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Principles of Agricultural Economics This book showcases the power of economic principles to explain and predict issues and current events in the food, agricultural, agribusiness, international trade, natural resources, and other sectors. The result is an agricultural economics textbook that provides students and instructors with a clear, up-to-date, and straightforward approach to learning how a market-based eco- nomy functions, and how to use simple economic principles for improved decision making. While the primary focus of the book is on microeconomic aspects, agricultural economics has expanded over recent decades to include issues of macroeconomics, international trade, agribusiness, environmental economics, natural resources, and international development. Hence, these topics are also provided with signifi cant coverage. Andrew Barkley is Professor and University Distinguished Teaching Scholar, Department of Agricultural Economics, Kansas State University, USA. Paul W. Barkley is Professor Emeritus, Department of Agricultural Economics, Washington State University, and Adjunct Professor, Department of Agricultural and Resource Economics, Oregon State University, USA. Principles of Agricultural Economics Andrew Barkley and Paul W. Barkley First published 2013 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2013 Andrew Barkley and Paul W. Barkley The right of Andrew Barkley and Paul W. Barkley to be identifi ed as authors of this work has been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice : Product or corporate names may be trademarks or registered trademarks, and are used only for identifi cation and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Barkley, Andrew, 1962– Principles of agricultural economics / Andrew and Paul W. Barkley. p. cm. 1. Agriculture—Economic aspects—United States. I. Barkley, Paul W. II. Title. HD1761.B32 2013 338.1—dc23 2012039020 ISBN: 978-0-415-54069-8 (hbk) ISBN: 978-0-415-54070-4 (pbk) ISBN: 978-0-203-37114-5 (ebk) Typeset in Times New Roman by Cenveo Publisher Services With deep gratitude to Mary Ellen Barkley and Lela Kelly Barkley. Contents List of boxes xi List of fi gures xiii List of tables xvii List of plates xviii Preface xx Acknowledgments xxi List of abbreviations xxii 1 I ntroduction to the economics of agriculture 1 Synopsis 1 1.0 Introduction 1 1.1 E conomics is important and interesting! 4 1.2 What is economics, and what is it about? 9 1.3 Scarcity 11 1.4 The economic organization of society 12 1.5 A model of an economy 14 1.6 Trends in the agricultural economy 15 1.7 Using graphs 16 1.8 Absolute and relative prices 17 1.9 Examples of graphs 19 1.10 Summary 22 1.11 Glossary 23 1.12 Review questions 24 2 The economics of production 29 Synopsis 29 2.1 The production function 29 2.2 Length of time: immediate run, short run, and long run 36 2.3 Physical production relationships 39 2.4 The Law of Diminishing Marginal Returns 50 2.5 The three stages of production 51 2.6 Summary 52 2.7 Glossary 53 2.8 Review questions 54 viii Contents 3 The costs of production 57 Synopsis 57 3.1 Profi ts 57 3.2 Opportunity costs 59 3.3 Costs and output 64 3.4 Cost curve example: Vermont dairy farmer 67 3.5 Where do cost curves come from? 72 3.6 Constant, decreasing, and increasing cost curves 75 3.7 Summary 79 3.8 Glossary 80 3.9 Review questions 81 4 Profi t maximization 85 Synopsis 85 4.0 Introduction 85 4.1 Perfect competition 85 4.2 The profi t-maximizing level of input 88 4.3 The profi t-maximizing level of output 100 4.4 Profi ts and losses, break even, and shutdown points 104 4.5 Summary 112 4.6 Glossary 113 4.7 Review questions 114 5 Optimal input selection 117 Synopsis 117 5.0 Introduction 117 5.1 The relationship between inputs 117 5.2 Isoquants 119 5.3 Relative prices 121 5.4 Isoquant types 124 5.5 Optimal input decisions 130 5.6 Optimal responses to price changes 137 5.7 Summary 141 5.8 Glossary 142 5.9 Review questions 142 6 Optimal output selection 145 Synopsis 145 6.0 Introduction 145 6.1 The Production Possibilities Frontier (PPF ) 145 6.2 The Marginal Rate of Product Substitution (MRPS) 149 6.3 The isorevenue line 150 6.4 The optimal output combination 152 6.5 Price changes and the optimal output combination 154 6.6 Review of profi t-maximization rules 156 Contents ix 6.7 Summary 158 6.8 Glossary 158 6.9 Review questions 158 7 Consumer choices 161 Synopsis 161 7.0 Introduction 161 7.1 Rational behavior 161 7.2 