Introduction To Agricultural Economics PDF

 1941 Huge governmen...

 1941 Huge government spending for WW II caused economic boom that brought end to the Great Depression. 1944 Bretton Woods accord established economic policy following WW II. This accord led to the creation of the World Bank and the General Agreement on Tariffs and Trade (GATT). International Monetary Fund established. 1930 1945 Smoot–Hawley Tariff Act passed; raised Commercial fertilizer gained use to help trade barriers; exacerbated collapse of increase yields. global trade. 1907 1946 1776 Bank panic; 246 U.S. banks collapse. 1932 The National School Lunch Program Great Depression deepened; 10,000 U.S. Adam Smith published Wealth of Nations. 1913 banks fail; unemployment rate approached established. 1815 Federal Reserve Act passed by Congress. 25 percent. 1948 Start of the 1815–1821 depression; 1914 Paul Samuelson became first American to widespread foreclosures, bank failures, Assembly line production adopted by 1933 win the Nobel Prize in Economic Sciences. high unemployment and trade balance Henry Ford led to mass production The United States abandoned the gold problems. concept. standard. Federal Deposit Insurance Corporation 1848 Clayton Anti-Trust Act passed, establishing established to protect depositors. John Stuart Smith published Principles of the Federal Trade Commission. Glass–Steagall Act passed, restricting Political Economics. Agricultural Extension Service was formed, a major step in direct education for banks from entering risky business. 1853 farmers. Farm Credit Administration established, Recession saw business activity fall almost regulating Farm Credit System credit for 20 percent. 1916 agriculture. Federal Farm Loan Act passed. 1862 Agricultural Adjustment Act passed President Abraham Lincoln created the 1918 authorizing farm price supports and first Department of Agriculture and signed End of WW I; return of troops to the work adjustment programs. the Morrill Land Grant College Act. force led to high unemployment. 1935 1865 1919 Social Security Act passed. Beginning of the 1865–1867 recession American Farm Bureau Federation formally WPA work program established to provide following the Civil War; lasted 32 months. organized. employment. Credit: Bachrach/Getty Images. 1700–1899 1900–1929 1930–1939 1940–1959 1873 1921 1936 1949 Panic resulted from failure of largest bank in The first farm market news radio report John Maynard Keynes published The Concept of target prices initiated under the the United States; depression lasted 5 years. was broadcast over KDKA, Pittsburgh. General Theory of Employment, Interest direction of secretary of agriculture Charles The United States returned to the gold Packers and Stockyards Act enacted. and Money. F. Brannan. standard. Robinson–Patman Act passed, prohibited 1922 anti-competitive practices including price 1951 1874 The Capper–Volstead Act exempts farm discrimination. Treasury pressured the Federal Reserve Georgia established the first state cooperatives from federal anti-trust to maintain low fixed interest rates on Department of Agriculture. legislation. government bonds as it issues government securities to finance Korean War defense Grain Futures Trading Act enacted. 1890 spending. Alfred Marshall published Principles of 1926 1954 Economics. The Cooperative Marketing Act of 1926 The Food for Peace Program (Public Passage of the Sherman Anti-Trust Act passed; permitted farmers or their Law 480) enacted; led to a permanent prohibiting certain business activities associations to acquire, exchange, and expansion of U.S. exports of agricultural deemed by government regulators to be disseminate a variety of price and market products. anti-competitive. information. 1929 1956 Unemployment Assistance Act passed. October 24th Wall Street Crash; beginning of the 11-year Great Depression. Credit: ClassicStock/Alamy Stock Photo. 1937 The Agricultural Marketing Agreement Act signed into law providing authority for federal marketing orders; reaffirmed the marketing agreement provisions of the Agricultural Adjustment Act of 1933.  1963 Milton Friedman introduced concept of monetarism; later received Nobel Prize in 1981 Economic Sciences in 1976. Recession lasting 16 months. President Reagan advocated supply-side economics. 1985 The Conservation Reserve Program (CRP) created by the U.S. Department of Agriculture largely to reduce soil erosion and improve water quality. 1987 Stock market plunged; new Federal Reserve chairman Alan Greenspan acted to stabilize the economy. 2007 Housing bubble burst, contributed to the subprime mortgage crisis and the Great 1996 Recession. Global financial crisis ensues. President Clinton signed welfare legislation that required work in exchange for 2008 assistance. Federal government rescued some of the Credit: Everett Collection Inc/Alamy Stock Photo. nation’s largest investment firms; Lehman World Trade Organization (WTO) Brothers investment bank failed. created; principal international forum 1964 governing world trade. Federal Agriculture Congress passes TARP legislation helping Congress passed President Kennedy’s $12 Improvement and Reform Act, also firms like General Motors and Chrysler billion tax cut; the economy takes off. known as the Freedom to Farm Act, was avoid bankruptcy. Food Stamp Act passed; provides financial implemented. This legislation revised and The Food, Conservation, and Energy Act assistance for the purchase of food for simplified direct payment programs for passed, increasing benefits of food stamp low-income people (known today as the crops and eliminated milk price supports recipients, and increasing support for the Supplemental Nutrition Assistance Program through direct government purchases. production of cellulosic ethanol. or SNAP). 1999 2009 1965 Congress partially repealed the 1933 Congress passed legislation providing tax President Johnson signed landmark Glass–Steagall Act; allows commercial cuts and new spending to spur economic amendment to the Social Security Act banks, investment banks, and securities growth; deficit reaches $1.4 trillion; Great creating Medicare and Medicaid. Credit: Richard Ellis/Alamy Stock Photo. firms to consolidate. Recession declared over in June. 1960–1979 1980–1995 1996–2005 2006–2012 1972 1989 2000 2010 Arab oil embargo during the Arab–Israeli Massive failure of savings and loan The U.S. Department of Agriculture Congress passed legislation aimed at war raised fuel prices. associations. unveiled organic standards for foods, and preventing risky behavior and regulatory Fall of the Berlin Wall signaled the end of the official organic seal developed. failures. 1973 the cold war. Congress passed the Health Care Reform Beginning of a recession lasting until 2001 Bill known as Obama Care. March 1975; affected by OPEC quadrupling 1990 Collapse of the speculative dot-com Sovereign debt crisis deepened in Europe. oil price and spending on Vietnam War. The World Wide Web created. bubble. 1978 1993 September 11th terrorist attacks on World 2011 Trade Center. President Obama signed the Budget Airline Deregulation Act passes; removed The North American Free Trade Agreement government controls over airfares and President Bush signed third largest tax cut Control Act extending national debt ceiling. (NAFTA) approved; created a trilateral trade routes. in U.S. history. bloc in North America among the United 2012 1979 States, Mexico, and Canada. 2002 U.S. economy experienced weak growth The Farm Security and Rural Investment as the unemployment rate remained Inflation shot up; new Federal Reserve 1994 Act enacted; addressed a great variety historically high in a recovery period. chairman Paul Volker responded by NAFTA removes tariff barriers between the reducing the money supply. of issues related to agriculture, ecology, Agriculture Reform, Food, and Jobs United States, Canada and Mexico. energy, trade, and nutrition. Act passed, revised several aspects of Grain embargo imposed against the Soviet Congress approved legislation allowing Union following the invasion of Afghanistan. Euro currency introduced. agricultural policy. branch banking nationwide. Farmers began using satellite technology to track and to plan their farming practices. 