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Agricultural and Resource Economics (GT

by: Amie Hudson

Agricultural and Resource Economics (GT AREC 202

Amie Hudson
GPA 3.62


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Class Notes
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This 39 page Class Notes was uploaded by Amie Hudson on Tuesday September 22, 2015. The Class Notes belongs to AREC 202 at Colorado State University taught by Staff in Fall. Since its upload, it has received 33 views. For similar materials see /class/210361/arec-202-colorado-state-university in Agricultural Economics And Business at Colorado State University.


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Date Created: 09/22/15
21 October Tobacco products are more inelastically demanded Reduction in quantity demanded w tax isn t very large Cigarettes vs Lamborghinis Same tax on both 100K sales tax Height of the DWL triangle is the same for both The DWL is wider for Lambos More DWL when elastic goods are taxed Larger tax revenue comes from taxing necessities But is that fair Taxing Lambos would be more fair but would not raise as much money In Economics there are a couple of principles that govern fairness Eg taxation Benefits received principle Eg toll bridge Those who receive the greatest benefits pay the highest taxes Ability to pay principle Those with the greatest ability should pay more To at least partially deal with the equity vs efficiency problem Income taxes More income 9 more taxes More income 9 higher percentage Income tax is like an excise tax on labor How much does this effect efficiency It depends on the elasticity of supply of labor What is the elasticity of supply of labor If you re the primary income earner of a household it s very inelastic Second income is a lot more elastic Secondary income earners may not get a job because their income will be taxed with the percentage of the primary income earner 14 October Midpoint formula General idea When given two points Eg P 100 and P 200 How much does price change Divide the difference by the average price 200 100 150 100 150 666 Pop quiz answer PA 5 PB 8 QDA1000 QDB 600 AQD 1000 600 400 1000 600 1600 2 800 40080012 A P 5 s 3 5813265 365 565108 EPD asparagus 9 22 GaSOIine 9 N2 Luxury items New cars 912 Cigarettes 9 14 Necessities Alcohol 9 105 If you wanted to reduce the quantity of consumption of 2 goods Good 1 Cigarettes Good 2 Asparagus For which good would a tax be more effective Asparagus it is demanded more elastically What determines the elasticity for an item No close substitutes Eg cigarettes of income share Time to adjust allows you to be more responsive to price Eg gasoline In the short run you are not very responsive to changes in price In the long run you will demand gasoline much more elastically buy a new car carpool ampc Thus far EPD Cross price elasticity of demand A Q of one good A P of another good D ECP Lamborghinis and gasoline If the P of Lamborghinis goes from 500K to 600K the Q for gasoline may go from 1003 barrels to SOB barrels Let s say P A Lamborghinis 50 and the A Q gasoline 20 What would be the cross price elasticity of demand for gasoline 20 5 04 Negative sign does matter with ECPD Negative sign means the 2 goods are compliments Without it they are substitutes A P Jeeps 20 AQD Hummers 10 Both positive 9 they are substitutes ECPD5 Income elasticity of demand ED A QD A Income Normal goods wine meat gasoline vegetables Inferior goods ramen public transit ED Distinction between necessities and luxuries EuD Distinction between substitutes and compliments ED Distinction between normal goods and inferior goods Inferior luxuries Cheap jewelry Normal necessity Electricity Bread Normal luxuries Lamborghinis Inferior necessities Ramen 2 September 1 Conceptual framework of opportunity cost a Law of Increasing Opportunity Cost 2 Demonstrate graphically 3 Demonstrate mathematically Conceptual OC is the value of the next best thing Law of increasing opportunity cost As you produce more of something ie good grades tasks the QC goes up Graphically Sta rt at quotAquot Time of Peace Normal factories not manufacturing tanks Then we need a police action Need some tanks At first this is easy Move to quotBquot Full blown war More difficult to convert factories Mathematically First Simplify the PPF Assume that it s a straight line What is the QC of producing 1 more steak How about the QC of 1 more chicken Increasing Returns to Scale As you produce more the cost of producing the next unit goes down Decreasing Returns to Sale As you produce more the cost of production goes up What is Demand But first What is Value How much is something quotworthquot Maximum willingness and ability to pay not necessarily in S Would you pay 1 for a new truck Yes obviously but that is not an accurate representation of the truck s value Demand Schedule of willingness to pay for various units of a good The quantity you would buy at a set of different prices Laws of Demand As prices goes up quality demanded goes down 4 November Test next Thursday Relationship between inputs and outputs Total product of labor is increasing Marginal product of labor is decreasing As we add more labor the benefits of the additional output are decreasing Assume that the cost per labor unit is constant If it is true that the marginal product of labor goes down as labor increases and labor is your only input then producing more units will be increasingly costly As we add more input we expect more output However the effect of each input goes down as we add more and more As we produce more total costs go up Since input s MP goes down as input goes up MC also rises In production many inputs are variable It is Wednesday and you want to produce more today What sorts of things can you add more