Utility 163 7.3 The Law of Diminishing Marginal Utility 169 7.4 Indifference curves 170 7.5 The marginal rate of substitution (MRS) 178 7.6 The budget constraint 180 7.7 Consumer equilibrium 183 7.8 The demand for meat in Phoenix, Arizona 185 7.9 Summary 191 7.10 Glossary 192 7.11 Review questions 193 8 Supply and demand 197 Synopsis 197 8.0 Introduction 197 8.1 Supply 197 8.2 The elasticity of supply 203 8.3 Change in supply; change in quantity supplied 208 8.4 Determinants of supply 210 8.5 Demand 214 8.6 The elasticity of demand 220 8.7 Change in demand; change in quantity demanded 232 8.8 Determinants of demand 235 8.9 Summary 242 8.10 Glossary 244 8.11 Review questions 245 9 Markets 249 Synopsis 249 9.0 Introduction 249 9.1 What is a market? 249 9.2 Market equilibrium 250 9.3 C omparative statics 254 9.4 Price policies 261 9.5 Mathematical models (optional) 265 9.6 S ummary 268 9.7 Glossary 268 9.8 Review questions 269 x Contents 10 The competitive fi rm 273 Synopsis 273 10.1 Market structure 273 10.2 Characteristics of perfect competition 275 10.3 The perfectly competitive fi rm 277 10.4 The effi ciency of competitive industries 282 10.5 Strategies for perfectly competitive fi rms 287 10.6 Summary 289 10.7 Glossary 289 10.8 Review questions 290 11 Market power 293 Synopsis 293 11.1 Market power 293 11.2 Monopoly 294 11.3 Monopolistic competition 302 11.4 Oligopoly 305 11.5 Is big necessarily bad? 310 11.6 Summary 310 11.7 Glossary 311 11.8 R eview questions 311 12 Agriculture and the global economy 315 Synopsis 315 12.1 Gobalization and agriculture 315 12.2 Interdependence and gains from trade 316 12.3 Gains from trade example: Oklahoma beef and wheat 317 12.4 The principle of comparative advantage 321 12.5 Comparative advantage and trade 324 12.6 Summary 327 12.7 Glossary 327 12.8 Review questions 327 13 Economics, agriculture, and the environment 329 Synopsis 329 13.0 Introduction 329 13.1 The tragedy of the commons 330 13.2 Externality 332 13.3 Private bargaining: Coase 334 13.4 Summary 337 13.5 Glossary 337 13.6 Review questions 338 Glossary 339 Index 347 Boxes 1.1 The United States Department of Agriculture (USDA) 6 1.2 Trade barriers 8 2.1 The North American northern high plains region 30 2.2 Nitrogen fertilizer use in US agriculture 33 2.3 US beef production and consumption 33 2.4 Business cycles and agriculture 38 2.5 Iowa corn 39 2.6 Green revolution in India 49 2.7 Cotton in Mississippi 50 3.1 Oklahoma wheat 62 3.2 Dairy farming in Vermont 69 3.3 Walmart 77 3.4 Network eonomies 78 4.1 Feedlot 89 4.2 European price supports and the environment 97 4.3 Catfi sh in Mississippi 111 5.1 John Deere 125 5.2 Center-pivot irrigation 128 5.3 No-till agriculture 129 5.4 Conservation Reserve Program 130 6.1 Biofuels 155 7.1 Behavioral economics 162 7.2 California agriculture 166 7.3 Florida oranges 172 7.4 Meat consumption in China 187 8.1 Tobacco in North Carolina 221 8.2 Washington apples 224 8.3 US wheat exports 236 8.4 Natural and organic beef 241 9.1 The substitution of beef, pork, and chicken in the US 256 9.2 African agriculture and food aid 259 10.1 Cut fl ower production 285 11.1 Electricity 297 11.2 Monopolistic competition in the soft drink industry: Coke and Pepsi 303 11.3 The Organization of the Petroleum Exporting Countries (OPEC) 307 11.4 Meat packing 308 xii Boxes 12.1 European agriculture 316 12.2 Adam Smith and absolute advantage 322 12.3 David Ricardo and comparative advantage 323 12.4 Agricultural productivity growth in Brazil 324 Figures 1.1 Circular fl ow diagram 14 1.2 The demand for pizza 17 1.3 The demand for hamburger in Miami, Florida 20 1.4 Total revenue for a veterinary clinic in Milwaukie, Wisconsin 22 2.1 Wheat yield as a function of nitrogen application 32 2.2 Beef output as a function of hormone use 34 2.3 Grade as a function of study time 35 2.4 Leather production: constant returns 40 2.5 Wheat production: increasing returns 41 2.6 Food production: decreasing returns 42 2.7 Food production: negative returns 42 2.8 The typical production function and diminishing returns 44 2.9 Corn production: total physical product 45 2.10 Physical product of corn: average and marginal product 45 2.11 The relationship between average and marginal 48 2.12 Technological change 49 2.13 Diminishing returns 51 2.14 The stages of production 52 3.1 Total revenues, total costs, and profi ts 58 3.2 Total Fixed Costs (TFC) 65 3.3 Total Variable Costs (TVC) 66 3.4 Total
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