Agricultural Economics: Pearson New International Edition

433 Pages·2013·7.564 MB·English

by  H. Drummond

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ISBN 978-1-29203-928-2
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Pearson New International Edition

Agricultural Economics
H. Evan Drummond John W. Goodwin
Third Edition
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ISBN 10: 1-292-03928-0
ISBN 13: 978-1-292-03928-2
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ISBN 10: 1-292-03928-0
ISBN 10: 1-269-37450-8
ISBN 13: 978-1-292-03928-2
ISBN 13: 978-1-269-37450-7
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Printed in the United States of America
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P E A R S O N C U S T O M L I B R AR Y
Table of Contents
Glossary
H. Evan Drummond/John W. Goodwin 1
1. The Food Industry
H. Evan Drummond/John W. Goodwin 15
2. Introduction to Agricultural Economics
H. Evan Drummond/John W. Goodwin 27
3. Introduction to Market Price Determination
H. Evan Drummond/John W. Goodwin 49
4. The Firm as a Production Unit
H. Evan Drummond/John W. Goodwin 63
5. Costs and Optimal Output Levels
H. Evan Drummond/John W. Goodwin 75
6. Supply, Market Adjustments, and Input Demand
H. Evan Drummond/John W. Goodwin 101
7. Imperfect Competition and Government Regulation
H. Evan Drummond/John W. Goodwin 113
8. The Concept of Elasticity
H. Evan Drummond/John W. Goodwin 131
9. The Theory of Consumer Behavior
H. Evan Drummond/John W. Goodwin 145
10. Money and Financial Intermediaries
H. Evan Drummond/John W. Goodwin 165
11. The Circular Flow of Income
H. Evan Drummond/John W. Goodwin 183
12. Monetary Policy
H. Evan Drummond/John W. Goodwin 205
I
222223333444235792567012159371337111
13. Fiscal Policy
H. Evan Drummond/John W. Goodwin 221
14. International Trade
H. Evan Drummond/John W. Goodwin 235
15. Agricultural Policy
H. Evan Drummond/John W. Goodwin 259
16. Food Marketing: From Stable to Table
H. Evan Drummond/John W. Goodwin 273
17. Futures Markets
H. Evan Drummond/John W. Goodwin 297
18. Financial Markets
H. Evan Drummond/John W. Goodwin 321
19. Investment Analysis
H. Evan Drummond/John W. Goodwin 353
20. Farm Service Sector
H. Evan Drummond/John W. Goodwin 363
21. The Economics of Market Failure
H. Evan Drummond/John W. Goodwin 377
22. The Malthusian Dilemma
H. Evan Drummond/John W. Goodwin 401
23. Economic Development and Food
H. Evan Drummond/John W. Goodwin 411
Index 421
II
Glossary
From the Glossary of Agricultural Economics, Third Edition, H. Evan Drummond, John W. Goodwin.
1
Copyright © 2011 by Pearson Education, Inc. Published by Pearson Prentice Hall. All rights reserved.
glossary
Accounting profit the difference between all revenues or Away from home expenditures on food that is not pre-
receipts of the firm and all expenses paid. pared at an individual’s residence.
Aggregate demand the total quantity of goods and Basic principle of the circular flow model for every
services that will be purchased at alternative price levels. physical flow there is an equal but opposite economic flow.
Aggregate supply the total quantity of goods and services Basis the difference between the cash price today of a com-
that will be produced at alternative price levels. modity and the price today of a contract for future delivery of
Agribusiness firms engaged in farm service marketing, the same commodity.
agricultural production, food processing, food distribution, Benefit-cost analysis an economic analysis of an invest-
and consumption. ment or policy alternative in which estimated total social
Agricultural economics the social science that deals with benefits are compared with estimated total social costs.
the allocation of scarce resources among those competing Bid the highest current offer to buy a stock.
alternative uses found in the production, processing, distri- Bills very short-term bonds with maturities, usually less
bution, and consumption of food and fiber. than 1 year.
Agricultural or food policy purposeful government action Biofuels alternatives to petroleum based fuels produced
in the agricultural and food sectors designed to produce results from biological or plant-based feedstocks.
consistent with a societal belief about what “ought to be.”
Birthrate the number of births per thousand of popula-
Annuity factor the sum of discount factors over a period tion per year.
of time.
Blue chips stocks of the biggest, most financially sound
Antitrust laws prohibiting business behavior that threatens companies. These are companies that are expected to be
competition, such as price-fixing, collusion, and anticompeti- around 10 years from now.
tive mergers.
