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AGRICULTURAL ECONOMICS

Introduction

Definition

ECONOMICS- the study of the method of allocations scarce physical and human resources among unlimited wants competing ends (Ferguson and Maurice)

The definitions has four concepts, namely:1. Human wants2. Goods and services (commodities)3. Resources and4. Scarcity and choice

General types of economic resources1. Natural Resources > land, forest, mines, other products of nature2. Human resources > physical and mental abilities of people3. Man- made or manufactured resources > tools, machineries, buildings, and other forms

of capital

EconomicsThe study of human society, with or without the use of money, employ scarce productive

resources to produce various commodities overtime, and distribute them for consumption now and in the near future among various people and groups in society (Samuelson)

EconomicsConcerned with efficient utilization or management of limited productive resources for

purposes of attaining the maximum satisfaction of human wants (Mc Cornell)

Based on the definitions, the following statement can be made:1. That economics is a science, specifically a social science.2. The economic resources are scarce or limited.3. That human wants are unlimited, competing and insatiable.4. That man’s society’s economic activities such as production, distributions and

consumption- can be done with or without the use of money.5. That the ultimate goal of man’s economic activities is maximum satisfaction of his wants

and need.6. That economics teaches efficient utilization of resources in the production, distribution,

and consumption of goods and services.7. That the resources are utilized not only to meet the needs of the present generation but

also of the future generation (this is the concept of sustainable resaources)

MICROECONOMICSThe branch of economics which is concerned with the problems and choices of individual economic units.

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Seeks to understand and explain the behavior of individual as they respond to changes in their economic environment (i.e. in the relative scarcity of the things involved in their choice of field)Explore the decisions that individual business and consumers make.

MACROECONOMICS The branch of economics which is concerned with the study of aggregate economic

behavior such as aggregate output, employment, money and the general price level. Deals with the study of economics as a whole. In macroeconomics, one looks at the economy as a whole instead of trying to understand

what determines the output of a single firm or industry, macroeconomics examines the factors that determine national output or national product.

AGRICULTURAL ECONOMICS An applied field of economics which deals with the proper allocation of scarce

agricultural resources among competing use in the production, processing, distribution and consumption of food and fiber.

The scientific study of methods, practices, conditions and policies affecting agriculture. Concerns with economic approaches, consumption’s, and preservation of natural

resources.

POSITIVE ECONOMICS The study of economics as an objective science. It is concerned with describing and analyzing “what is” and predictions “what will occur”

given the circumstances and known economic relationship, without passing any value judgment on the ethical merits of the results.

It strives to describe what exists and how it works.

NORMATIVE ECONOMICS o Looks at the outcome of economic behavior and work if they are good or bad and

whether they can be made better.o It involves judgment and prescriptions for causes of action.

Economic Problem/ Scarcity and the Basic Economic Questions

Scarcity and Choice

Scarcity – is the main obstacle which economics aims to hurdle. Because of scarcity, there is a need to decide how to allocate resources and make choices on the goods to be produced.

Important Concepts related to Scarcity:

Opportunity Cost – refers to the value of the best foregone alternative.

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The basic economic problem that underlies all economic issues is the combined existence of scarce resources and unlimited wants.

Three Basic Economic Questions or Problems forced by any Economy includes:1. What and How much should we produced?2. How should production be organized?3. For whom should food be produced?

Technology Choices and Production Possibility Frontier (PPF)

Production Possibility Frontier (PPF)The problem of scarcity of resources/ necessities that everyone must make choices that

entail costs. This means that if we choose more of one thing, then we choose less of another. The production choices open to any economy or society.

Production Possibilities- This is reflected by the production possibility frontier (PPF). The PPF gives a menu

of choices to produce goods in the most efficient way in term of resource use.

Points Inside the Frontier- Implies the efficiencies that not all the resources are fully employed and/ or not using

the best techniques. Can be corrected by increasing the production of any of the two goods or both.

Points Outside the Frontier- Infeasible, not unless there is increased in the quantities or resources and/ or

improvement in the technologies.

Alternative Economic System

1. Custom Economy- functioning of the economy is governed by customs, beliefs, and traditions.

2. Command Economy – public ownership of resources and with a centralized decisions on the allocation of resources.

3. Market/ Capitalist Economy- private ownership of resources and decisions on the allocation of resources is made through market interaction.

