General Agricultural Economics PDF

Instructor: Marlo Artemio Jr. L. Agr.  Introduction (Theory, Scarcity, Microeconomic Theory, Markets, Functions, Equilibrium, Positive and Normative Economics) What is Economics? The proper allocation and efficient use of limited resources for the maximum satisfaction of human wants. T...

Instructor: Marlo Artemio Jr. L. Agr.  Introduction (Theory, Scarcity, Microeconomic Theory, Markets, Functions, Equilibrium, Positive and Normative Economics) What is Economics? The proper allocation and efficient use of limited resources for the maximum satisfaction of human wants. The Purpose of Theory Purpose: Predict and Explain A hypothesis that has been successfully tested. Example. ”If the price of a commodity rises, then the quantity demanded of the commodity declines” The Problem of Scarcity Scarce is closely associated with the economics. Scarcity Is the central fact of every society. Economic resources: Land, labor, capital, and entrepreneurship – used in producing goods and services. Limited or scarce resources=Limited ability of every society to produce goods and services All societies face the problems of what to produce, how to produce, For whom to produce, how to ration the commodity over time, and how to provide for the maintenance and growth of the system. - all these problems are solved by the price mechanism The Problem of Scarcity What to produce? refers to those goods and services and the quantity of each that the economy should produce. More of one good or service usually means less of others. How does price mechanism solves the “What to Produce?” problem in every economy? Only those commodities for which consumers are willing to pay a price per unit sufficiently high to cover at least the full cost of producing them will be supplied by producers in the long run. The Problem of Scarcity How to produce? refers to the choice of the combination of factors and the particular technique to use in producing a good or service. Since resources are limited in every economy, when more of them are used to produce some goods and services, less are available to produce others. How does price mechanism solves the “How to Produce?” problem in every economy? Because the price of a factor normally represents its relative scarcity, the best technique to use in producing a good or service is the one that results in the least dollar cost of production. The Problem of Scarcity For whom to produce? Refers to how the total output is to be divided among different consumers. Since resources and thus goods and services are scarce in every economy, no society can satisfy all the wants of all its people. How does price mechanism solves the “For whom to Produce?” problem in every economy? The economy will produce those commodities that satisfy the wants of those people who have the money to pay for them Economic Systems Model Capitalism/ Free-enterprise/Free-Market – factors of production and distribution are owned and managed by private individuals or corporation Characteristics: a. Private property b. Economic freedom c. Free competition d. Profit Motive Communism - factors of production and distribution are owned and manage by the state Characteristics: a. No private property b. No free competition c. No economic freedom d. No profit motive e. Presence of central planning Socialism combination of capitalism and communism -the major and strategic industries are owned and managed by the state while the minor industries belong to the private sector. Its characteristics is a combination of capitalism and communism  The Function of Microeconomic Theory Microeconomic theory, or price theory, studies the economic behavior of individual decision- making units such as consumers, resource owners, and business firms in a free-enterprise economy. Thus, microeconomic theory, or price theory, studies the flow of goods and services from business firms to households, the composition of such a flow, and how the prices of goods and services in the flow are determined Circular Flow of Economy Markets, Functions, and Equilibrium A market is the place or context in which buyers and sellers buy and sell goods, services, and resources. A function shows the relationship between two or more variables. Equilibrium refers to the market condition which once achieved, tends to persist. Equilibrium results from the balancing of market forces (market demand and market supply). Partial equilibrium – equilibrium of individual firm in the economy viewed in isolation. General equilibrium – simultaneous equilibrium of all the individual firms in the economy. Positive Economics and Normative Economics Positive economics deals with or studies what is, or how the economic problems facing a society are actually solved. Normative economics, on the other hand, deals with or studies what ought to be, or how the economic problems facing the society should be solved. Demand, Supply and Equilibrium Demand The quantity of a commodity that an individual is willing to purchase over a specific time period. Demand schedule tabular representation of demand PRICE 5 10 15 20 25 Quantity 50 40 30 20 10 Demanded  Price D Demand Curve – graphical representation of demand Quantity Demanded The demand curve is downward sloping due to the negative, or indirect relationship between the Price and Quantity demanded. Law of Demand: P↑-D↓ - When the Price Increases the Demand Decreases P↓-D↑ - When the Price decreases, the Demand Increases  Price Qd 2 Change in Quantity Demanded P2 - the movement from one point to the other along the same demand Qd 