Board of directors a group of individuals elected by
Appreciation an increase in the value of a country’s cur- shareholders to manage a corporation on behalf of the share-
rency relative to the currency of another country. If A holders. The board hires and fires the management of the
appreciates relative to B, then B depreciates relative to A. company and makes broad policy decisions.
Arable land land that—because of its landform, climate, Bond market market on which previously issued bonds
and soils—is suitable for the planting of crops. are bought and sold.
Arbitrage the practice of simultaneously buying and sell- Bonds legal agreement between lender and borrower when
ing a single product on two different markets to profit from business firms borrow from the public.
the price differential between the two markets.
Book value the per-share value of the corporation issuing
Ask the lowest current offer to sell a stock. the stock. That is, if the company were liquidated, what the
Assembly the collection of small amounts of product per-share value of the proceeds would be.
from many producers to create a large enough amount of Break-even point product price for which the economic
product for efficient shipment. profits of the firm are zero.
Asymmetric knowledge when the buyer and seller do Brokers individuals licensed to carry buy/sell orders of
not have the same information about a market or good. individuals to the different exchanges.
Atomistic each economic unit is so small relative to the total Budget line combinations of two goods the consumer is
market that actions by that unit will not affect the market. able to purchase given a budget constraint.
Average Crop Revenue Election (ACRE) an alternative Buy a contract the buyer of a futures contract agrees to
to the traditional price/income support programs. Rather than accept delivery of a specified commodity on a specified future
supporting prices/incomes, ACRE supports total revenue (i.e., date at a price agreed upon today.
output * price).
Call to redeem a bond prior to the maturity date specified
Average fixed cost fixed costs per unit of output. on the face of the bond. Most bonds are callable at a premium
Average revenue revenue per unit of output; equal to over the face value.
the price of the product in perfect competition. Call option the right to buy a futures contract.
Average total cost total costs per unit of output. Cash markets markets in which delivery is expected
Average variable cost variable costs per unit of output. immediately upon payment.
2
glossary
Causation there is a cause-effect relation between two Common stock a class of stock that gives shareholders full
variables. A change in one variable causes a change in the voting rights in the business of the corporation. Dividends
second variable. on common stock are at the discretion of the board of direc-
Causes of hunger poor distribution systems and lack of tors. Usually the common shareholder is at the end of the
effective demand are the primary causes of hunger. line in terms of claimants for the earnings of the corporation
or for assets in the case of bankruptcy.
Central bank a special bank created by the government to
serve as a bank for commercial banks and for the national Comparative statics a before–after comparison to deter-
treasury. mine the impact of some action.
Ceteris paribus a shorthand way of saying “let one Competitive imports imports of items that are commer-
economic variable (the cause) change and see how another cially produced in the United States, such as wine.
economic variable (the effect) changes, assuming that every- Complements goods that are typically consumed
thing else remains unchanged.” together. An increase in the consumption of one comple-
Charter a legal document, similar to a constitution, that mentary good (gasoline) will result in an increase of the
establishes a corporation and lays out the rules that will gov- other good (tires).
ern the corporation. Charters are submitted to and approved Compounding the process of finding a future value, given
by the secretary of state in the state in which the corporation a present value.
is legally established.
Concentration the dominance of an industry by a few
Circular flow model a macroeconomic model that empha- firms, usually measured by the percentage of the total market
sizes the continuous flow of goods and services through the owned by the largest four (or any other number) firms.
production and consumption processes.
Conduct behavior of the profit-maximizing firm manager.
Close a contract to remove or complete the contractual Conduct is determined by structure.
obligations of an open contract.
Conservation Reserve Program (CRP) a set of policies
Close a hedge to cancel the contractual obligations designed to encourage land owners to put their fragile lands
made when a hedge was opened by buying or selling an off- into conservation uses such as forests, wildlife habitat, and
setting position in futures markets. The closing of a hedge is grassland buffers.
usually associated with some action in the cash market for
Constant returns to scale as all inputs are increased by a
the commodity.
given proportion, output increases by the same proportion.
Closed-end funds a mutual fund with a finite number of
Constrained optimization simplifying an optimization
shares such that when one investor buys shares another must
problem by holding one or more variables constant (con-
sell. Shares of the mutual fund basically trade like shares of
strained) and finding the optimal levels of the remaining
stock in a corporation and may sell above or below the NAV
variables.
of the fund.
Consumption using up something that has been produced.