of Labor Consumable supplies These are variable costs in the short run Other things are hard to increase in a day Workspace Land Your time Heavy machinery Technology These are fixed costs in the short run Long run 9 the time it takes for all input to become variable Important Points What is the total cost of producing 0 units if the fixed cost is 50 50 Marginal cost The change in total cost given a change in quantity produced 24 August What is economics Study of how scarce resources are allocated to competing uses Scarcity Not enough to satisfy the needs of everyone Competing uses Resource Something that can be used for production land labor time Economic problem example Should I come to class on the first day No Other things to do just gonna go over the syllabus Had to get up get ready get dressed Why people make the decision they do Macroeconomics Macro scale Decisions by government International policy Inflation Unemployment Microeconomics Smaller scale Studying decisions by individual firms and consumers Specific industries Opportunity cost The value of the next best alternative Costs sleep or free time to go to class What is the opportunity cost of driving the lambourgini Lambourgini problem 1600000 Lambourgini Cannot sell Sunk cost Other car worth 1000000 to you 654400 actual cost Net benefit of other car 1000000 worth 654 400 cost 346600 Opportunity cost Value of the next best thing Choose option that is best All other options are lesser Sunk cost Something already done I already came to class Should not be factored into decision making People respond to incentives Incentives Things to which people respond People make trade offers at the margin Margin Unit by unit basis Decision to go to the next class or stay home 5 Octo be r How can a drought in Russia raise the price of bread in the United States Drought essentially raises the cost of production Wheat is an input to the production of bread Drought in Russia 9 price of bread goes up Be careful on tests do not write that supply goes up when it shifts Cap and Trade Example 2 factories Emissions cause acid rain externality Restrict emissions to 75 of emissions Each producer allowed 75 units of emissions Cap Easy for first factory to reduce emissions Factory 2 difficult to reduce emissions Emissions credits are tradeable Factory 2 can buy credits from factory 1 and not reduce Couse Theorem f property rights are fully specified the market will deal with externalities on its own 2 person example Watering grass Accidentally hit neighbor w spray Right to spray water Neighbor can pay the waterer not to spray No right to spray water Waterer can pay neighbor to close their window This wouldn t work if The neighbor is rich and doesn t care how much money you want to give them Your neighbor is in the mafia f property rights are not well defined f externality is a public good bad Cap and Trade Reduces individual producers to certain levels of externality The amount that they are able to emit can be thought of as credits Producers buy sell credits Inefficient producers buy Efficient producers tend to sell How do you know where DWL is Identify social costs and benefits Look for places where there are costs greater than the benefits but you re still producing f MC lt MB but you are not capitalizing on the opportunity External benefits of gardening Raises home values May help other people s lawns flowers 31 August On a graph of income verses age the y intercept is your income when you re 0 The slope ofa line at its maximum is 0 You have the comparative advantage over Bill Gates You don t have anything to lose by mowing lawns rather than making computer programs Bill Gates should only be making computer programs you should only be mowing lawns 2 people 2 goods 9 animals hunted cheese Deserted island You have the comparative advantage against the other guy in animals killed The other guy has the comparative advantage against you in cheese making Deal You spend 100 of your time on animals he spends 100 of his time on cheese Trade 5050 Questions for thought ie posstest s 1 What if the other guy had the absolute advantage in both goods Trade still beneficial 2 Could either individual have the comparative advantage in both goods at the same time If equation of line is y 10 2x what is the opportunity cost of producing x and the opportunity cost of producing y OC of 1 more x 2y OCof1 moreysz Imagine you produce good grades 1 A costs 3 hours per week 2 As cost 6 hours per week 20 As cost 60 hours per week 40 As cost 120 hours 9 Not reasonable Run out of energy Law of Increasing Opportunity Cost Tradeoff between regular factories and munitions factories Regular factories clothing steel automobiles food ampc At first conversion is easy Comes at low OC gun factories ampc Next convert factories that are close Finally fluff into tanks You don t get as much out of converting factories n linear graphs you always give up the same amount consistent OC 26 August Lambovs Shelby What is the DC of driving the Lambo Cannot drive the Shelby How much is the Shelby worth 1000000 benefit 650000 cost 350000 net benefit Marginal analysis Evaluating on a unit by unit basis Marginal benefit benefits of one more unit Marginal cost cost of one more unit Efficiency Resources are allocated to their highest value use Markets can lead to efficiency Lots of fish 9 lots of reproduction 9 large harvest Few fish 9 little reproduction 9 small harvest Overfishing is inefficient Gains to Trade Two parties can engage in trade and both can be made better off Equilibrium markets tend toward equilibrium Nobody can make changes to make themselves better off What is Equity Fair trading Define fairness Equality Equal opportunity Government 3 roles Insure efficiency Promote equity Stabilization Now we have high unemployment