1 curve due to the change in price P1 Quantity Demanded Price Change in demand - shift of the D2 demand curve either from the left or to the right. Q3 D1 Quantity Demanded Factors Affecting Change in Demand a. Population growth b. Age distribution c. Income d. Expectation of future price e. Environmental factors f. Taste and preference g. Change in the price of other goods Change in the Price of other Goods: substitute goods - goods which can take the place the other goods - positively related ex. coke and Pepsi { If the price of coke increases the demand for pepsi increases } complementary goods - goods which goes together - negatively related ex. coffee and sugar { If the price of coffee increases the demand for sugar decreases } Supply Quantity of goods and services that a producer or seller is willing to sell at a given time and price. Supply schedule tabular representation of supply PRICE 5 10 15 20 25 Quantity 10 20 30 40 50 Supplied  Price S Supply Curve – graphical representation of Supply Quantity Supplied The supply curve is upward sloping due to the positive, or direct relationship between the Price and Quantity Supplied. Law of Demand: P↑-S ↑ - When the Price Increases the Supply Increases P↓-S ↓ - When the Price decreases, the Supply Decreases  Price Change in quantity supplied - P1 movement from one point to the other along the same supply curve due to the change in price P2 Qs 1 Quantity Qs 2 Supplied Price S2 Change in supply - shift of the S1 supply curve either from the left or to the right. S3 Quantity Supplied Factors Affecting Change in Supply a. Technology b. Change in the price of inputs c. Weather condition d. Natural Calamities e. Expectation of price f. Production costs  Supply and Demand S Price Surplus S>D Above the equilibrium Equilibrium point D=S point – S>D - surplus Below the equilibrium D point - S change in Qd eΔQd) Quantity Demanded Degrees of Price Elasticity of Demand 3. Unitary - change in price = change in Qd e=1 for normal goods Price Electronic Devices Household Items Basic Clothing ΔP=ΔQd) Quantity Demanded Degrees of Price Elasticity of Demand 4. Perfectly elastic – Price is constant, there is change in Qd e=0 (cryptocurrency) Price Homogeneous Agricultural Goods Stocks and Bonds in Efficient Markets No ΔP, ΔQd) Quantity Demanded Degrees of Price Elasticity of Demand 5. Perfectly inelastic – change in Price constant Qd e=0 Medicine Price Life-saving medication ΔP, No ΔQd) Quantity Demanded Factors affecting the Price Elasticity of Demand 1. Given demand curve 2. Different demand curve 3. Product characteristics 4. Consumers characteristics 5. Characteristics of the marketing system Degrees of Price Elasticity of Supply 1. Elastic - change in price < change in Qs e>1 Products which are easy to produce/not seasonal Price ΔP˂ΔQs Quantity Supplied Degrees of Price Elasticity of Supply 2. Inelastic - change in price > change in Qs eΔQs Quantity Supplied Degrees of Price Elasticity of Supply 3. Unitary - change in price = change in Qs e=1 collectibles Price ΔP=ΔQs Quantity Supplied Degrees of Price Elasticity of Supply 4. Perfectly elastic – Price is constant, there is change in Qs e=0 labor in a highly competitive market Price No ΔP, ΔQs Quantity Supplied Degrees of Price Elasticity of Supply 5. Perfectly inelastic – change in Price constant Qs e=0 Land Price ΔP, No ΔQs Quantity Supplied Midpoint Method for Elasticity % change in Qty % change in Price Consumer Demand Theories A. Total and Marginal Utility Utility - the level of satisfaction in the consumption of goods and services Utils - unit of satisfaction TU - Total Utility - total satisfaction in the consumption of goods and services MU - Marginal Utility - additional satisfaction derived in consuming one more unit of goods and services Saturation point - point wherein individuals reach maximum satisfaction and marginal utility is equal to zero.  TU TUx=30 Qx TUx MUx 0 0 1 10 10 Qs 2 2 18 8 3 24 6 4 28 4 Quantity 5 30 2 MU 6 30 0 7 28 -2 The falling MUx curve illustrates the principle of diminishing marginal utility. For every Qx =6 unit of good or service consumed, the MUx=0 marginal utility will eventually decrease. Quantity B. Consumer Equilibrium The objective of a rational consumer is to maximize the total utility or satisfaction derived from spending personal income (constraint) The consumer is said to be in equilibrium when able to spend personal income in such a way that the utility or satisfaction of the last dollar spent on the various commodities is the same. Mux/Px = Muy/Py=… Subject to the constraint that PxQx + PyQx +….= M (individuals income)  Q 1 2 3 4 5 6 7 8 Mux 16 14 12 10 8 6 4 2 Muy 11 10 9 8 7 6 5 4 If the individual spent the total income in any other way, the total utility would be less when Qx= 3, Qy=6, the two conditions for consumer equilibrium are simultaneously satisfied: That is, the MU of the last dollar spent on X (6 utils) equals the MU of the last dollar spent on Y, and the amount of money spent on X ($6) plus the amount of money spent on Y ($6) exactly equals the individual’s money income (of $12). The same two general conditions would have to hold for the individual to be in equilibrium if having purchased more than two commodities.  