1995 World Trade Organization was formed in GATT Uruguay round. Credit: Alex Wong/Staff/Getty Images. Introduction to Agricultural Economics This page intentionally left blank Introduction to Agricultural Economics Seventh Edition John B. Penson, Jr. Texas A&M University Oral Capps, Jr. Texas A&M University C. Parr Rosson III Texas A&M University Richard T. Woodward Texas A&M University 330 Hudson Street, NY, NY 10013 Vice President, Portfolio Management: Andrew Gilfillan Content Producer: Ruchi Sachdev Portfolio Manager: Pamela Chirls Manager, Rights Management: Johanna Burke Editorial Assistant: Lara Dimmick Operations Specialist: Deidra Smith Development Editor: Melissa Mashburn Full-Service Management and Composition: Senior Vice President, Marketing: David Gesell iEnergizer Aptara®, Ltd. Field Marketing Manager: Thomas Hayward Full-Service Project Manager: Rakhshinda Chishty Marketing Coordinator: Elizabeth MacKenzie-Lamb Cover Design: Studio Montage Director, Digital Studio and Content Production: Brian Hyland Cover Photo: James Pintar/Fotolia Managing Producer: Cynthia Zonneveld Printer/Binder: LSC Communications Managing Producer: Jennifer Sargunar Cover Printer: Lehigh-Phoenix Content Producer: Rinki Kaur Text Font: Garamond 3 LT Pro, 11/13 Copyright © 2018, 2015, 2010 by Pearson Education, Inc. or its affiliates. All Rights Reserved. Manufactured in the United States of America. This publication is protected by copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise. For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/. Acknowledgments of third-party content appear on the appropriate page within the text. Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors. Library of Congress Cataloging-in-Publication Data Names: Penson, John B., Jr., author. | Capps, Oral, author. | Rosson, C. Parr, author. | Woodward, Richard T., author. Title: Introduction to agricultural economics/John B. Penson, Jr., Oral Capps, Jr., C. Parr Rosson III, Richard T. Woodward. Description: Seventh edition. | Hoboken: Pearson, 2017. | Includes bibliographical references and index. Identifiers: LCCN 2017002085 | ISBN 9780134602820 | ISBN 013460282X Subjects: LCSH: Agriculture—Economic aspects. Classification: LCC HD1415.P374 2017 | DDC 338.1—dc23 LC record available at https://lccn.loc.gov/2017002085 1 17 ISBN 13: 978-0-13-460282-0 ISBN 10: 0-13-460282-X  We thank our families for their patience and support, and dedicate this book to them: My wife Donna; children Matt, John, and Laura; and my mother Mary Elizabeth for her interest in literature JBP My wife Debbie, sons Kevin and Eric, and my mother Shirley and grandmother May Manuel—my most ardent supporters. I am forever grateful to them for inspiring me to do my best and to always finish strong! OCJ My wife Helen and sons CP, Henry, and Jonathan CPR My wife Rosie and children Christopher and Sophia RTW This page intentionally left blank contents Preface xiii Food Processors, Wholesalers, and Retailers 32 About the Authors xvii Value-Added Process 34 Fiber Manufacturers 36 Shippers and Handlers 37 part one Importance of Export Markets 37 Introduction Summary 37 Key Terms 38 Testing Your Economic Quotient 38 1 References 40 What Is Agricultural Economics? 1 part two Scope of Economics 2 Understanding Consumer Behavior Scarce Resources 2 Making Choices 3 3 Definition of Economics 5 Microeconomics versus Macroeconomics 5 Positive versus Normative Economics 6 Alternative Economic Systems 6 Theory of Consumer Behavior 41 Utility Theory 41 Definition of Agricultural Economics 8 Total Utility 42 What Does an Agricultural Economist Do? 8 Marginal Utility 43 Role at Microeconomic Level 8 Law of Diminishing Marginal Utility 44 Role at Macroeconomic Level 8 Indifference Curves 44 Marginal Analysis 8 Concept of Isoutility 45 What Lies Ahead? 9 Marginal Rate of Substitution 46 Summary 10 The Budget Constraint 47 Key Terms 11 Summary 50 Testing Your Economic Quotient 11 Key Terms 51 References 12 Testing Your Economic Quotient 51 Graphical Analysis 12 2 4 Consumer Equilibrium and Market The U.S. Food and Fiber Industry 16 Demand 56 Indices 16 Conditions for Consumer Equilibrium 56 What Is the Food and Fiber Industry? 19 Changes in Equilibrium 58 Changing Complexion of Farming 21 Changes in Product Price 58 Physical Structure 21 Changes in Other Demand Determinants 60 Specialization, Diversification, Organization, The Law of Demand 63 and Contracting 22 Market Demand 63 Productivity 24 Interpretation of Market Demand 64 Profitability 27 Tastes and Preferences 65 Financial Structure 28 Composition of the Population 65 Other Sectors in the Food and Fiber Industry 31 Attitudes toward Nutrition and Health 66 Farm Input Suppliers 31 Food Safety 66 vii viii   contents Lifestyles 66 Total Physical Product Curve 94 Technological Forces 66 Marginal Physical Product Curve 95 Advertising and Promotion 67 Average Physical Product Curve 96 Consumer Surplus 67 Stages of Production 97 Summary 68 Assessing Short-Run Business Key Terms 68 Costs 98 Testing Your Economic Quotient 69 Total Costs and the TPP Curve 98 Reference 73 Average Costs and the APP Curve 100 Marginal Costs and the MPP Curve 100 Economics of Short-Run Decisions 101 5 Measurement and Interpretation Marginal and Average Revenue 101 Level of Output: MC = MR 101 Level of Resource Use: MVP = MIC 104 of Elasticities 74 What Lies Ahead? 105 Own-Price Elasticity of Demand 75 Summary 106 Income Elasticity of Demand 79 Key Terms 106 Testing Your Economic Quotient 107 Cross-Price Elasticity of Demand 80 Other General Properties 81 Some Real-World Examples 82 Applicability of Demand Elasticities 84 7 Economics of Input and Product Applicability to Policymakers 84 Applicability to Farmers 85 Substitution 109 Applicability to Consumers 85 Concept and Measurement of Applicability to Input Manufacturers 85 Isoquants 110 Applicability to Food Processors and Trade Rate of Technical Substitution 110 Firms 85 The ISO-Cost Line 112 Summary 86 Least-Cost Use of Inputs for a Given Key Terms 86 Output 114 Testing Your Economic Quotient 87 Short-Run Least-Cost Input Use 114 References 89 Effects of Input Price Changes 116 Least-Cost Input Use for a Given Budget 116 part three Long-Run Expansion of Resource Use 117 Long-Run Average Costs 117 Business Behavior and Market The Long-Run Planning Curve 118 Equilibrium Economics of Business Expansion 120 Capital Variable in the Long Run 121 6 Concept and Measurement of the Production Possibilities Frontier 123 Production Possibilities Frontier 123 Introduction to Production Product Substitution 124 and Resource Use 90 Concept and Measurement of the ISO-Revenue Conditions for Perfect Competition 91 Line 125 Classification of Inputs 91 Profit-Maximizing Combination of Products 126 Land 91 Choice of Products in the Short Run 126 Labor 91 Effects of Change in Product Prices 127 Capital 92 Summary 129 Management 92 Key Terms 129 Important Production Relationships 93 Testing Your Economic Quotient 130 The Production Function 93 Reference 133  contents   ix 8 Market Equilibrium and Product Price: Testing Your Economic Quotient 171 References 175 Perfect Competition 134 part four Derivation of the Market Supply Curve 134 Government in the Food and Fiber Firm Supply Curve 134 Industry Market Supply Curve 135 10 Own-Price Elasticity of Supply 136 Producer Surplus 137 Market Equilibrium Under Perfect Competition 138 Natural Resources, the Environment, Market Equilibrium 138 and Agriculture 176 Total Economic Surplus 141 Agriculture and the Environment 177 Applicability to Policy Analysis 142 Water Pollution 177 Adjustments to Market Equilibrium 142 Air Pollution 179 Market Disequilibrium 142 Global Climate Change 180 Length of Adjustment Period 143 Other Environmental Impacts 182 Cobweb Adjustment Cycle 144 Economics of the Environment 183 Summary 145 Efficient Property Rights 184 Key Terms 145 Efficiency and Externalities in Agriculture 184 Testing Your Economic Quotient 145 Environmental Policies 186 The Economics of the Resources of Agriculture 189 9 Market Equilibrium and Product