4. Mixed Economy- combination of the first three mentioned economies. Most economics today are mixed economies.

The Key Economic Problem

1. Consumption Related- what to produce, how much to produce.2. Production related- how shall the goods and services be produced.

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3. Distribution related – For whom shall the goods and services be distributed?4. Growth overtime – what resources can be spared today for the need of future generation?

MICROECONOMICS

Demand, Supply and Market Equilibrium

The Concept of Demand

Demand- refers to the amount of goods and/ or services that consumers are both willing and able to purchase at alternative prices in a given period, other things held constant.

The Law of Demand Asserts that the quantity demanded of a good and/ or services is negatively related to its

own price. (i.e. when the price of certain commodity go up we are willing to purchase few of that commodity.

There are two reasons for the negative relationship between price and quantity demanded has to do with our budget as consumers. Paying a higher price for some amount of commodity effectively reduces our income. At higher prices, consumers are forced to purchase less of all the commodities they usually buy.

Ways of Presenting Demand

1. A Demand Schedule – is a numerical tabulation of the quantity demanded at selected prices, assuming other thing held constant.

Table for Deand Schedule for Denim Pants

Price of Pants (P) Quantity Demanded/ month0 850 7100 6150 5200 4250 3300 2350 1400 0

2. A Demand Curve – is a representation of the Demand Schedule. The demand curve is drawn as downward sloping to illustrate the inverse relationship between price and quantity demanded.

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P400300200100 D

0 2 4 6 8 Q

3. Demand Function- Quantity demanded (QD) is expressed as a mathematical function of price (P). The demand function may thus be written as:

QD = a- bP

Wherea = is the horizontal intercept of the equation or the quantity demanded when price is

zero.

-b = slope of the function. This illustrates the negative or inverse relationship between Price and quantity demanded. The slope also indicates the change in quantity demanded per unit change in price.

4. Market Demand- the summation of all individual demands.

The Concept of Supply

Supply- refers to the amount of goods and/ or services that a firm or producer is willing and able to offer for sale. A supply curve is the representation of the supply schedule while a supply function mathematically represents the relationship between price and quantity supplied.

The Law of SupplyStates that quantity supplied is positively related to price i.e. firms offer larger amounts at

higher prices and smaller amounts at lower prices. In this case, price is the reward for production so that higher market prices bring forth large quantities.

Higher prices, provides firms with extra funds to purchase more resources or inputs to increase production. Higher prices also acts as a signal to producers that consumers value their goods highly and desire more of them.

Ways of Presenting Supply

1. Supply Schedule – tabular presentation of supply.

2. Supply Curve – graphical presentation of supply.

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3. Supply Function – mathematical presentation of the relationship between price and quantity supplied.

4. Market Supply- the summation of all individual supply.

Table 3.2 Supply schedule for denim pants.

Price of denim (Pesos) Quantity supplied (no. of pairs)0 050 1100 2150 3200 4250 5300 6350 7400 8

Figure 3.2 Supply Curve

P S

400

300

200

100

0 2 4 6 8 Q

Changes in Quantity Demanded and Quantity Supplied (movements along the demand and supply curves)

A change in price, both in the upward and downward directions, results or gives rise to changes in quantity demanded or supplied. Thus, movement along the demand curve refers to changes in quantity demanded.

If there is an increase in price, consumers respond by decreasing the quantity they want to buy of the good. Similarly, movement along the supply curve mean changes in quantity supplied. A decrease in price will decrease quantity supplied because suppliers respond by producing less at lower prices.

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Shifts in the Demand and Supply CurveAside from price, or independent of the influence of price, the following are the factors which can cause demand to increase or decrease.

1. IncomeA higher level generally translates into greater ability to buy goods and services,

and hence, higher demand for most goods. Thus, when a consumer’s income increases, the demand curve shifts to the right.

At the same price, demand for the good has increased. Similarly, a fall in income reduces demand, causing the demand curve to shift to the left.

Goods for which demand increases as income increases and for which demand decreases as income increases are known as Normal Goods.

However, it is possible for demand to actually decrease when consumers’ income increases. Such commodities are known as Inferior Goods.

In the case of the inferior goods, an increase in income results in decrease in demand for such goods. Thus, the demand shifts to the left.

2. Prices of related commoditiesOur demand for an item is also influenced by the prices of related goods and

services. Goods may be either substitute or complements for each other.Example: Ballpen and pencil are substitute goods.When the prices of ballpen increases, the demand for pencils will increase causing

the demand curve for pencils to shift to the right.