Coase theorem identifies the conditions under which a
successful economic transaction will occur. Contract farming farmers producing to the specifications
of a contract (including price) with the buyer, rather than
Collateral the pledge of real property that a loan will be
relying on the dictates of the market.
paid off. If the borrower defaults on a loan, the lender takes
possession of the collateral and sells it to recover the Cooperative a form of business organization in which the
defaulted loan. company is owned by the farmers it serves.
Collateralized debt obligation a bundle or package of Coordination the communication system that conveys
real estate mortgages that are sold as something similar to a consumer wants to producers. Traditionally, prices were the
bond; also known as mortgage-backed securities. primary means of communication. More recently manage-
ment information systems have replaced prices.
Command system an allocative system in which eco-
nomic choices are made by some central administrative unit. Corporation a legal entity that is formed to own and
operate a business.
Commission service fee paid to brokers for each trade
executed. Correlation changes in two variables are related to one
another in a predictable manner but not necessarily in a
Commodities undifferentiated goods in which one pro-
cause-effect manner.
ducer’s product is indistinguishable from another’s. Examples
are iron ore, field corn, and iceberg lettuce. Cost structure the relative importance of fixed and vari-
able costs in the total costs of the firm.
Commodity processors companies that buy raw agricul-
tural commodities (such as soybeans) and process them into Countercyclical payments made to farmers when aver-
food product ingredients. age annual prices are less than an established target price.
Common property goods for which property rights are Coupon payment the annual interest payment promised
poorly defined and for which consumption is rival. by the bond issuer, expressed in dollar amounts.
3
glossary
Coupon rate the annual interest payment promised by the Depreciation a decline in the value of a country’s currency
bond issuer expressed as a percentage of the face value. A bond relative to the currency of another country.
with a 6 percent coupon rate promises to pay $60 per year.
Derived farm-level demand the primary retail-level
Creditor one to whom others owe money. demand minus the marketing margin.
Cross-price elasticity a measure of the sensitivity of Derived retail-level supply the primary farm-level sup-
quantity demanded to changes in the price of another prod- ply plus the marketing margin.
uct, usually a substitute or complementary good.
Devalue a change in the official value of one currency rela-
Current yield the coupon payment promised by a bond tive to another or allowing market forces to decrease the
divided by the current market price of the bond expressed as exchange rate.
a percentage.
Developing countries those countries in the transition
Day orders a limit order that is canceled at the end of the from an economy that is predominantly subsistence farming
day if not executed. to a mixed economy of manufacturing, services, and commer-
Death rate the number of deaths per thousand of popula- cial agriculture.
tion per year. Differentiated products products with unique charac-
Debt ceilings legislative limits on the amount of the teristics that separate them from close substitutes.
federal debt. Dilution reducing the value of previously issued shares by
Debtor one who owes money to others. issuing new shares. Assumes the value of the company does
not grow as rapidly as the number of shares does.
Decreasing marginal returns as additional units of the
variable input are used, output increases at a decreasing rate. Diminishing marginal rate of factor substitution as
more and more units of one variable input are used, the
Decreasing returns to scale as all inputs are increased by
quantity of the other input that would have to be substituted
a given proportion, output increases by a lesser proportion.
for it to keep production constant falls.
Deficiency payment if average market prices are less than
Diminishing returns as additional units of an economic
the target price, a cash payment is made to farmers to make
variable are used, the additional impact of that variable will
up the difference.
eventually increase at a decreasing rate.
Deficit spending policy of purposeful government deficits
Direct cash payment an entitlement program that pays
to compensate for insufficient aggregate demand in other
farmers who have or who are growing certain crops regardless
sectors of the economy.
of price and/or production.
Deficit when government receipts are less than govern-
Discount factor the ratio of present value to future value.
ment expenditures during a fiscal year.
Discount or below par bonds with a current market
Demand curve of the variable input quantities of the
price below face value.
variable input used by the firm at alternative input prices,
ceteris paribus; equal to the value of the marginal product Discount rate the time value of money expressed as an
curve in the rational range of production annual percentage rate.
Demand curve a two-dimensional graph illustrating a Discount rate interest rate charged when commercial banks
demand relationship. borrow additional reserves from the Federal Reserve Bank.
Demand deposits balances in checking accounts with Discounting the process of finding a present value, given a
commercial banks. future value.
Demand for food marketing services fastest-growing Distributors wholesales and others who buy large lots of
segment of the food industry in a developing country as con- food from processors and distribute it to many retailers in
sumers shift their diet to animal protein sources and more smaller lots.
prepared foods.
Dividend yield the amount of dividends paid per share
Demand schedule a schedule identifying specific price- during the past 12 months expressed as a percentage of the
quantity combinations that exist in a demand relationship. current price of the stock.
