SIXTH EDITION. John B. Penson, Jr. Texas A&M University. Oral Capps, Jr. Texas A&M University. C. Parr Rosson III Texas A&M University

Transcription

1 INTRODUCTION TO AGRICULTURAL ECONOMICS SIXTH 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 PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Säo Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

2 contents part one Introduction What Is Agricultural Economics? 1 Scope of Economics 2 Scarce Resources 2 Making Choices 3 Definition of Economics 5 Microeconomics versus Macroeconomics 5 Positive versus Normative Economics 5 Alternative Economic Systems 6 Definition of Agricultural Economics 6 What Does an Agricultural Economist Do? 6 Role at Microeconomic Level 7 Role at Macroeconomic Level 7 Marginal Analysis 7 What Lies Ahead? 7 Summary 8 Key Terms 9 Testing Your Economic Quotient 9 References 9 Craphical Analysis 10 The U.S. Food and Fiber Industry 13 Indices 14 What is the Food and Fiber Industry? 16 Changing Complexion of Farming 19 Physical Structure 19 Specialization, Diversification, Organization, and Contracting 19 Productivity 22 Profitability 23 Financial Structure 25 Other Sectors in the Food and Fiber Industry 27 Farm Input Suppliers 28 Food Processors, Wholesalers, and Retailers 28 Value-Added Process 30

3 Fiber Manufacturers 32 Shippers and Händlers 33 Importanee of Export Markets 33 Summary 34 Key Terms 35 Testing Your Economic Quotient 35 References 36 part two Understanding Consumer Behavior Theory of Consumer Behavior 37 Utility Theory 37 Total Utility 38 Marginal Utility 39 Law of Diminishing Marginal Utility 40 Indifference Curves 40 Concept of Isoutility 41 Marginal Rate of Substitution 42 The Budget Constraint 43 Summary 46 Key Terms 47 Testing Your Economic Quotient 47 Reference 50 Consumer Equilibrium and Market Demand 51 Conditions for Consumer Equilibrium 51 Changes in Equilibrium 53 Changes in Product Price 53 Changes in Other Demand Determinants 56 The Law of Demand 58 Market Demand 58 Interpretation of Market Demand 59 Tastes and Preferences 60 Composition of the Population 60 Attitudes toward Nutrition and Health 61 Food Safety 61 Lifestyles 61 Technological Forces 61 Advertising and Promotion 62 Consumer Surplus 62 Summary 63 Key Terms 63 Testing Your Economic Quotient 64 Reference 67

4 CONTENTS X Measurement and Interpretation of Elasticities 69 Own-Price Elasticity of Demand 70 Income Elasticity of Demand 73 Cross-Price Elasticity of Demand 75 Other General Properties 75 Some Real-World Examples 77 Applicability of Demand Elasticities 79 Applicability to Policymakers 79 Applicability to Farmers 80 Applicability to Consumers 80 Applicability to Input Manufacturers 80 Applicability to Food Processors and Trade Firms 81 Summary 81 Key Terms 82 Testing Your Economic Quotient 82 References 84 part three Business Behavior and Market Equilibrium Introduction to Production and Resource Use 85 Conditions for Perfect Competition 86 Classification of Inputs 86 Land 86 Labor 86 Capital 87 Management 87 Important Production Relationships 88 The Production Function 88 Total Physical Product Curve 89 Marginal Physical Product Curve 90 Ave rage Physical Product Curve 91 Stages of Production 92 Assessing Short-Run Business Costs 93 Total Costs and the TPP Curve 93 Ave rage Costs and the APP Curve 95 Marginal Costs and the MPP Curve 95 Economics of Short-Run Decisions 96 Marginal and Ave rage Revenue 96 Level of Output: MC = MR 96 Level of Resource Use: MVP = MIC 99

5 What Lies Ahead? 100 Summary 101 Key Terms 101 Testing Your Economic Quotient Economics of Input and Product Substitution 105 Concept and Measurement of Isoquants 106 Rate of Technical Substitution 106 The Iso-Cost Line 108 Least-Cost Use of Inputs for a Given Output 110 Short-Run Least-Cost Input Use 110 Effects of Input Price Changes 112 Least-Cost Input Use for a Given Budget 112 Long-Run Expansion of Input Use 113 Long-Run Average Costs 113 The Long-Run Flanning Curve 114 Economics of Business Expansion 116 Capital Variable in the Long Run 117 Concept and Measurement of the Production Possibilities Frontier 119 Production Possibilities Frontier 119 Product Substitution 120 Concept and Measurement of the Iso-Revenue Line 121 Profit-Maximizing Combination of Products 122 Choice of Products in the Short Run 122 Effects of Change in Product Prices 123 Summary 125 Key Terms 125 Testing Your Economic Quotient 126 Reference 129 #8 Market Equilibrium and Product Price: Perfect Competition 131 Derivation of the Market Supply Curve 131 Firm Supply Curve 131 Market Supply Curve 132 Own-Price Elasticity of Supply 133 Producer Surplus 134 Market Equilibrium Under Perfect Competition 135 Market Equilibrium 135 Total Economic Surplus 138 Applicability to Policy Analysis 139