Gov bad Analyze with vs without Maybe it would be worse without the government Production Possibilities Frontier The amount you can produce given a fixed amount of resources Imagine 2 goods Steak chicken You don t know what is optimal without prices to compare 2 people You vs Bill Gates Who should be mowing Bill Gates lawn given the fact that he has a large lawnmower and you are going to be using a pair of scissors Lawns mowed vs new computer programs made In order for you to mow more lawns 0C is low In order for Bill Gates to mow more lawns 0C is high OC what you have to give up You can produce lawns mowed at the lowest OC You have the comparative advantage Bill Gates can produce more of everything He has the absolute advantage 21 September CS PS net social surplus Nice maximize NSS As an economist who wishes to maximize NSS do you value producers or consumers Neither Gives no shift in supply or demand what is the optimal policy to maximize NSS Do nothing Minimum wage Restriction on prices Price floor Assume market is functioning perfectly Maximizes PS amp CS That Guy TG above the equilibrium point on the supply curve would work if the wage was higher More quantity supplied of labor Unemployment the percentage of individuals willing and able to work at the current wage rate cannot find jobs Price floors reduce CS increase unemployment increase PS for some producers decrease NSS Price ceiling eg rent control Excess demand or shortage Ceiling prevents you from going higher Floor prevents you from going lower Price ceiling As a result of the lower price there is a shortage and less apartments are occupied Quota Restriction on total production DWL loss in N55 due to under production Where is CS and PS 12 October What is consumer surplus Net benefits of consumption for all units consumed NB Total value Max WTP for units purchased minus what you actually needed to pay High likelihood of another question like this on the next midterm Elasticity Flexibility of demand or supply Own price elasticity of demand The amount that quantity changes given changes in price AQDAP Goods with elastic demand own price elasticity of D Recreation equipment Airplane tickets Movies Characterized as luxuries Goods with inelastic demand own price elasticity of D Food Housing Medication Necessities EPD Own price elasticity of demand EPDAQAPl Let s say if P of cigarettes goes up 20 Q of cigarettes goes down by 8 What would be the own price elasticity of demand for cigarettes No they cancel in the equation So it is unitless EU for candy bars 15 Market for candy bars is more elastic than cigarettes For every 1 change in price QD changes by 15 for candy bars For every 1 change in price QD changes by 4 for cigarettes Due to the law of demand when P goes up QD goes down As a result EU will always be negative EPDSO If ED 4 economists just call it 4 Elastic Unit Elastic 1 Inelastic lt1 If between 0 and 1 inelastic eg 2 8 If greater than 1 elastic eg 25 Calculating elasticity Exa m Midpoint formula Focus on numerator Q2 Q1 Qz Q1 2 X 100 Top score 103 Curve is out of 93 On test is a raw score Divide it by 93 Low score 24 After curve 29 people 90 41 people 8090 34 people 7080 21 people 6070 34 people lt59 30 September Production Externality Happens during the production process Consumption Externality Happens when an item is consumed Other people smelling your axe They like it external benefit They don t external cost Smoking near someone else Consumer negative You get in shape other people get to look at you Consumer positive Enjoying the smell of a coffee shop Producer positive Hitting someone drunk driving Consumer negative You had the alcohol Victim is third party Prince William Sound Alaska Exxon oil spill Producer negative externality Pollution is often good Implies consumption or production of beneficial products Each unit of oil we consume enhances probability of a spill 9 increases external cost Social cost includes private amp externality cost Option to help mitigate externality costs Price floors Price ceilings Quotas Taxes If we tax goods that have negative externality cost Reduce consumption externalities Offset other taxes This is a double dividend If we overproduce because of externalities tax will make us cut back to the point we should be at We should be at market equilibrium IF the market is functioning perfectly Negative external cost 9 market is not perfect Positive externalities Flu shot When I get a flu shot 35 other people are less likely to get sick My employer will get more money because I m not taking time off externalities shift consumption up We underproduce because individual consumers do not account for externalities 18 November What would happen to the market for steak if the price of steak sauce went down Short run amp long run In the short run market demand rises price rises MR for individual rises You don t make more because MC gt MR You don t produce less because MC lt MR You produce where MC MR TC Qx ATC In the long run more producers will enter the market driving the price down Price falls all the way back to the breakeven price no economic profit Step 1 In the market demand shifts out and equilibrium price goes up Step 2 As a result individual producers see large economic profit Step 3 People enter the market until prices fall to their original levels due to the presence of economic profit Step 1 is an exogenous shock Producers didn t change price or anything in this specific market Perfect competition no economic profits amp an elastic market in the long run As a result in the short run the supply curve is going to be a lot more inelastic than in the long run Why does monopoly exist in the first place Control of a scarce resource Increasing returns to scale As we produce more and more it becomes cheaper and cheaper