Price: Soil Quality and Quantity 189 The Economics of Soil Conservation 190 Characteristics of Soil 190 Imperfect Competition 149 Discounting and Present Value Analysis 191 The Present Value of Soil Resources 191 Market Structure Characteristics 150 Practice: The Dust Bowl 192 Number of Firms and Size Distribution 150 Product Differentiation 151 Water as an Economic Asset 193 Barriers to Entry 151 Government Policies for Agriculture, Natural Economic Environment 152 Resources, and the Environment 195 Classification of Firms 152 Soil Erosion Policies and the Conservation Reserve Program 195 Imperfect Competition in Selling 153 Other Federal Incentive Programs for Agricultural Monopolistic Competition 153 Conservation 196 Oligopoly 156 Environmental Regulations 196 Monopoly 159 The Endangered Species Act 197 Comparison of Alternative Market Structures 161 Summary 198 Welfare Effects of Imperfect Competition 161 Key Terms 198 Imperfect Competition in Buying 162 Testing Your Economic Quotient 198 Monopsony 163 References 200 Oligopsony and Monopsonistic Competition 165 11 Market Structures in Livestock Industry 166 Governmental Regulatory Measures 167 Legislative Acts 167 Government Intervention Ceiling Price 168 in Agriculture 201 Lump-Sum Tax 169 Minimum Price 169 Rationale for Government Intervention 201 Summary 171 Farm Economic Issues 203 Key Terms 171 Historical Perspective on the Farm Problem 203 x   contents Forms of Government Intervention 205 What Lies Ahead? 244 Historical Support Mechanisms 207 Summary 245 Loan Rate Mechanism 207 Key Terms 246 Set-Aside Mechanism 209 Testing Your Economic Quotient 246 Target Price Mechanism 211 References 247 Countercyclical Payments Mechanism 212 Conservation Reserve Mechanism 213 Commodities Covered by Government Programs 214 Phasing Out of Supply Management 215 13 Macroeconomic Policy Crop Insurance 215 Fundamentals 248 Current Farm BILL 216 Characteristics of Money 249 Price Loss Coverage Program 216 Functions of Money 249 ARC Program 217 Money versus Near Monies 249 Domestic Demand Expansion Programs 217 Backing of Money 250 Importance of Export Demand 218 Federal Reserve System 250 Consumer Issues 220 Organization of the Federal Reserve System 250 Adequate and Cheap Food Supply 220 Functions of the Federal Reserve System 252 Nutrition and Health 220 Monetary Policy Instruments 253 Food Safety 220 Food Subsidies 221 Changing the Money Supply 255 Summary 221 Creation of Deposits 255 Key Terms 223 Monetary Policy and the Money Supply 258 Testing Your Economic Quotient 223 Money Market Equilibrium 259 References 225 Demand for Money 259 Equilibrium Conditions 261 part five Effects of Monetary Policy on the Economy 261 Macroeconomics of Agriculture Transmission of Policy 261 Combating Recessionary Gaps 262 12 Combating Inflationary Gaps 263 Microeconomic Perspectives 263 The Federal Budget 265 Product Markets and National Federal Expenditures 265 Output 226 Federal Receipts 266 Circular Flow of Payments 227 Budget Deficit 268 Barter Economy 227 The National Debt 269 Monetary Economy 228 National Debt and GDP 269 Composition and Measurement of Gross Domestic Ownership of National Debt 269 Product 230 Burdening Future Generations? 271 Consumption, Savings, and Investment 231 Fiscal Policy Options 272 Determinants of Planned Consumption 232 Automatic Policy Instruments 272 Determinants of Planned Saving 235 Discretionary Policy Instruments 273 Determinants of Planned Investment 237 Fiscal Policy and Aggregate Demand 275 Equilibrium National Income and Output 240 Combating Recessionary Gaps 276 Aggregate Expenditures 240 Combating Inflationary Gaps 277 The Keynesian Cross 240 Summary 278 Deriving Aggregate Demand Curve 241 Key Terms 279 Aggregate Supply and Full Employment 242 Testing Your Economic Quotient 279 Recessionary and Inflationary Gaps 244 References 281  contents   xi 14 Consequences of Business part six International Agricultural Trade Fluctuations 282 16 Fluctuations in Business Activity 282 Nature of Business Fluctuations 282 Indicators of Economic Activity 284 Agricultural Trade and Exchange Consequences of Business Fluctuations 286 Rates 316 Unemployment 286 Inflation 287 Growth and Instability in Agricultural Trade 317 Short-Run Phillips Curve 292 Export Boom and Bust 317 Moves toward Trade Liberalization 318 Macroeconomic Policy Options 293 Laissez-faire Macroeconomic Policy 294 The Importance of Agricultural Trade 319 Demand-Oriented Macroeconomic Policy 294 Increased Export Dependence 319 Supply-Oriented Macroeconomic Policy 295 Greater Dependence on Imports 319 Summary 296 The Composition of Agricultural Key Terms 297 Trade 320 Testing Your Economic Quotient 297 The Role of Agricultural Exports 320 References 298 The Role of Agricultural Imports 320 Direction of U.S. Agricultural Trade 321 Major Export Markets 321 15 Macroeconomic Policy and Major Import Suppliers 321 U.S. Agricultural Trade Performance 321 The Balance of Trade 322 Agriculture 299 Exchange Rates and the Foreign Exchange A Historical U.S. Perspective 300 Market 323 The Big Five 302 Exchange Rates Defined 323 Rate of Inflation 302 The Foreign Exchange Market 324 Rate of Interest 302 The International Monetary System 326 Rate of Unemployment 303 The Gold Standard and the Rate of Growth in Real GDP 303 Interwar Years 326 Rate of Foreign Exchange 303 The Bretton Woods System 326 Impacts of Macroeconomic Policy Actions The Present International on the General Economy 303 Monetary System 328 The Real Economy 304 The European Monetary System 329 The Monetary Economy 305 The European Union and the European Monetary System 330 Macro–Market–Micro Linkage 305 Exchange Rate Determination 330 Impacts of Macroeconomic Policy Actions on Demand and Supply of Foreign Currencies 330 Agriculture 306 Relative Interest Rates 331 Effect of Expansionary Monetary Policy 307 Changes in Relative Prices 333 Effect of Contractionary Fiscal Policy 309 Balance of Trade Impacts 333 Microeconomic Performance Implications 312 The Role of Expectations 334 Implications for Imperfect Competition 313 Exchange Rates and U.S. Agricultural Implications for Other Sectors in the Trade 334 Food and Fiber Industry 313 Exchange Rate Indices 335 Summary 314 Exchange Rate Impacts on Prices 336 Key Terms 314 Considerations for Policy Coordination 337 Testing Your Economic Quotient 314 Macroeconomic Policy Coordination 337 Reference 315 Domestic Agricultural Policy Coordination 338 xii   contents Summary 338 Why Restrict Trade? 358 Key Terms 340 Protectionism in Agriculture 358 Testing Your Economic Quotient 340 Arguments against Trade 358 Reference 341 Trade Restrictions 360 Import Policies 360 17 Domestic Agriculture and Food Policies 365 Export Policies 366 Agricultural Trade Policy Making 367 Why Nations Trade 342 The General Agreement on Tariffs and Trade Why Trade? 342 and the World Trade Organization 367 Absolute Advantage 343 The United Nations Conference on Trade Comparative Advantage 345 and Development 369 Factors Affecting Comparative U.S. Agricultural Trade Policy Formulation 369 Advantage 347 The Economic Policy Council 370 Comparative Advantage and Competitive The Importance of Preferential Trading Advantage 347 Arrangements 371 Gains from Trade 349 Forms of Economic Integration 371 The Importance of Exchange and Reasons for Preferential Trading Specialization 349 Arrangements 372 Distribution of the Gains from Trade 350 Counter Economic and Political Power in Other Summary 351 Parts of the World 373 Key Terms 352 Reduce Side Effects 373 Testing Your Economic Quotient 352 Foster Political Stability and Economic References 353 Prosperity 373 Do Preferential Trading Arrangements Create or Divert Trade? 