6 Adjustments to Market Equilibrium 139 Market Disequilibrium 139 Length of Adjustment Period 140 Cobweb Adjustment Cycle 141 Summary 142 Key Terms 142 Testing Your Economic Quotient 142 Market Equilibrium and Product Price: Imperfect Competition 147 Market Structure Characteristics 148 Number of Firms and Size Distribution 148 Product Differentiation 149 Barriens to Entry 149 Economic Environment 150 Classification of Firms 150 Imperfect Competition in Selling 151 Monopolistic Competition 151 Oligopoly 154 Monopoly 157 Comparison of Alternative Market Structures 159 Weifare Effects of Imperfect Competition 159 Imperfect Competition in Buying 160 Monopsony 161 Oligopsony and Monopsonistic Competition 163 Market Structures in Livestock Industry 164 Governmental Regulatory Measures 165 Legislative Acts 165 Ceiling Price 166 Lump-Sum Tax 167 Minimum Price 167 Summary 169 Key Terms 169 Testing Your Economic Quotient 169 Reference s 172 part four Government in the Food and Fiber Industry Natural Resources, the Environment, and Agriculture 173 Agriculture and the Environment 174 Water Pollution 174 Air Pollution 176

7 Global Climate Change 177 Other Environmental Impacts 179 Economics of the Environment 180 Efficient Property Rights 181 Efficiency and Externalities in Agriculture 181 Environmental Policies 183 The Economics of the Resources of Agriculture 186 Soll Quality and Quantity 186 The Economics of Soil Conservation 187 Characteristics of Soil 187 Discounting and Present Value Analysis 188 The Present Value of Soil Resources 188 Practice: The Dust Bowl 189 Water as an Economic Asset 190 Government Policies for Agriculture, Natural Resources, and the Environment 192 Soil Erosion Policies and the Conservation Reserve Program 192 Other Federal Incentive Programs for Agricultural Conservation 193 Environmental Regulations 193 The Endangered Species Act 194 Summary 195 Key Terms 196 Testing Your Economic Quotient 196 References 198 & 11 Government Intervention in Agriculture 199 Rationale for Government Intervention 199 Farm Economic Issues 201 Historical Perspective on the Farm Problem 201 Forms of Government Intervention 203 Consumer Issues 205 Adequate and Cheap Food Supply 205 Nutrition and Health 206 Food Safety 206 Food Subsidies 206 Historical Support Mechanisms 207 Loan Rate Mechanism 207 Set-Aside Mechanism 209 Target Price Mechanism 211 Countercyclical Payments Mechanism 211 Conservation Reserve Mechanism 212 Commodities Covered by Government Programs 213

8 Phasing Out of Supply Management 214 Domestic Demand Expansion Programs 216 Importance of Export Demand 217 Summary 219 Key Terms 220 Testing Your Economic Quotient 220 References 222 part five Macroeconomics of Agriculture Product Markets and National Output 223 Circular Flow of Payments 224 Barter Economy 224 Monetary Economy 225 Composition and Measurement of Gross Domestic Product 227 Consumption, Savings, and Investment 228 Determinants of Planned Consumption 229 Determinants of Planned Saving 232 Determinants of Planned Investment 234 Equilibrium National Income and Output 237 Aggregate Expenditures 237 The Keynesian Cross 237 Deriving Aggregate Demand Curve 238 Aggregate Supply and Füll Employment 239 Recessionary and Inflationary Gaps 241 What Lies Ahead? 241 Summary 242 Key Terms 243 Testing Your Economic Quotient 243 References 244 Macroeconomic Policy Fundamentals 245 Characteristics of Money 246 Functions of Money 246 Money versus Near Monies 246 Backing of Money 247 Federal Reserve System 247 Organization of the Federal Reserve System 247 Functions of the Federal Reserve System 249 Monetary Policy Instruments 250