C. Indifference Curves An indifference curve shows the various combinations of commodity X and commodity Y which yield equal utility or satisfaction to the consumer. Characteristics of Indifference Curve Y Negatively sloped – due to the indirect relationship of commodity x and y Convex to the origin – due to the diminishing MRS They cannot intersect – due to the budget line constraints. X D. Budget Constraint Line and Consumer Equilibrium Y The budget constraint line shows all the different combinations of the two commodities Budget Constraint Line that a consumer can purchase, given his or her money income and the prices of the two commodities. Budget Constraint Line X Y A consumer is in equilibrium when, given personal income and price constraints, the consumer maximizes the total utility or satisfaction from his or her expenditures. Consumer Equilibrium -Tangent to the budget line X The marginal rate of substitution (MRS) - refers to the amount of Y that a consumer is willing to give up in order to gain one additional unit of X (and still remain on the same indifference curve). As the individual moves down an indifference curve, the MRSxy diminishes. E. Income-consumption Curve and Engel Curve The income- consumption curve is the locus of points of consumer equilibrium resulting when only the consumer’s income is varied. E. Income-consumption Curve and Engel Curve The Engel curve shows the amount of a commodity that the consumer would purchase per unit of time at various levels of total income. Engel Curve Income Income Normal Goods Inferior Goods Quantity Quantity Positively Sloped Engel Curve Negaitively Sloped Engel Curve eM>0 eM1 eM =between 0-1  Theory of Production A. Production with one Variable Input: Total, Average, and Marginal Product Production – the process of transforming inputs to outputs Creation of goods to satisfy human wants. Function – Shows the relationship between two variables (depended and independent) Production Function – the technical relationship between the application of variable inputs and the maximum obtainable output Y Production function X  Land Labor TP AP MP STAGE 1 – TP ↑ 1 0 0 0 increasing rate; MP and AP↑; 1 1 3 3 3 MP>AP 1 2 8 4 5 STAGE 1 STAGE 2 STAGE 3 STAGE 2 – TP ↑ 1 3 12 4 4 decreasing rate; MP and AP↓; 1 4 15 3.75 3 MP ↑output 3. Increasing Return to Scale - ↑input ˂ ↑output Economies of Scale efficiency of management in relation to size and resources External economies of scale - factors outside the firm which contribute to its efficiency Good government policies Good communication facilities Good transportation facilities Good roads and bridges Good weather conditions Internal economies of scale – factors inside the firm which contribute to its efficiency Technical economies of scale – use of good technology, specialization (education), labor and use of machineries Financial economies of scale – availability of capital, large firm have easier access to capital with lower interest. Marketing economies of scale – large firms purchase and sell in volume (lower costs per unit), large market share, target mark-up Administrative and management economies of scale – specialization in management (education) – will increase productivity and lower production costs Diseconomies of Scale inefficiency in production in relation to size and available resources External diseconomies of scale - factors outside the firm which contribute to its inefficiency poor government policies Poor communication facilities Poor transportation facilities Poor roads and bridges Air and water pollution Bad weather condition Internal diseconomies of scale - factors inside the firm which contribute to its efficiency Technical diseconomies of scale – slow to adopt changes, red tape Financial diseconomies of scale – limited access to capital Marketing diseconomies of scale – can’t sell in volume Administrative and management diseconomies of scale – overspecialization, difficulty of management Appropriate Techniques of Production Profit Maximization TR-TC Approach Long-run: Quantity Price TR TC TP MR MC TR > TC = ↑Production TR = TC = maintain production 0 4 0 1 -1 TR ˂ TC = ↓ production 1 4 4 2 2 4 1 Short-run: TR > VC = operate 2 4 8 4 4 4 2 TR ˂ VC = shutdown 3 4 12 7 5 4 3 MR – MC Approach 4 4 16 10 6 4 3 MR > MC = ↑ Production MR = MC = maintain production/Profit 5 4 20 15 5 4 5 maximization point 6 4 24 21 3 4 6 MR ˂ MC = ↓ Production Price and Output Determination  What is Market? What is Revenue? Elements of Market: Revenue means income. By revenue we Buyers & Sellers mean sales figure that a firm earns by Goods & Service selling its output. Price for a product or service at a time Knowledge about market condition Bargaining for a price TYPES OF MARKET STRUCTURE: TYPES OF REVENUE: Perfect competition Total Revenue TR=Price(P) x Quantity(Q) Monopolistic competition Average Revenue AR=TR/Q AR=(PxQ)/Q Monopoly Marginal Revenue MR=TRn-TRn1 Oligopoly Total Revenue refers to the amount of money which a firm realize by selling certain units of commodity Average Revenue is the revenue earned per unit of output. Marginal Revenue is the change in the Total revenue resulting from the sake of an additional unit of a commodity. What is Profit? Profit is the difference between income and expenditure. Super Normal Profit is an excess profit which is earned over and above the minimum profit. TYPES OF PROFIT: Supernormal Normal Profit is minimum profit which is earned Average revenue (AR) >Average Cost (AC) by the firm. In this case revenue is equal to the Total revenue (TR) >Total Cost (TC) cost. Normal As per accounting definition normal profit should Average revenue (AR) =Average Cost (AC) be zero but economically the cost includes rent for Total revenue (TR) =Total Cost (TC) land, wages to labor, interest on capital, some minimum profit to entrepreneur ; which is required Subnormal MR=TRn-TRn1 to run the business. Average revenue (AR)