374 18 Agricultural Trade Policy and Static Effects 374 Dynamic Effects 377 Summary 378 Preferential Trading Arrangements 354 Key Terms 379 Testing Your Economic Quotient 380 Trade and Welfare 355 References 381 Autarky or the Closed Economy 355 Trade and Partial Equilibrium 356 Glossary 383 Welfare Gains from Trade 357 Index 399 Preface The purpose of this book is to provide beginning students in agriculture with a sys- tematic introduction to basic economic concepts and issues as they relate to a major segment of the U.S. economy—the food and fiber industry. This process requires an understanding of the microeconomic and macroeconomic forces influencing the deci- sions of producers and consumers of food and fiber products, including (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. The integration of micro-macro-trade linkages provided in our book helps stu- dents understand these linkages which are so important in today’s economy. The cov- erage of demand and supply concepts with examples helps students understand later concepts covered in macroeconomics and trade. References back to microeconomic concepts when discussing macroeconomic and trade concepts help cement these inter- relationships for students. New to This Edition The 7th edition has been thoroughly revised to provide students with the most up-to- date coverage of this dynamic sector within the global economy. Key updates include the following: A new four-color design to better capture student interest and make the economic concepts expressed within the art program easier to grasp; Expanded TEQ (Testing Your Economic Quotient) questions at the end of each chapter to aid student self-study efforts; Major restructuring of Chapter 11 dealing with government’s role in agriculture, including updated coverage of current farm commodity policy; Extensive revision of Chapters 12–15 dealing with key macroeconomic topics and how macroeconomic events affect agriculture; All tables and figures have been updated to reflect the most currently available data. Conceptual Overview This book goes beyond the farm gate to address the entire food and fiber industry, which represents a notable percentage of the U.S. national output. This book places a strong emphasis on the macroeconomics of agriculture, the role of government in agriculture, and international agricultural trade. Experience over the last several decades certainly has shown that farmers and ranchers, agribusinesses, financial insti- tutions, and consumers of food and fiber products are significantly affected by macro- economic policies and trade agreements. Conceptually, the book begins with defining the field of agricultural economics with examples and the structure of the nation’s food and fiber industry. The book then builds from microeconomics to macroeconomics to international economics. The student is initially introduced to concepts and examples of consumer behavior and behavior of the firm, concluding with derivation of the market demand and ­supply under perfect competition and then imperfect competition. The book offers xiii xiv   preface extensive coverage of the important concept of elasticity and its relevance to under- standing revenue and economic welfare implications for both consumers and produc- ers. Microeconomic coverage also includes addressing concepts in natural resources and government programs, important facets of agricultural economics. The extensive coverage of microeconomic concepts including imperfect competition helps students understand the coverage of macroeconomics at the firm, market, and economy level. Finally, the coverage of international trade helps students understand the events in today’s global economy. Text Structure and ­Chapter Pedagogy Our book is divided into six parts and includes 18 chapters. Part 1 consists of two chapters and serves as an introduction to the material. We begin the book by answer- ing the question raised in Chapter 1, “What is agricultural economics?” We define the field of economics and then develop our definition of agricultural economics based on the role agricultural economists play at the micro and macro levels. Chapter 2 pro- vides a historical background by discussing the changing structure of agriculture dur- ing the post–World War II period and of the sectors that supply farmers and ranchers with inputs, process their output, sell value-added products to domestic consumers, and trade food and fiber products in the global marketplace. Part 2 helps students understand the economic decisions made by consumers of food and fiber products. Topics include the forces influencing consumer behavior (Chapter 3); the concept of market demand for a particular product (Chapter 4); and the elasticity of demand (Chapter 5). The specification of key 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 its implication on producer revenue. Part 3 covers the supply side of the market. Chapter 6 focuses on issues related to resource use and production responses by businesses in the short run. Chapter 7 discusses the economic forces underlying the firm’s input use, the expansion of the firm, and the choice of commodities. An introduction to the market supply curve and determination of market clearing prices and quantities under perfect competition (Chapter 8) and imperfect competition (Chapter 9) completes this part. This section of the book includes empirical examples that illustrate the magnitude and applicability of the relationships covered in these chapters. Part 4 addresses the role of government in the food and fiber industry. Natural resources, the environment, and agriculture are covered in Chapter 10. This chapter includes the role of government regulation, which reflects the increasing recognition that natural resources and the environment are scarce resources and require careful man- agement. The government’s role in providing subsidies to agriculture, curbing market power, and providing for a secure and safe food supply is addressed in Chapter 11. Part 5 focuses on the macroeconomics of agriculture. Chapter 12 outlines the general linkages between product markets and national output. Chapter 13 documents the importance of monetary and fiscal policy to the performance of the economy. The consequences of business fluctuations in the economy are covered in Chapter 14. ­Chapter 15 covers the relationship between macroeconomic policy and its effects on the economic performance of agriculture. Part 6 focuses on international agricultural trade issues. Chapter 16 examines the growth and instability of agricultural trade, including the relative dependence on exports and imports, as well as the foreign exchange market, the international monetary system, and the effects of foreign exchange rates on U.S. agricultural trade. Chapter 17  preface   xv explores the rationale behind international trade as well as the beneficiaries of interna- tional trade. Finally, Chapter 18 focuses on agricultural trade policy and preferential trade agreements. This includes issues dealing with trade restriction and whether prefer- ential trade agreements create or divert trade. Each chapter concludes with a summary and a list of key terms. A “Testing Your Economic Quotient” section contains questions and problems to reinforce the key issues covered. Understanding the answers to these questions and problems will help students properly prepare for exams. References also are listed at the end of each chapter. Instructor Ancillaries To access supplementary materials online, instructors need to request an instructor access code. Go to www.pearsonhighered.com/irc, where you can register for an instruc- tor access code. Within 48 hours after registering, you will receive a confirming e-mail, including an instructor access code. Once you have received your code, go to the site and log on for full instructions on downloading the materials you wish to use. Acknowledgments We wish to thank the many students who have given us comments and suggestions during the development phases of this and previous editions of the book. We also thank the following reviewers for their valuable feedback: Marlies Boyd, Modesto Junior College; Stephen King, Western Kentucky University; Pierre Boumtje, South- ern Arkansas University; and Xiaowei Cai, California Polytechnic State University. This page intentionally left blank About the Authors John B. Penson, Jr., holds the titles of Regents Professor and Stiles Endowed Professor of Agriculture in the Department of Agricultural Economics at Texas A&M University. He is also a senior scientist with the Norman Borlaug Institute for International