9 Changing the Money Supply 252 Creation of Deposits 252 Monetary Policy and the Money Supply 255 Money Market Equilibrium 256 Demand for Money 256 Equilibrium Conditions 258 Effects of Monetary Policy on the Economy 258 Transmission of Policy 258 Combating Recessionary Gaps 258 Combating Inflationary Gaps 260 Microeconomic Perspectives 260 The Federal Budget 262 Federal Expenditures 262 Federal Receipts 263 Budget Deficit 265 The National Debt 266 National Debt and GDP 266 Ownership of National Debt 266 Burdening Future Generations? 268 Fiscal Policy Options 269 Automatic Policy Instruments 269 Discretionary Policy Instruments 270 Fiscal Policy and Aggregate Demand 272 Combating Recessionary Gaps 273 Combating Inflationary Gaps 274 Summary 275 Key Terms 276 Testing Your Economic Quotient 276 References 278 Consequences of Business Fluctuations 279 Fluctuations in Business Activity 279 Nature of Business Fluctuations 280 Indicators of Economic Activity 281 Consequences of Business Fluctuations 283 Unemployment 283 Inflation 284 Short-Run Phillips Curve 289 Macroeconomic Policy Options 290 Laissez-faire Macroeconomic Policy 291 Demand-Oriented Macroeconomic Policy 291 Supply-Oriented Macroeconomic Policy 292 Summary 293 Key Terms 294 Testing Your Economic Quotient 294 References 295

10 CONTENTS XV 15 Macroeconomic Policy and Agriculture 297 A Historical U.S. Perspective 298 The Big Five 299 Rate of Inflation 300 Rate of Interest 300 Rate of Unemployment 301 Rate of Growth in Real GDP 301 Rate of Foreign Exchange 301 Impacts of Macroeconomic Policy Actions on the General Economy 301 The Real Economy 302 The Monetary Economy 302 Macro-Market-Micro Linkage 303 Impacts of Macroeconomic Policy Actions on Agriculture 304 Effect of Expansionary Monetary Policy 305 Effect of Contractionary Fiscal Policy 307 Microeconomic Performance Implications 309 Implications for Imperfect Competition 310 Implications for Other Sectors in the Food and Fiber Industry 311 Summary 311 Key Terms 312 Testing Your Economic Quotient 312 Reference 313 part six International Agricultural Trade 16 Agricultural Trade and Exchange Rates 315 Growth and Instability in Agricultural Trade 316 Export Boom and Bust 316 Moves toward Trade Liberalization 317 The Importance of Agricultural Trade 318 Increased Export Dependence 318 Greater Dependence on Imports 318 The Composition of Agricultural Trade 319 The Role of Agricultural Exports 319 The Role of Agricultural Imports 319 Direction of U.S. Agricultural Trade 320 Major Export Markets 320 Major Import Suppliers 320 U.S. Agricultural Trade Performance 320 The Balance of Trade 321

11 Exchange Rates and the Foreign Exchange Market 322 Exchange Rates Defined 322 The Foreign Exchange Market 322 The Balance of Payments 325 The Current Account 325 The Capital Account 326 Financial Account 326 The United States as a Debtor Nation 326 The International Monetary System 327 The Gold Standard and the Interwar Years 328 The Bretton Woods System 328 The Present International Monetary System 330 The European Monetary System 331 The European Union and the European Monetary System 331 Exchange Rate Determination 332 Demand and Supply of Foreign Currencies 332 Relative Interest Rates 333 Changes in Relative Prices 334 Balance of Trade Impacts 335 The Role of Expectations 336 Exchange Rates and U.S. Agricultural Trade 336 Exchange Rate Indices 337 Exchange Rate Impacts on Prices 337 Considerations for Policy Coordination 338 Macroeconomic Policy Coordination 338 Domestic Agricultural Policy Coordination 339 Summary 340 Key Terms 342 Testing Your Economic Quotient 342 References 343 Why Nations Trade 345 Why Trade? 345 Absolute Advantage 346 Comparative Advantage 348 Factors Affecting Comparative Advantage 350 Comparative Advantage and Competitive Advantage 350 Gains from Trade 352 The Importance of Exchange and Specialization 352 Distribution of the Gains from Trade 353 Summary 354 Key Terms 355 Testing Your Economic Quotient 355 References 356

12 CONTENTS XV * 18 Agricultural Trade Policy and Preferential Trading Arrangements 357 Trade and Weifare 358 Autarky or the Closed Economy 358 Trade and Partial Equilibrium 359 Weifare Gains from Trade 360 Why Restrict Trade? 361 Protectionism in Agriculture 361 Arguments against Trade 361 Trade Restrictions 363 Import Policies 363 Domestic Agriculture and Food Policies 368 Export Policies 369 Agricultural Trade Policy Making 370 The General Agreement on Tariffs and Trade and the World Trade Organization 370 The United Nations Conference on Trade and Development 372 U.S. Agricultural Trade Policy Formulation 372 The Economic Policy Council 373 The Importance of Preferential Trading Arrangements 374 Forms of Economic Integration 374 Reasons for Preferential Trading Arrangements 375 Counter Economic and Political Power in Other Parts of the World 376 Reduce Side Effects 376 Foster Political Stability and Economic Prosperity 376 Do Preferential Trading Arrangements Create or Divert Trade? 377 Static Effects 377 Dynamic Effects 380 Summary 381 Key Terms 382 Testing Your Economic Quotient 383 References 384 Glossary 385 Index 399