Relating goods may also be compliments in consumption. Complementary goods are always consumed together. A CD player and a CD are examples of complementary goods. The demand for a CDs would fall if prices of CD players were double. When the price of a complementary good falls, demand for the related goods increases, thus shifting the demand curve to the right.

3. Consumer Tastes and preferences

Greater amounts of a good are demanded at every possible price when consumer tastes shift towards a particular good.

Demand for a good will decrease if consumer preferences change in the opposite direction, making the good less desirable than before. The demand curve shifts to the left; at every possible price, less of the good is demanded than before.

4. Consumer expectationExpectation about future prices and income affect our current demand for many

goods and services.

5. Number of Consumers

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The number of consumers affects the market demand for a good. Since the market demand for is a horizontal summation of a separate demand schedules of individual consumers, an increase in the number of consumers shifts the demand curve to the right.

Like demand, there are other factors aside from price that affect the supply schedule. These factors are: (Factors Affecting Supply)

1. Resource PricesWhen prices of inputs to production increases, the supply of the firm’s product

decreases. The entire supply curve shifts leftward because with higher production costs, firms cannot produce and offer the same quantity as before the increase in costs.

Decreases in resource prices; however, translate to an increase in supply. Falling raw material costs, for instance, will reduce the production costs of firms allowing them to expand output levels.

2. Prices of Related Goods in Production Resources or factor inputs can be employed to produce not just one but several

alternative goods and services. Thus, when the prices of any of these goods changes, the supply of a good related in production also changes.

3. TechnologyA change in production techniques can lower or raise production cost and affect

supply. A cost saving invention will enable firms to produce and sell more goods than before at any given price. Therefore, improvements in technology shift the supply curve to the right. Changes in technology that raise production costs, on the other hand, shift the supply curve to the left.

4. Producer expectationWhen producers expect the price of their product to rise in the future, they may

hoard their output and store it for alter sale, effectively reducing supply in the present period.

Thus the supply curve shifts to the left. The reverse is true if firms expect the price of their product fall in the near future. Supply may increase in the current period as firms try to increase production as well as to dispose of their inventory at the current price.

5. Number of Sellers Market supply is the horizontal summation of the supply schedules of individual

producers. When firms are enticed to enter market, larger quantities are produced at all possible prices, shifting the supply curve to the right. Similarly, the supply curve shifts to the left when firm exit the market because of supply decreases.

LAWS OF SUPPLY AND DEMANDEquilibrium price and quantity result from the interaction of demand and supply.

However, if there are any changes in any of the supply and demand, new equilibrium may be reached.

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Different directions of change have various effects on price and quantity which are summarized as follows:

a. An increased in demand causes an increase in both the equilibrium price and equilibrium quantity exchange.

b. A decrease in demand cause a decrease in both the equilibrium price and equilibrium quantity exchanged.

c. An increase in supply causes a decrease in equilibrium price and an increase in thew equilibrium quantity exchanged.

d. An increase in supply cause an increase in the equilibrium price and a decrease in the equilibrium quantity exchanged.

e. If both the supply and demand changes, shift the change in equilibrium price and quantity will depend on the magnitude of the change in the two curves.

If demand increases faster/ larger than supply, equilibrium price and quantity will increase.

If supply increases faster/ larger than demand, equilibrium price will decrease but equilibrium will increase.

If demand and supply increase equally, the equilibrium price will not change but equilibrium quantity will increase.

Market Equilibrium

Market equilibrium- is that state in which both price and quantity area at levels at which the amount firm want to supply matches exactly the amount consumers want to buy.

That price is called equilibrium price and the market clearing amount is called the equilibrium quantity. The market is said to be “at rest” since the equilibrium price and equilibrium quantity will stay at those levels until either demand or supply changes.

At prices above the equilibrium price, the quantity supplied is greater than quantity demanded; resulting in temporary surplus.

At prices below the equilibrium price, the buying public demands goods than are available, creating temporary shortage.

Elasticity Concepts The measurement of how much the quantity demanded (or quantity supplied) of a certain good changes a result of a relative change in its price is known as own price elasticity of demand (or of

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elasticity of supply) (the concept of price elasticity also applies to supply. The formulae and interpretation are the same except that quantity demanded should be replaced with quantity supplied)

Price elasticity of demand ( E)- is defined as the ratio of the percentage change in quantity demanded to the

percentage change in price, or

E = % in Qd % in P

If elasticity is measured at a single point on the demand curve, it is known as point elasticity.