Agri- culture. Penson received a Ph.D. degree in agricultural economics from the University of Illinois. Penson has taught courses in Korea, Japan, Guatemala, Nicaragua, and Ecua- dor. His research has focused on the macroeconomics of agriculture and portfolio credit risk analysis. He has also conducted research in the Middle East and Eurasia. Oral Capps, Jr., holds the titles of Executive Professor and Regents Professor in the Department of Agricultural Economics at Texas A&M University. He is a certified business economist and co-director of the Agribusiness, Food and Consumer Econom- ics Research Center at Texas A&M University. He is also holder of the Southwest Dairy Marketing Endowed Chair. He received a Ph.D. in agricultural economics from Virginia Tech. He has received numerous teaching and research awards and is recog- nized internationally for his research in demand and price analysis. C. Parr Rosson III is Professor and Department Head of the Agricultural Economics Department at Texas A&M University. He received his Ph.D. in agricultural econom- ics from Texas A&M University. Rosson works in the areas of international trade and international marketing. He currently chairs the Education Committee of the Texas– Cuba Trade Alliance. He served on the Grains, Feed, Oilseeds and Planting Seeds Agricultural Trade Advisory Committee for the U.S. Trade Representative and U.S. Department of Agriculture from 2001 to 2015. He has conducted projects in Latin America, the Middle East, and Asia. Richard T. Woodward is Professor in the Department of Agricultural Economics at Texas A&M University. His research is in the general area of environmental and resource economics. His recent research projects have focused on the use of transfer- able permits to address water quality and fishery challenges and problems of choice under uncertainty. xvii This page intentionally left blank  1 What Is Agricultural Economics? Chapter Outline Scope of Economics  2 Role at Macroeconomic Level 8 Scarce Resources 2 Marginal Analysis 8 Making Choices 3 What Lies Ahead? 9 Definition of Economics  5 Summary 10 Microeconomics versus Key Terms  11 Macroeconomics 5 Testing Your Economic Positive versus Normative Economics 6 Quotient 11 Alternative Economic Systems 6 References 12 Definition of Agricultural Graphical Analysis  12 Economics 8 Constructing a Graph 12 What Does an Agricultural Slope of a Linear Curve 13 Economist Do? 8 Slope of a Nonlinear Curve 13 Role at Microeconomic Level 8 Agricultural economics is an applied social science that deals with how producers, ­ consumers, and societies use scarce resources in the production, marketing, and ­ consumption of food and fiber products. In agricultural markets, the forces of supply and demand are at work. Credit: Brad McMillan/Cartoon Stock. Agriculture certainly is among the most prominent sectors of any economy. Psalm 104 illustrates this point: “Bless the lord, O my soul, thou dost cause the grass to grow for the cattle, and plants for man to cultivate, that he may bring forth food from the Earth.” Unequivocally, from biblical times agriculture has been a discipline wor- thy of study. We specifically are interested in the economic relationships inherent in the agricultural sector. 2   chapter one what is agricultural economics? The roots of agricultural economics perhaps can be traced back to ancient Egypt, arguably to the first agricultural economist, Joseph. Joseph interpreted the dreams of the Pharaoh of Egypt and correctly predicted seven years of feast and seven years of famine. What is agricultural economics? If you were to say “Agricultural economics is the application of economic principles to agriculture,” you would be technically ­correct—but in a narrow context. This definition does not recognize the economic, social, and environmental issues addressed by the agricultural economics profession. To perceive agricultural economics as being limited only to the economics of farming and ranching operations would be incorrect. These operations account for only 2% to 4% of the nation’s output. Actually, the scope of agricultural economics goes well beyond the farm gate to encompass a broader range of food- and fiber-related activi- ties. When viewed from this broader perspective, the agricultural sector accounts for approximately 12% to 15% of the nation’s output. Before we define agricultural economics further, let us first examine the scope of economics and the role that agricultural economists play in today’s economy. This examination will allow us to propose a more definitive answer to the question raised by the chapter title. A more in-depth assessment of the nation’s food and fiber indus- try is presented in Chapter 2. Scope of Economics Two frequently used clichés describe the economic problem: “You can’t have your cake and eat it too” and “There’s no such thing as a free lunch.” Because we— individually or collectively—cannot have everything we desire, we must make choices. Consumers, for example, must make expenditure decisions with a budget in mind. Their objective is to maximize the satisfaction they derive from allocat- ing their time between work and leisure, and from allocating their available income to consumption and saving, given current prices and interest rates. Pro- ducers must make production, marketing, and investment decisions with a bud- get in mind. Their objective is to maximize the profit of the firm, given its current resources and current relative prices. After considering the costs and ben- efits involved, society also must make choices on how to allocate its scarce resources among different government programs most efficiently. Scarce Resources The term scarcity refers to the finite quantity of resources that are available to meet society’s needs. Because nature does not freely provide enough of these resources, only Scarce resources can a limited quantity is available. Scarce resources can be broken down into the follow- be divided into natural ing categories: (1) natural and biological resources; (2) human resources; and (3) man- and biological resources, ufactured resources. human resources, and manufactured resources. Natural and Biological Resources Land and mineral deposits are examples of scarce natural resources. The quality of these natural resources in the United States differs greatly from region to region. Some lands are incapable of growing anything in their natural state, and other lands are extremely fertile. Still other areas are rich in coal deposits or oil and natural gas reserves. In recent years, our society also has become aware of the increasing scarcity of fresh water, especially in the West. Whereas energy- related natural resources have represented critical scarce resources in recent decades,  what is agricultural economics? chapter one    3 water could become the critical scarce natural resource in the near future. In addition to natural resources, scarce resources also include biological resources such as live- stock, wildlife, and different genetic varieties of crops. Human Resources Human resources are services provided by laborers and man- agement to the production of goods and services that also are considered scarce. Laborers, for example, provide services that, combined with scarce nonhuman resources, produce economic goods.1 Workers in the automotive industry provide the labor input to produce cars and trucks. Farm laborers provide the labor input to produce crops and livestock. Labor is considered scarce even when the country’s labor force is not fully employed. Laborers supply services in response to the going wage rate. Agribusinesses may not be able to hire all the labor services they desire at the wage they wish to pay. Management, another form of human resource, provides entrepreneurial ser- vices, which may entail the formation of a new firm, the renovation or expansion of an existing firm, the taking of financial risks, and the supervision of the use of the firm’s existing resources so that its objectives can be met. Without entrepreneurship, large- scale agribusinesses would cease operating efficiently. Manufactured Resources The third category of