Demand the quantities of a good that buyers are willing to Dividend a distribution of the corporation’s earnings to
purchase at a series of alternative prices, in a given market, the owners of the corporation—the shareholders. Each share
during a given period of time, ceteris paribus. of stock receives the same dividend.
Demand/supply shift a change in the demand/supply Dow Jones Industrial Average an index of the prices of
relationship caused by a change in one of the ceteris paribus 30 blue chip stocks.
conditions.
Downward inflexible prices Keynes’ argument that
Demographic transition a model of population growth because of institutional constraints, the classical assumption
that emphasizes the relationship between economic growth of flexible prices that would either rise or fall to achieve equi-
and population growth. librium was not valid.
4
glossary
Dynamic an economic analysis over a period of time ana- adjust the consumption pattern such that the marginal utility
lyzing the adjustment process. per dollar of expenditure for each good is the same.
Earnings profits of the corporation. Earnings are usually Equity the distributional impacts of a policy between the
reported on an earnings-per-share (EPS) basis. The higher rich and the poor, between Americans and foreigners, and so
the EPS of a stock, ceteris paribus,the higher the price of the forth.
stock.
Ethanol a biofuel form of alcohol that can be mixed with
Economic efficiency output per dollar of input cost. A gasoline for use in automobiles.
decrease in costs per unit is an increase in economic
Excess reserves bank reserves in excess of the amount of
efficiency.
required reserves.
Economic integration the combination of two or more
Exchange rate equilibrium price on a foreign exchange
related economic activities under the control of a single
market.
management.
Exogenous external to the firm; beyond the control of the
Economic model a conceptualization, based on assump-
manager of the firm.
tions, of how economic activity occurs.
Expansion path locus of points of local optimal factor-
Economic profit the difference between all revenues or
factor combinations for multiple isoproduct curves.
receipts of the firm and the value of all inputs used by the
Export supply quantities of goods domestic producers are
firm, whether paid or not.
willing to export at alternative prices, ceteris paribus.
Economic recession period of time when the real (i.e.,
External deficit amount borrowed from outside the
inflation-adjusted) economic growth is negative.
United States to finance net imports.
Economics the social science that deals with the allocation
Externalities the economic or welfare impacts of an eco-
of scarce resources among an unlimited number of compet-
nomic transaction on those not involved in the transaction.
ing alternative uses.
Face value the amount borrowed when a bond is issued:
Efficiency a general economic concept used in a variety of
always $1,000.
situations measuring output per unit of input. The higher the
ratio, the more efficient the process. Factor markets markets on which factors of production
are traded.
Elastic a demand relationship in which the rate of change
of quantity demanded is greater than the rate of change of Factor-factor model model of a firm with two variable
price. factors of production used in producing a single product.
Elasticities by market level in any given market for any Factor-product model a very simple profit-maximizing
given commodity, the elasticities of supply and demand will model of the firm with one variable input and one output.
always be more inelastic at the farm level than at the retail Factors of production goods, services, and resources used
level. in the production process to produce goods and services.
Elasticity coefficient a quantitative measure of the Family of funds several different mutual funds with dif-
degree of responsiveness for a product in a market. Equal to ferent investment objectives managed by a single manager.
the rate of change of quantity demanded (or supplied)
Famine a one-time loss of food in some region or country
divided by the rate of change of the other variable such as
that is caused by some external event.
price of the product, and so forth.
Farm Bill a legislative package typically passed by Congress
Elasticity of demand a measure of the sensitivity of
every 5 years that deals with agricultural subsidies, nutrition
quantity demanded to changes in the price of the product.
programs, conservation programs, and other matters related
Elasticity of supply a measure of the sensitivity of the to agriculture.
quantity supplied to changes in the price of the product.
Farm service marketing all the activities and services
Elasticity a measure of how responsive the quantity that are brought to the farmer, rancher, or producer in the
demanded by consumers or the quantity supplied by pro- form of purchased inputs.
ducers is to a change in the equilibrium price or some other
Farm service sector those firms that produce and dis-
economic factor.
tribute the goods and services that farmers (producers) buy as
Endogenous internal to the firm; may be controlled by a part of their business activities.
the firm manager.
Farm share value of farm production as a percentage of
Enterprise a single production activity. the retail price of food.
Equilibrium price the single price at which the quantity Farm structure the study and analysis of farm characteris-
supplied in a market is equal to the quantity demanded.
tics such as the physical and economic size of farms, owner-
Equi-marginal principle of optimization in order to ship of farms, and characteristics of the farm manager and his
optimize utility given a limited budget, the consumer will or her family.
5