on average to produce Natural monopoly Like telephone companies Technological superiority Government created barriers Government agency Permits rules ampc restricting entry amp exit Patents amp copyrights Governments giving copyrights creates an incentive to innovate Companies have a reason to research and develop for themselves 19 October Term paper Can pick a topic or use data given on Aplia Look at syllabus for more info Due 30 November Libcoostateedu Academic journals Click on articles amp databases Click on E economics 9 econ lit Or W web of science Last week Different types of elasticity Own price elasticity of demand EPD Own price elasticity of demand Effect of AP on revenue Assume you can control price Want to get more money do you raise price QE quantity effect on revenue PE price effect on revenue If both come to ask how to raise revenue Tell asparagus grower to lower prices Tell cigarette manufacturer to raise prices The QE is greater than PE for elastic goods Vice versa for inelastic goods Unit elastic goods QE PE Last thing from last week How does QID relate with EPD Normal inferior Luxuries necessities When P changes there are 2 effects Substitution effect As P changes other goods look more attractive Income effect As prices go up your real income effectively goes down less purchasing power Taxes On what types of goods will taxes have the greatest effect Inelastic goods Elastic normal Taxes will have the greatest effect on elastic goods Intuition DWL created by movement away from optimal quantity Elastically produced or consumed goods have greater quantity responses to changes in price Therefore taxing more elastically supplied and or demanded goods will have a greater effect in terms of quantity and in terms of DWL 30 November Monopoly 1 producer who controls the market eg ATampT Microsoft Nike they are the only company that can make Nike shoes Ford How do we end up with a monopoly Control a scarce resource Technologically superior Increasing returns to scale lead to a natural monopoly Government created barriers Property rights Assume 9 monopoly They can control prices and make them ridiculous That s not socially optimal Poor consumers Slight aside Recall marginal revenue The amount of money earned for producing an additional unit It isnot marginal profit For a perfectly competitive market for one producer MR market price If we look at the demand curve for a monopolistic company What is the revenue earned for selling the first unit The corresponding point for that quantity on the demand curve What is the marginal revenue for selling the second unit Not the corresponding point Hint You must charge one price for all units MR the corresponding point on the demand curve the difference between that corresponding point and the corresponding point for the first unit The price you set depends on how many units you re selling If you sell 1 you can charge the corresponding price from the demand curve But if you sell 2 you have to charge the corresponding price for the second unit for both the first and the second unit This takes out the money you could have earned from one selling one unit and charging that higher corresponding price D20 x Revenue Revenue Marginal revenue is just the change in total revenue given a change in quantity produced When you produce more you gain the quantity effect from selling more products and lose the price effect since the price must be lower if you sell more MR quantity effect price effect How many units would a monopolist produce Where MR MC You don t produce more because it would cost more than you earn What price will you charge The equivalent point on the demand curve from the quantity as much as possible You produce where MR MC Given that quantity produced you will charge as much as possible equivalent Q on demand curve Where s profit Quantity x ATC TC Price x Quantity TR TR TC Profit 9 November Pre Lecture warmup If TC 1000 for 3 units What is ATC for three units If AVC 20 for 4 units What is TVC for four units If TC for 0 units 60 What are fixed costs 1333 1000 3 80 4 x 20 60 What if TC 600 20Q2 what are fixed costs 600 When Q 0 total cost 600 MC often goes down first and then begins to rise Goes down when people start to specialize productivity goes up It rises as you run into scarcities of space other resources The difference between AVC and ATC converges as we produce more The difference between AVC and ATC is AFC At first looking at ATC it becomes cheaper and cheaper to produce Then after a point it gets more and more expensive to produce The cheaper section Increasing returns to scale The more expensive section decreasing returns to scale In the long run all inputs become variable What would happen if you invested in cost saving technology which has high initial costs but saves you money Your average total cost goes from having a low fixed cost and higher variable cost to having a higher fixed cost and a lower variable cost In the super long run you can continue buying more machinery or bigger shops to lower the variable costs with higher fixed costs But at a point the expensiveness outweighs the savings If you want to produce at X a high amount you cannot have costs that are very low because they will not be great enough initially to cover that production Long run here is referring to when all inputs become variable Midpoint formula Why do we use it Allows you to take an average of percentage changes 50 units 100 units 100 50 75 75 is average of 50 amp 100 666 A What s your optimal consumption bundle Depends on preferences ie maximum utility More labor 9 the value of each individual laborer goes down If marginal laborers are getting less productive as add more it ll be more expensive to produce more units


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