scarce resources is manufactured resources or, more simply, capital. Manufactured resources are machines, equip- ment, and structures. A product that has not been used up in the year it was made also is considered a manufactured resource. For example, inventories of corn raised but not fed to livestock or sold to agribusinesses represent a manufactured resource. Scarcity is a relative concept. Nations with high per capita incomes and wealth Scarcity refers to the face the problem of scarcity like nations with low per capita incomes and wealth. fixed quantity of resources that are available to meet The difference lies in the degree to which resource scarcity exists and the forms that societal needs. it takes. Making Choices Resource scarcity forces consumers and producers to make choices. These choices have a time dimension. The choices consumers make today will have an effect on how they will live in the future. The choices businesses make today will have an effect on the future profitability of their firms. Your decision to go to college rather than get a job today was probably based in part on your desire to increase your future earning power or eventual wealth, knowing what your earning potential would be if you did not attend college. The choices one makes also have an associated opportunity cost. The opportunity Opportunity cost refers cost of going to college now is the income you are currently foregoing by not getting a to the implicit cost job now. The opportunity cost of a consumer taking $1,000 out of his or her savings associated with the next best alternative in a set of account to buy a cell phone or other assorted technological devices is the interest income choices available to decision this money would have earned if left in the bank. An agribusiness firm considering the makers. purchase of a new computer system also must consider the income it could receive by using this money for another purpose. The bottom line expressed in economic terms is whether the economic benefits exceed the costs, including foregone income. Simply put, 1 Goods and services produced from scarce resources also are scarce and are referred to as economic goods. Economic goods are in contrast to free goods, in which the quantity desired is available at a price of zero. Air has long been a free good, but pollution (a negative good), which makes the air unfit to breathe, is changing this notion in some areas. 4   chapter one what is agricultural economics? opportunity cost is a concept associated with economic decisions. It refers to the implicit cost associated with the next best alternative. To illustrate the concept of opportunity cost, consider the following hypotheti- cal example. Suppose that RJR Nabisco has three alternatives for manufacturing snack foods: Alternative 1: manufacture cookies alone and obtain a profit of $30 million. Alternative 2: manufacture chips alone and obtain a profit of $25 million. Alternative 3: manufacture both cookies and chips and obtain a profit of $35 million. Because Alternative 3 offers the highest profit to RJR Nabisco, it is rational economically for the firm to adopt this choice and consequently manufacture both cookies and chips. However, in doing so, the firm foregoes Alternatives 1 and 2. The implicit cost associated with the next best alternative is to forgo a profit of $30 mil- lion. Thus, $30 million is the opportunity cost in this example. Sometimes the choices we make are constrained not only by resource scarcity but also by noneconomic considerations. These forces may be political, psychologi- cal, sociological, legal, or moral. For example, some states have blue laws that pro- hibit the sale of specific commodities on Sundays. A variety of regulations exist at the federal and state levels that govern the production of food and fiber products, including environmental and food safety concerns. For example, specific chemicals are banned from use in producing and processing food products because of their potential health hazard. The Big Green movement in California in 1990 sought to ban the use of all agricultural chemicals that were shown to pose health hazards to laboratory animals. As another example, over the period February 2007 to August 2007, a nationwide recall of Peter Pan peanut butter took place due to its association with salmonella contamination. This product was not available in grocery stores for a period of 27 weeks. Most resources are best suited for a particular use. For example, the instruc- tor of this course is better qualified to teach this course than to perform open-heart surgery. By focusing the use of our resources on a specific task, we are engaging in specialization. With a given set of human and nonhuman resources, specializa- tion of effort generally results in a higher total output. Individuals should do what they do comparatively better than others, given their endowment of resources. Some individuals might specialize in fields such as professional athletics, medi- cine, or law. Others might specialize in agricultural economics. States and nations may find it to their advantage to specialize in the production of coffee, rice, or computers and import other commodities for which their endowment of natural, human, and manufactured resources is ill-suited. As illustrated in Figure 1-1, Kansas has a surplus of wheat production but a shortage of orange production, while Florida has a surplus of orange production and a shortage of wheat produc- tion. Both states have a shortage of potato production, while Idaho has plenty to spare. Specialization in production provides the basis for trade among producers and consumers. Choices in the allocation of resources made by society (a collection of individu- als) might be quite different from the choices made by individual members of society. For example, all nations normally allocate some resources to military uses. Society as a whole must decide how best to allocate its resources between the production of civil- ian goods and services and the production of military goods, popularly referred to as the choice of “guns versus butter.”  what is agricultural economics? chapter one    5 KANSAS Figure 1-1 Surplus of Wheat Specialization and resource Shortage of Oranges allocation. Shortage of Potatoes at s O h he e ra e a W tato ng t W Po es IDAHO FLORIDA Surplus of Potatoes Surplus of Oranges Potatoes Shortage of Wheat Shortage of Wheat Oranges Shortage of Oranges Shortage of Potatoes Definition of Economics With the foregoing concepts of resource scarcity and choice in mind, we may now define the nature and scope of the field of economics as follows: Economics is a social science that deals with how consumers, producers, and societies choose among the alternative uses of scarce resources in the process of producing, exchanging, and consuming goods and services. Microeconomics versus Macroeconomics As with most disciplines, the field of economics can be divided into several branches. Microeconomics and macroeconomics are two major branches of eco- Microeconomics is a nomics. Microeconomics focuses on the economic actions of individuals or specific branch of economics that groups of individuals. For example, microeconomists are concerned with the eco- focuses on the actions or behavior of individual nomic behavior of consumers who demand goods and services and producers who agents or groups of agents. supply goods and services, and the determination of the prices of those goods and services. Macroeconomics focuses on broad aggregates, such as the growth of the Macroeconomics is another branch that nation’s gross domestic product (GDP), the gaps between the economy’s potential centers attention on broad GDP and its current GDP, and trade-offs between unemployment and inflation. aggregates of the economy. For example, macroeconomists are concerned with identifying the monetary and fiscal policies that would reduce inflation, promote growth of the nation’s economy, improve the nation’s trade balance (exports minus imports), and reduce the national debt. Macroeconomics explicitly accounts for the interrelationships between the nation’s labor, product, and money