	(3)
Adequate and Cheap Food Supply	278	(1)
Nutrition and Health	278	(1)
Food Subsidies	278	(1)
Rural Communities	279	(2)
Resource Issues	281	(6)
Soil Erosion and Land Use	281	(1)
Adequacy of Water Supply	282	(2)
Hired Farm Labor	284	(1)
Energy	285	(2)
International Issues	287	(2)
Adequacy of World Food Supply	287	(1)
Movement toward Free Trade	288	(1)
What Lies Ahead?	289	(1)
Summary	290	(1)
Definition of Key Terms	291	(2)
References	293	(1)
Supporting Farm Prices and Incomes	294	(27)
Price and Income Support Mechanisms	296	(9)
Loan Rate Mechanism	296	(2)
Set-Aside Mechanism	298	(3)
Target Price Mechanism	301	(1)
Conservation Reserve Mechanism	302	(1)
Commodities Covered by Government Programs	303	(2)
Phasing Out of Supply Management	305	(2)
Domestic Demand Expansion Programs	307	(1)
Importance of Export Demand	308	(6)
Calculating Total Demand Elasticity	310	(1)
Impact of Rising Export Demand	310	(1)
Impact on Farm Revenue of Wheat Producers	311	(2)
Implications for Policy	313	(1)
Summary	314	(1)
Definition of Key Terms	315	(2)
References	317	(1)
Exercises	317	(4)
PART V Macroeconomics of Agriculture	321	(131)
Product Markets and National Output	323	(28)
Circular Flow of Payments	324	(3)
Barter Economy	324	(1)
Monetary Economy	325	(2)
Composition and Measurement of Gross Domestic Product	327	(3)
Consumption, Savings, and Investment	330	(10)
Determinants of Planned Consumption	331	(3)
Determinants of Planned Saving	334	(2)
Determinants of Planned Investment	336	(4)
Equilibrium National Income and Output	340	(6)
Aggregate Expenditures	340	(1)
The Keynesian Cross	341	(1)
Deriving Aggregate Demand Curve	341	(1)
Aggregate Supply and Full Employment	342	(3)
Recessionary and Inflationary Gaps	345	(1)
What Lies Ahead?	346	(1)
Summary	346	(2)
Definition of Key Terms	348	(1)
References	349	(1)
Exercises	350	(1)
Consequences of Business Fluctuations	351	(23)
Fluctuations in Business Activity	352	(2)
Nature of Business Fluctuations	352	(1)
Indicators of Economic Activity	353	(1)
Consequences of Business Fluctuations	354	(11)
Unemployment	355	(2)
Inflation	357	(7)
Short-Run Phillips Curve	364	(1)
Macroeconomic Policy Options	365	(4)
Laissez-Faire Macroeconomic Policy	365	(1)
Demand-Oriented Macroeconomic Policy	366	(2)
Supply-Oriented Macroeconomic Policy	368	(1)
Summary	369	(1)
Definition of Key Terms	370	(1)
References	371	(1)
Exercises	372	(2)
Money, Money Markets, and Monetary Policy	374	(25)
Characteristics of Money	375	(2)
Functions of Money	375	(1)
Money versus Near Monies	376	(1)
Backing of Money	376	(1)
Federal Reserve System	377	(5)
Organization of the Federal Reserve System	377	(2)
Functions of the Federal Reserve System	379	(2)
Monetary Policy Instruments	381	(1)
Changing the Money Supply	382	(5)
Creation of Deposits	382	(3)
Monetary Policy and the Money Supply	385	(2)
Money Market Equilibrium	387	(2)
Demand for Money	387	(2)
Equilibrium Conditions	389	(1)
Effects of Monetary Policy on the Economy	389	(6)
Transmission of Policy	389	(1)
Combating Recessionary Gaps	390	(2)
Combating Inflationary Gaps	392	(1)
Combating Stagflation	393	(1)
Microeconomic Perspectives	393	(1)
Potential Problems in Policy Implementation	394	(1)
Summary	395	(1)
Definition of Key Terms	396	(1)
References	397	(1)
Exercises	397	(2)
Fiscal Policy and Budget Deficits	399	(23)
The Federal Budget	400	(4)
Federal Expenditures	400	(2)
Federal Receipts	402	(1)
Budget Deficit	402	(2)
The National Debt	404	(5)
National Debt and GDP	405	(1)
Interest Payments and GDP	406	(1)
Ownership of National Debt	407	(1)
Burdening Future Generations?	407	(2)
Fiscal Policy Options	409	(8)
Automatic Policy Instruments	409	(1)
Discretionary Policy Instruments	410	(2)
Fiscal Policy and Aggregate Demand	412	(1)
Combating Recessionary Gaps	413	(2)
Combating Inflationary Gaps	415	(1)
Combating Stagflation	416	(1)
Difficulties in Policy Implementation	416	(1)
What Lies Ahead?	417	(1)
Summary	417	(1)
Definition of Key Terms	418	(1)
References	419	(1)
Exercises	420	(2)
Macroeconomic Policy and Agriculture	422	(30)
Impacts of Policy Actions on the General Economy	423	(3)
Market Interest Rates	423	(1)
Real GDP and Disposable Income	423	(1)
