Ag Economics

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  1. žDefinition of Economics
    Social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity
  2. What are the 3 parts of economic perspective?
    • 1. –Scarcity & choice (unlimited wants, limited resources create opportunity costs - to obtain more of one, you forgo the opportunity of getting the next best thing)
    • 2. –Purposeful behavior– (Utility, happiness/satisfaction)
    • 3. –Marginal Analysis (–Marginal Benefit/Marginal Cost)
  3. Marginal benefit
    The added benefit from adding one more thing: the marginal benift for adding one more class is that I'm that much closer to obtaining my degree.
  4. Marginal cost
    The added cost of adding one more unit: The marginal cost of adding is one more class is money, combined with the additional time I'd need to be in class, study, etc.
  5. What is the difference between microeconomics and macroeconomics?
    • Microeconomics is the study of the individual, a consumer, a worker, a household, a firm
    • Macroeconomics is the study of the whole economony: interest rates, value of the dollar, inflation
  6. Positive economics
    Just the facts, cause and effect, no value judgement
  7. Normative economics
    • Value judgements: cause, effect, recommendations
    • Think "should" or "ought"
  8. The economizing problem
    • Our economic wants exceed our economic means.
    • limited income, unlimited wants
  9. When something's marginal benefits exceed its marginal costs, what should you do?
    Consume more
  10. Principle
    A well-tested economic theory
  11. Suppose an economist says that "Other things equal, the lower the price of bananas, the greater the amount of bananas purchased." This statement indicates that:
    all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed to be constant.
  12. When economists say that people act rationally in their self interest, they mean that individuals:
    look for and pursue opportunities to increase their utility.
  13. Microeconomics is concerned with:
    a detailed examination of specific economic units that make up the economic system.
  14. An increase in income:
    Shifts the consumer's budget line to the right.
  15. If you know the slope of the line and the vertical intercept you can graph without plotting points.
    Y (line) = a (vertical intercept) + bx (b is slope)
  16. Slope of a line Rise
    • Change in Y
    • Change in X
  17. If there is an upward sloping line, is the relationship direct or indirect?
    Direct (also positive)
  18. If the slope of the line is downward, is the relationship positive or negative?
  19. Where is the vertical intercept?
    Where the slope crosses the vertical line
  20. How do you know when something is attainable or unattainable on a budget line?
    All combinations on the inside of the budget line are attainable. All combinations beyond the budget line are unattainable.
  21. Utility
    The pleasure happiness or satisfaction obtained from consuming a good or service
  22. A command system
    • Also known as socialism or communism
    • Government owns most resources and economic decision making occurs through a central economic plan
  23. Examples of command system
    • North Korea
    • China
    • Cuba
  24. Economic system
    • A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem.
    • What goods produced? How produced? Who gets products? How accomodate change and promote technological progress?
  25. What countries are market economies?
    • U.S.
    • Canada
  26. Competition
    There are independantly acting buyers and sellers in each market
  27. A fundamental difference between the command system and the market system is that, in command systems:
    the division of output is decided by central planning rather than by individuals operating freely through markets
  28. Economic systems differ according to which two main characteristics?
    Who owns the factors of production, and the methods used to coordinate economic activity.
  29. The invisible hand promotes society's interests because:
    Individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase.
  30. What is a fundamental characteristic of the market system?
    Property rights
  31. Black markets are associated with
    Price ceilings and the resulting product shortages
  32. Normal goods
    • consumption varies directly with income
    • demand curve increases as income rises
  33. Because of unseasonably cold weather, the supply of oranges has substantially decreased. This statement indicates the:
    amount of oranges that will be available at various prices has declined
  34. Price floor
    government is imposing a minimum legal price that is typically above the equilibrium price
  35. A market
    is an institution that brings together buyers and sellers
  36. The upward slope of the supply curve indicates
    the law of supply (as price rises, the quantity supplied rises, as price falls, the quantity supplied falls)
  37. Law of demand
    • As price falls, the quantity demanded rises, as price rises, the quantity demanded falls
    • There is a negative or inverse relationship between quantity demanded and price
    • Downward slope
  38. The subsitution effect
    When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower.
  39. College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are
    Inferior goods
  40. Price ceiling
    government is imposing a legal price that is typically below the equilibrium price
  41. Equilibrium price
    Is where the demand curve intersects the supply curve
  42. If the demand for product X is inelastic, a 4 percent increase in the price of X will:
    decrease the quantity of X demanded by less than 4 percent
  43. Cross elasticity of demand
    Measures how sensitive purchases of a specific product are to changes in:the price of some other product
  44. Basic determinants of supply
    • 1. resource prices
    • 2. Technology
    • 3. taxes and subsidies
    • 4. prices of other goods
    • 5. producer expectations
    • 6. number of sellers in the market
  45. A change in any one of the determinants of supply will...
    • move the supply curve either right or left
    • a shift to the right is an increase in supply
    • a shift to the left is a decrease in supply
  46. The main determinant of elasticity of supply is the
    • amount of time the producer has to adjust inputs in response to a price change
    • If quantity supplied by produces is relatively responsive to price changes, supply is elastic