markets and the economic decisions of foreign governments and individuals. Despite the differences between microeconomics and macroeconomics, there is no conflict between these two branches. After all, the economy in the aggregate is certainly affected by the events taking place in individual markets. A word of caution: we must be careful when generalizing the aggregate or macroeconomic consequences of an individual or a microeconomic event. If not, we run the risk of committing a fallacy of composition, meaning that which is true in an individual situation is not necessarily true in the aggregate. For example, sup- pose Walt Wheatman adopts a new technology that doubles his wheat production. If the thousands of other wheat farmers in the United States and other wheat 6   chapter one what is agricultural economics? producers worldwide do not follow suit, Walt’s income will rise sharply. It would be wrong for Walt or others to conclude, however, that all wheat farmers would achieve income gains if they also adopted this new technology. If other wheat pro- ducers did respond, supply would expand substantially, and wheat prices would fall dramatically. Positive versus Normative Economics Positive economics deals The study of economics also can be divided between positive economics and with what-is and what- ­normative economics. Positive economics focuses on what-is and what-would-­ would-happen-if questions. happen-if questions and policy issues. No value judgments or prescriptions are made. Normative Instead, the economic behavior of producers and consumers is explained or predicted. economics focuses on For example, policymakers may be interested in knowing how consumers and produc- what-should-be or what- ers would respond to a tax cut or alternatively to a tax hike. Or, policymakers may be ought-to-be questions. interested in to what degree the problem of obesity may be mitigated if a notable tax is placed on sugar-sweetened beverages. Normative economics focuses on determining “what should be” or “what ought to be.” For example, policymakers might inquire as to which of several alternative policies should be adopted to maximize the economic welfare of produc- ers and consumers. At the micro level, an automobile manufacturing plant might be interested in knowing the number of vehicles it should be producing to maxi- mize profit.2 Alternative Economic Systems An economic system can be defined as the institutional means by which resources are used to satisfy human desires; the term institutional refers to the laws, habits, eth- ics, and customs of the nation’s citizens. Capitalism is a free market economic system in which individuals own resources and have the right to employ their time and resources however they choose, with minimal legal constraints from government. Prices signal the value of resources and economic goods. Under capi- talism, as claimed by the Scottish economist and moral philosopher Adam Smith in his book An Inquiry into the Nature and Causes of the Wealth of Nations published Adam Smith, the pioneer of capitalism. Credit: GL Archive/Alamy Stock Photo. 2 For a more in-depth discussion of positive and normative economics, see Friedman (1974).  what is agricultural economics? chapter one    7 Thomas Piketty, the French economist who proposes redistribution of wealth through global taxation. Credit: Rachel Torres/Alamy Stock Photo. in 1776, individuals’ efforts to maximize their own gains in a free market benefit society. One of the most important concepts of The Wealth of Nations is Smith’s idea of the invisible hand. In his investigation as to why some countries are poor and stay poor, while other nations grow and prosper, Smith found that increases in productivity of individuals that come from their individual talents, the divi- sion of labor unhindered by government restrictions, and voluntary transactions in a free market result in rising prosperity. The “invisible hand of the market” is a metaphor conceived by Adam Smith to describe the self-regulating behavior of the marketplace. Capitalism differs sharply from socialism or communism. Under socialism or communism, resources are generally collectively owned and the government decides how human and nonhuman resources are to be utilized across the various sectors of the economy. Prices largely are set by the government and administered to consumers and farmers. Winston Churchill noted that “socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy; its inherent virtue is the equal sharing of misery” (www.brainyquote.com). Capital in the 21st Century, written in 2013 by the French economist Thomas Piketty, argues that inequality in wealth leads to stagnant or declining economic growth. To address this issue, Piketty proposes redistribution of wealth through a global tax. A measurement of the equality or inequality in the distribution of wealth for any nation can be made by calculating the Gini coefficient, proposed in 1912 by the Italian statistician and sociologist Corrado Gini. A Gini coefficient close to 0 reflects complete equality in the distribution of wealth, while a Gini coefficient close to 1 reflects complete inequality. To provide perspective concerning this metric, since 2007, the Gini coefficient for the United States has risen from 0.463 to 0.477, a change of roughly 3%. The United States has what is commonly referred to as a mixed economic sys- tem; that is, markets are not entirely free to determine price in some markets but are free in others. The government’s intervention in the agricultural arena, for example, is well known. Loan guarantees to crop producers and guarantees to savings and loan depositors are forms of government intervention in the private sector. The govern- ment also controls numerous aspects of transportation, communications, education, and finance. Food assistance programs such as the Supplemental Nutritional Assis- tance Program (SNAP) and the Women, Infants, and Children (WIC) Program also are indicative of a mixed economic system. 8   chapter one what is agricultural economics? Definition of Agricultural Economics Because agricultural economics involves the application of economics to agriculture, we may define this field of study as follows: Agricultural economics is an applied social science that deals with how producers, consumers, and societies use scarce and natural resources in the production, processing, marketing, and consumption of food and fiber products. What Does An Agricultural Economist Do? The application of economics to agriculture in a complex market economy such as that of the United States has a long and rich history. We can summarize this activity by discussing the activities of agricultural economists at the microeconomic level and at the macroeconomic level. Role at Microeconomic Level Agricultural economists at the micro level are concerned with issues related to resource use in the production, processing, distribution, and consumption of products in the food and fiber system. Production economists examine resource demand by busi- nesses and their supply response. Market economists focus on the flow of food and fiber through market channels to their final destination and the determination of prices at each stage. Financial economists are concerned with issues related to the financing of businesses and the supply of capital to these firms. Resource economists focus on the use and preservation of the nation’s natural resources. Other economists are interested in the formation of government programs for specific commodities that will support the incomes of farmers and provide food and fiber products to low-income consumers. Role at Macroeconomic Level Agricultural economists involved at the macro level are interested in how agriculture and agribusinesses affect domestic and world economies and how the events taking place in other sectors affect these firms and vice versa. For example, agricultural econ- omists employed by the Federal Reserve System must evaluate how changes in mone- tary policy affect the prices of various food commodities. Macroeconomists with a research interest may use computer-based models to analyze the direct and indirect effects that specific monetary or fiscal policy proposals would have on the farm busi- ness sector. Macroeconomists employed by multinational food companies examine foreign trade relationships for food and fiber products. Others address issues in the area of international development. Marginal Analysis Economists frequently are concerned with what happens at the margin. A microecon- omist may focus on how the addition of another input by a business, or the purchase of another product by a consumer, will change the economic well-being of the busi- ness and the consumer. A macroeconomist, on the other hand, may focus on how a change in the tax rate on personal income may change the nation’s output, interest rates, inflation, and the federal budget deficit. The key word in this example is change, or, more specifically, how a change in price, quantity, and so on will affect other prices and quantities in the economy, and how this situation might change the eco- nomic well-being of consumers, businesses, and the economy as a whole. Many of the chapters to follow include a discussion of marginal analysis so as to better understand economic decisions made at the firm, household, or economy level.  