If it is computed between two points on the demand curve, it is called arc elasticity. Arc elasticity becomes point elasticity as the distance between the two points approaches zero.

Elasticity Values Description/E/ = 0 Perfect inelastic/E/ < 1 Inelastic/E/ = 1 Unit elastic/E/ < 1> 1 Elastic/E/ = ∞ Perfect elastic

When the percentage change in quantity demanded is greater than the percentage change in price, it is said to be price elastic. i.e. demand is relatively sensitive to small price changes.

But if the percentage change in quantity demanded is less than the percentage change in price, demand Is said to be price inelastic.

If the percentage change in quantity demanded is exactly equal to the percentage change in price, demand is unit elastic.

If quantity demanded does not change as price changes (the demand curve is vertical), the demand is perfectly inelastic.

Demand is perfectly elastic, when consumers are prepared to buy all they can at same price and none at all at ant other price (the demand curve is horizontal).

Along a straight line demand curve, the value of the price elasticity of demand varies. All straight line demand curves have segment where demand is inelastic, elastic, or unit elastic.

Determinants of Price Elasticity of Demand

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a. The availability of good substitute for the commodity > more substitute, more elastic.b. The number of uses the good can be put into > more uses, more elasticc. The price of the good relative to the consumer’s purchasing power > if the good takes

larger share of the budget the more likely to be more elastic.d. The time frame under consideration > the longer the period of time, the more elastice. Location among the demand curve

Income Elasticity of Demand

Quantity demanded may also change if the consumer’s income changes. Income elasticitymeasures the responsiveness of quantity demanded to changes in income.

Income elasticity (π) may be computed as follows:

Π = % in Qd % in Income

When the income elasticity of demand assumes a positive value, quantity demanded of the good increases and the good being studied is known as Normal Goods. If the quantity of a good falls as income increases, the income elasticity takes a negative value and the good is called Inferior Good. The value of the income elasticity coeeficient can vary greatly.Goods may also be classified as “luxuries or necessities” depending on their demand elasticities. If the income elasticity of demand is greater than 1, the good may be considered a luxury while if income elasticity of demand is less than 1, the good may be considered a necessity.

Cross Price Elasticity of Demand

It measures the percentage change in quantity demanded of one good following a one percentage change in the price of another good.

Lxy = % in Qdx___________% in Py

Price increases of a substitute good leads to an increase in the quantity demanded of the other good; hence, when the cross price elasticity is a positive number, the two goods are substitute goods.

On the other hand, when the cross price elasticity has a negative value, the goods are complementary goods. A price increase of a complementary good leads to a decrease in the quantity denuded of the other good.

Minimum Price Policy

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If the government feels that the market price for a commodity is too low, it can institute a Floor Price policy. (i.e. set up a price support.) For example, floor price are usually imposed on certain product to help farmer.

To be effective, a floor price is set up above the market equilibrium price. As such, it will always result in excess supply or surplus.

Maximum Price Policy

A Price Ceiling policy is usually imposed if the government thinks that the market price of a commodity is too high.

The objective of this policy is to extend a price subsidy to consumers. If the price ceiling policy is effective, it will result in excess demand or shortage. This shortage can be eliminated by rationing, importing, and injecting buffer stocks to the market

Tax Incidence

Imposition of a tax affects consumption and production. The tax could be a specific or excise tax or ad valorem tax.

The specific tax or excise tax is a tax per unit of the product, while ad valorem tax is a tax percentage of the selling price

Who bears the greater portion of the tax? Is it the consumers or the producers?The tax is likely to raise the equilibrium price, but by an amount less than tax.

Sharing of the tax burdens on the price elasticities of demand and supply.

If the demand is more elastic than supply, the greater portion of the tax is l;ikely to be shouldered more by the producers.

If demand is less than supply, the consumers pay a greater portion of the tax.

I f the demand is perfectly inelastic, the consumers pay 100% of the tax.

Theory of Consumer Behavior

The Theory of Consumer Behavior is useful in understanding the demand side of the market.

Useful Concepts and Measurements

Utility- the measurement of satisfaction derived from the consumption of a good or services. Measurements

Cardinal Utility Measurement- assume that an individual can assign absolute values or numbers

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for the satisfaction derived.