Unemployment Rate	424	(1)
Inflation Rate	425	(1)
Foreign Exchange Rate	425	(1)
Impacts of Policy Actions on Agriculture	426	(7)
Farm Product Prices	426	(2)
Farm Input Prices	428	(1)
Farm Interest Rates	429	(1)
Net Farm Income	430	(2)
Farmland Prices	432	(1)
A Brief History Lesson	433	(15)
The 1970s: A Decade of Expansion	430	(6)
The 1980s: A Decade of Contraction	436	(6)
The 1990s: A Decade of Change	442	(6)
Summary	448	(1)
Definition of Key Terms	449	(1)
References	449	(3)
PART VI International Agricultural Trade	452	(117)
Agriculture and International Trade	453	(27)
Growth and Instability in Agricultural Trade	454	(4)
Export Boom and Bust	455	(1)
Moves toward Trade Liberalization	456	(2)
The Importance of Agricultural Trade	458	(4)
Increased Export Dependence	458	(1)
Greater Dependence on Imports	458	(2)
Farm and Nonfarm Impacts of Exports	460	(2)
The Composition of Agricultural Trade	462	(3)
The Role of Agricultural Exports	462	(1)
The Role of Agricultural Imports	463	(2)
Direction of U.S. Agricultural Trade	465	(6)
Emerging Export Market Trends	465	(2)
Key Regional Markets	467	(2)
Major Import Suppliers	469	(2)
U.S. Agricultural Trade Performance	471	(4)
The Balance of Trade	474	(1)
Summary	475	(1)
Definition of Key Terms	476	(1)
References	477	(1)
Exercises	478	(2)
Exchange Rates and Agricultural Trade	480	(30)
Exchange Rates and the Foreign Exchange Market	481	(4)
Exchange Rates Defined	481	(1)
The Foreign Exchange Market	482	(3)
The Balance of Payments	485	(5)
The Current Account	485	(1)
The Private Capital Account	486	(1)
Official Settlements Account	486	(1)
The United States as a Debtor Nation	486	(4)
The International Monetary System	490	(4)
The Gold Standard and the Interwar Years	490	(1)
The Bretton Woods System	490	(2)
The Present International Monetary System	492	(2)
The European Monetary System	494	(1)
The European Union and the European Monetary System	494	(1)
Exchange Rate Determination	495	(5)
Demand and Supply of Foreign Currencies	495	(1)
Relative Interest Rates	496	(2)
Changes in Relative Prices	498	(1)
Balance of Trade Impacts	498	(2)
The Role of Expectations	500	(1)
Exchange Rates and U.S. Agricultural Trade	500	(3)
Exchange Rate Indices	502	(1)
Exchange Rate Impacts on Prices	502	(1)
Considerations for Policy Coordination	503	(2)
Macroeconomic Policy Coordination	503	(1)
Domestic Agricultural Policy Coordination	504	(1)
Summary	505	(2)
Definition of Key Terms	507	(1)
References	508	(1)
Exercises	508	(2)
Why Nations Trade	510	(15)
Why Trade?	510	(2)
Absolute Advantage	512	(6)
Comparative Advantage	514	(2)
Factors Affecting Comparative Advantage	516	(1)
Comparative Advantage and Competitive Advantage	516	(2)
Gains from Trade	518	(3)
The Importance of Exchange and Specialization	518	(1)
Distribution of the Gains from Tirade	519	(2)
Summary	521	(1)
Definition of Key Terms	522	(1)
References	522	(1)
Exercises	523	(2)
Agricultural Trade Policy	525	(27)
Trade and Welfare	526	(4)
Autarky or the Closed Economy	526	(1)
Trade and Partial Equilibrium	527	(2)
Welfare Gains from Trade	529	(1)
Why Restrict Trade?	530	(2)
Protectionism in Agriculture	530	(1)
Arguments against Trade	531	(1)
Trade Restrictions	532	(10)
Import Policies	533	(6)
Domestic Agriculture and Food Policies	539	(1)
Export Policies	540	(2)
Agricultural Trade Policy Making	542	(4)
The General Agreement on Tariffs and Trade	542	(2)
The United Nations Conference on Trade and Development	544	(1)
U.S. Agricultural Trade Policy Formulation	545	(1)
Summary	546	(2)
Definition of Key Terms	548	(1)
References	549	(1)
Exercises	550	(2)
Emerging Issues in Agricultural Trade: The Formation of Preferential Trading Arrangements	552	(17)
The Importance of Preferential Trading Arrangements	553	(1)
Forms of Economic Integration	554	(1)
Reasons for Preferential Trading Arrangements	555	(2)
Preferential Trading Arrangements and the GATT	555	(1)
Counter Economic and Political Power in Other Parts of the World	556	(1)
Reduce Side Effects	557	(1)
Foster Political Stability and Economic Prosperity	557	(4)
Do Preferential Trading Arrangements Create or Divert Trade?	557	(1)
Static Effects	558	(3)