what is agricultural economics? chapter one    9 Sonny Perdue, the current U.S. secretary of Zippy Duvall, the current president of the Ameri- ­agriculture. Credit: ZUMA Press, Inc./Alamy can Farm Bureau Federation. Credit: Courtesy of Stock Photo. Farm Bureau Federation. Key agencies that agricultural economists deal with include the Economic Research Service (www.ers.usda.gov), the U.S. Department of Agriculture, and the American Farm Bureau Federation (AFBF) (www.fb.org), the voice of agriculture. The current U.S. secretary of agriculture is Sonny Perdue, and the current president of the AFBF is Zippy Duvall, a farmer from Georgia. What Lies Ahead? Chapter 2 gives an overview of the structure of the nation’s food and fiber system and the important role it plays in the U.S. general economy. The remaining parts of the book can be summarized as follows: Part 2 focuses on understanding consumer behavior in the marketplace, particularly in explaining the demand for food and fiber products. Chapter 3 presents the theory of consumer behavior. Chapter 4 describes the conditions for consumer equilibrium and determination of market demand. Chapter 5 discusses the measurement and interpretation of demand elasticities. Part 3 changes the focus from the behavior of consumers to the behavior of produc- ers of food and fiber products. Emphasis is placed on market equilibrium and mar- ket structures. Chapter 6 describes the measurement of production relationships, costs of production, and revenue. Chapter 7 describes the economics of input sub- stitution and describes the economics of product substitution. Chapter 8 describes the determination of output and price under conditions of perfect competition. Finally, Chapter 9 describes the determination of output and price under conditions of imperfect competition. Part 4 examines the resource, environmental, and political setting in which produc- ers and consumers of food and fiber products in the United States are immersed. Chapter 10 deals with resource and environmental economics. Chapter 11 focuses 10   chapter one what is agricultural economics? on the rationale for government intervention and outlines the development and application of income and price supports in the United States, primarily from the 1930s to the present. Part 5 switches attention to the macroeconomy—what makes it tick and the impor- tant links between the food and fiber system and the rest of the economy. Chapter 12 discusses product markets and national output. Chapter 13 also focuses on the tools of monetary and fiscal policy. Chapter 14 centers attention on business fluctuations, addressing consequences and policy applications. Chapter 15 concerns the macroeco- nomics of agriculture using information gleaned from Chapters 11 to 14. Part 6 draws attention to international linkages and to the global economy. Chapter 16 focuses on agriculture and international trade. It examines exchange rates and agricultural trade. Chapter 17 addresses the issue of why nations trade. Chapter 18 concerns agricultural trade policy and preferential trading arrangements. Consequently, the book addresses seven different facets: (1) agricultural economics and the food and fiber sector; (2) consumer behavior; (3) business behavior and market equilibrium in perfectly competitive and imperfectly competitive environments; (4) resource and environmental economics; (5) government intervention in the food and fiber industry; (6) the macroeconomics of agriculture; and (7) international linkages primarily concerning trade, exchange rates, and trade policy. Importantly, we wish to develop the understanding of and the ability to apply the economic principles that agricultural economists use to understand and predict individual and aggregate economic behavior and the impact of such behavior upon the well-being of society. In short, we plan to provide you the reader a framework to think for yourself, at least in conjunction with issues indigenous to economics. Summary The purpose of this chapter is to define the field of agri- as measured by gross domestic product (GDP), cultural economics as a subset of the general field of unemployment, and inflation. Macroeconomic economics. The major points made in this chapter are analysis normally deals with the notion of general summarized as follows: equilibrium; events in all markets are allowed to vary. 1. Scarce resources are human and nonhuman resources that exist in a finite quantity. Scarce resources can 5. Positive economic analysis focuses on what-is and be subdivided into three groups: (1) natural and what-would-happen-if questions and policy issues. biological resources; (2) human resources; and (3) Normative economic analysis focuses on what- manufactured resources. should-be or what-ought-to-be policy issues. 2. Resource scarcity forces both consumers and farmers 6. Capitalism, or free market economics, socialism, to make choices. and communism represent alternative economic systems. The U.S. economy represents a mixed 3. Most resources are best suited to a particular use. economic system. Some markets are free to deter- Specialization of effort may lead to a higher total mine price, and other market prices are regulated. output. 7. Agricultural economics is an applied social sci- 4. The field of economics can be divided into micro- ence that deals with how producers, consumers, economics and macroeconomics. Microeconomics and societies use scarce and natural resources in the focuses on the actions of individuals—specifically production, processing, marketing, and consump- the economic behavior of consumers and f­armers. tion of food and fiber products. Microeconomic analysis largely deals with the notion of partial equilibrium; events outside the 8. Agricultural economists at the micro level are market in question are assumed to be constant. concerned with issues related to resource use in Macroeconomics focuses on broad aggregates, the production, processing, distribution, and con- including the nation’s aggregate performance sumption of products in the food and fiber system.  what is agricultural economics? chapter one    11 9. Agricultural economists involved at the macro and how the events taking place in other sectors level are interested in how agriculture and agri- affect these firms and vice versa. businesses affect domestic and world economies Key Terms Agricultural economics Human resources Opportunity cost Biological resources Macroeconomics Positive economics Capital Management Scarce resources Capitalism Manufactured resources Scarcity Communism Microeconomics Socialism Economics Mixed economic system Specialization Fallacy of composition Natural resources Food and fiber system Normative economics Testing Your Economic Quotient 1. Land, labor, and capital are examples of what three 4. To economists, the word marginal means types of scarce resources?. a. 5. Circle the correct answer. The U.S. economy repre-