Ordinal Utility Measurement- no need to assign value or number for the satisfaction, instead can rank his/ her preferences.

Total Utility (TU)- the overall level of satisfaction derived from consuming a good or service.

Marginal Utility (MU) – the additional satisfaction that an individual derives from consuming an additional unit of a good or service.

Total Utility, in general increases as quantity consumed increases.

At a certain point, Total Utility starts to decrease as quantity increases.

If TU is increasing, MU is positive but decreasing.

This decreasing MU is explained by the Law of Diminishing Marginal Utility.

Diminishing Marginal Utility- As more and more of a good is consumed, the process of consumption, will at some point

yield smaller and smaller additional utility or satisfaction.

Consumer Equilibrium or Law of ConsumptionIn consuming a good or service, the consumer is faced with the following constraints:

price of the goods and Income.

o To maximize satisfaction the consumer should follow the Equi- Marginal Principle- the consumer maximizes satisfaction by equating the marginal utility per peso spent on the goods.

Indifference Curve – given two goods, an indifference curve shows the combination of the two goods that gives the same level of satisfaction. The higher the indifference curve, the higher the satisfaction.

Budget line- gives the feasible combination of goods within the limit of income.

Theory of Production and Cost

A Firm - is an entity concerned with the purchase and employment of resources in the production of various goods and services.

The Production Function

Production Function- refer to the physical relationship between the inputs or resources of a firm and their output of goods and services at a given period of time, ceteris paribus.

The Production Function is dependent on different time frames:

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Firms can produce for a brief or lengthy period of time. The shortness or longness of a period is dependent on the viewpoint of individual firms

Planning Periods1. Short- run planning period- where at least one input is fixed.2. Long- run planning period- where all inputs are variable.

Factors or Inputs of ProductionThe Inputs – used by a firm refer to the resources that contribute in the production of

commodity. Most resources are lumped into three (3) categories: Land, Labor and Capital.

These resources can further be classified into: Fixed inputs and Variable Inputs

Fixed Inputs are resources used at a constant amount in the production of a commodity.

Variable Inputs refer to resources that can change into quantity depending on the level of output being produced.

Production Analysis with One Variable Input

Total Product (Q) refers to the total amount of output produced in physical unit.

Marginal Product- refers to the rate of change in an output is change by one unit holding all other things constant.

It can be observed that the value of the marginal product increases and reaches a maximum level. Beyond this point, the marginal product declines, reaches zero, and subsequently becomes negative.

The phenomenon of declining marginal product is known in economics as the law of diminishing returns.

The Law of Diminishing ReturnsStates that “as the use of an input increases (with other fixed input), a point will

eventually be reached at which the resulting additions to output decreases.

Average Product

The Average Product measures the total output per unit of input used. The “productivity” of input is usually expressed in terms of its average product.

Comparing the average product and marginal product curves, we noticed that the marginal product peaks earlier. Furthermore, it intersects average product at the latter’s maximum point.

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A simple “rule of thumb” can be derived from the behavior:

If AP (average product) increases, it is below MP; however, when it decreases, it is above MP (marginal product).

If we combine the total product, average product, and marginal product curves in one diagram, we can delineate three stages of production for labor: Stage II, III & I.

Stage I is bounded by Y- axis and the intersection of MP and AP curves. Stage II starts off from MP- AP intersection and ends where MP is equal

to zero, implying that Q maximum. Stage III begins when MP is zero and covers the area where the value of

MP and Q is falling.

Note:

In Stage I of the diagram, all the product curves are increasing. The increase in AP implies an increase in labor productivity. Stage I stops where AP reaches its maximum. The initial increase in MP illustrates that output increases at an increasing rate. However, the peaking and then declining of the marginal product and beyond respectively, it is also in this stage of production, on the other hand that the law of diminishing returns begins to manifests.

Stage II of production starts where the AP of the input begins to decline, relevant stage of production.

Stage III starts where the MP has turned negative. In this last stage of production, all product curves are decreasing. At this stage, total output starts falling even as the input is increased and it will be totally or absolutely inefficient to employ any additional input of labor.

Characteristics of the different stages of production or input use.

Stage TP AP MP

I increasing at an is increasing is greater than APincreasing rate

II increasing at an is decreasing is decreasing butdecreasing rate is greater than MP positive

III is decreasing is decreasing negative.

Boundaries between stages of production:o Between I and II – AP= MPo Between II and III – M is 0; TP is maximum.

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Cost of Production