    • If it is relatively insensitive to price changes, supply is inelastic
  47. Equation for measuring the degree of price elasticity or inelasticity of supply
    • Qs2-Qs1/(QS2+Qs1)/2
    • divided by
    • P2-P1/(P2+P1)/2
  48. Price elasticity of demand coefficient measures
    how sensitive consumers are to changes in price
  49. If demand for a product is elastic, the value of the price elasticity coefficient is
    greater than 1
  50. The price elasticity of demand is generally
    negative, but the minus sign is ignored
  51. The basic formula for the price elasticity of demand coefficient is:
    percentage change in quantity demanded/percentage change in price
  52. Which type of goods is most adversely affected by recessions?
    Goods for which the income elasticity coefficient is relatively high and positive
  53. Marginal utility can be
    positive, negative or zero
  54. When does an externality occur?
    When some of the costs or benefits of a good or service are passed onto or "spill over to" someone other than the immediate buyer or seller
  55. Examples of negative externalities
    • The cost of breathing poluted air
    • Noise from jet engines on people who live by airports
    • Foul smelling gases from biodiesel plants
  56. Examples of positive externalities
    • Bees
    • Vaccinations
    • Lighting displays
    • Fieworks
  57. Positive externalities (bees, vaccines, light displays) cause what kind of market failure?
  58. Negative externalities (pollution, noise) cause what kind of market failures?
  59. Free rider problem
    The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit because of nonexcludability
  60. Because of the free rider problem
    The market demand for the good is understated or nonexistent
  61. People enjoy outdoor holiday lighting displays, and would be willing to pay to see these displays, but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a:
    Demand-side market failure
  62. Marginal utility
    the extra satisfaction a consumer realizes from an additional unity of that product
  63. Why do demand curves slope downward?
    Diminishing marginal utility
  64. Two main characteristics of public goods?
    • nonrivalry
    • nonexcludability
  65. A positive externality or spillover benefit occurs when:
    the benefits associated with a product exceed those accruing to people who consume it.
  66. To maximize utility a consumer should allocate money income so that the:
    marginal utility obtained from the last dollar spent on each product is the same
  67. Economic costs
    • Implicit (opportunity) costs + explicit (actual) costs
    • How much should you pay to keep a parcel of land in its current use?
    • What must you make per hour to stay in your current job?
  68. Explicit costs
    • Monetary payments for resources that a firm does not own
    • -salaries, rents inputs
  69. Implicit costs
    • The opportunity costs of using resources the firm does own
    • opportunity cost of land, natural resources
    • foregone rent,, foregone interest, wages, normal profit
  70. Accounting profit
    • Total revenue minus explicit costs
    • Tends to overstate actual profit
  71. Normal profit
    What the business owner could have made doing something else
  72. Economic profit
    total revenue minus explicit and implicit costs
  73. Basic characteristics of short run production
    • Plant capacity is fixed
    • Can adjust the degree to which plant is used
  74. Marginal product
    The extra output associated with adding one more unit of a variable resource (workers, pound of fertilizer, etc.)
  75. Average Product
    Total product divided by units of resources
  76. What happens if there is no production in the short run?
    The firm loses its fixed costs
  77. MR=MC
    Applies to everyone
  78. Law of diminishing returns
    • As additional units of variable resources are added to a fixed resource, beyond some point the extra or marginal product attributed to the added resource will decline
    • Assumptions: technology is fixed
  79. Total costs
    Total fixed costs + total variable costs
  80. Average total cost
    Total cost divided by Quantity
  81. Marginal cost
    • Added cost of producing one more unit of output
    • Change in total cost divided by change in quantity
  82. Economies of scale
    • As a firm produces more, there are lower average costs of production
    • Labor specialization, managerial specialty, efficient capital, etc.
  83. Diseconomies of scale
    • As a firm increases production, average cost increases
    • In the long run, your average total cost curve rises
  84. Minimum efficient scale
    • The lowest level of output at which a firm can minimize long run average costs.
    • The point on the graph where it flattens out (the smallest level of output at which ATC is minimized)
  85. Characteristics of a purely competitive firm
    • 1. Very large number of sellers
    • 2. Standardized product (corn, soybeans, beef)
    • 3. Price takers
    • 4. Free entry and exit from market
  86. For purely competitive firm, demand is
    • perfectly elastic.
    • Firms only determine how much they produce
    • Demand curve is a straight line
  87. How should a purely competitive seller set price?
    Price= AR, MR, TR/output
  88. MR = MC can be P = MC for a purely competitive market because
    each added output adds exactly its price to total revenue
  89. Profit equals
    everything above the average total cost curve
  90. Break even point
    • The point at which all costs are covered
    • ATC = MC
  91. Loss minimizing point
    Minimum average variable cost
  92. Shutdown price
    When average variable cost is greater than the price, shutdown
  93. The demand for agricultural products:
    • Has a elasticity coefficient between .20 and .25.
    • Suggests prices of farm products would have to fall by 40 to 50 percent for cosnumers to increase their purchases by 10 percent
  94. Farm share of the GDP
    is declining, going from 7% in 1950 to about 1% today
  95. Over time, technological advances in ag have
    increased the minimum efficient scale of production in agriculture and reduced the prices of farm products.
  96. One consequence of the long-run problem faced by farms has been a:
    massive exit of workers from agriculture to other sectors of the economy
  97. An extraordinarily small crop of farm products due to drought causes:
    a large increase in the price of farm products because the demand for farm products is price inelastic.
  98. What percent of their spending do US consumers allocate to their food purchases?
    • 12%
    • That means more likely to be inelastic
  99. Price supports in agriculture have been criticized because:
    They tend to help large producers more than small
Card Set:
Ag Economics
2012-06-15 23:04:58
econ economics MSU AGB144 agriculture ag Missouri State

AGB144 Agriculture Economics
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