Dynamic Effects	561	(1)
Provisions of the North American Free Trade Agreement	562	(2)
Summary	564	(1)
Definition of Key Terms	565	(1)
References	566	(1)
Edercises	566	(3)
Index	569

Excerpts

The purpose of this book is to provide beginning students in agriculture with a systematic introduction to the basic concepts and issues in economics as they relate to a major segment of the US economy--namely, the food and fiber industry. This requires that the student understand. the microeconomic and macroeconomic forces influencing the decisions of producers and consumers of food and fiber products, which include (1) farmers and ranchers, (2) the agribusinesses that supply them with production inputs and credit, (3) the agribusinesses that process food products and manufacture fiber products, and (4) the agribusinesses that provide marketing and related services at the wholesale and retail levels to both domestic consumers and overseas markets. We begin the book by answering the question raised by the title of Chapter 1, "What is agricultural economics?" We do this by first defining the field of economics and then developing a definition of agricultural economics based on the role that agricultural economists play at both the micro and macro levels. Chapter 2 discusses the changing structure of agriculture during the post-World War 11 period and the structure of those sectors in the economy that supply farmers and ranchers with inputs and process their output. Part II helps students understand the economic decisions made by consumers of food and fiber products. The topics covered here include the forces influencing consumer behavior (Chapter 3) and the concept market demand for a particular product (Chapter 4). Part II concludes with the elasticity of demand (Chapter 5). The specification of various elasticity measures is supplemented by empirical examples and their relevance to decision making in the food and fiber industry, including the potential magnitude of consumer response and the implication for producer revenue. Part III turns to the supply side of the market. Chapter 6 describes some basic fundamentals of assessing current business performance. Issues related to resource use and production response by businesses in the short run are explained in Chapter 7. This is followed by a discussion of the economic forces underlying the firm's input use (Chapters 8) and the firm's choice of commodities to produce (Chapter 9). Chapter 10 introduces the market supply curve, followed by the determination of market clearing prices and quantities under perfect and imperfect competition in Chapter 11. Empirical examples illustrate the magnitude and applicability of the relationships covered in the chapter. Part IV addresses the role of government in the food and fiber industry. Chapter 12 outlines the general nature of government involvement in farm economic issues, consumer issues, resource issues, and international trade issues. Resource issues are also addressed in other chapters as well. Chapter 13 explores the relationship between market equilibrium and farm program policy, introducing the variety of approaches taken to support prices and incomes of farmers over the last 50 years. This includes the current farm commodity legislation set to expire after 2002. Part V focuses on the macroeconomics of agriculture. Chapter 14 outlines the general linkage between product markets and national output, Chapter 15 illustrates the consequences of business fluctuations in the economy, Chapter 16 documents the importance of monetary policy to the economic performance of the economy, and Chapter 17 does the same thing for fiscal policy. Part V establishes the relationship between events in the general economy and their impacts on agriculture and other sectors in the U.S. food and fiber industry. Chapter 18 concludes this part of the book with a brief walk through the last several decades, illustrating graphically how changes in the macroeconomy affected the economic performance of agriculture. Part VI focuses on international agricultural trade issues. Chapter 19 examines the growth and