Introduction to Agricultural & Resource Economics
Introduction to Agricultural & Resource Economics ARE 201
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This 25 page Class Notes was uploaded by Norbert Terry on Thursday October 15, 2015. The Class Notes belongs to ARE 201 at North Carolina State University taught by Michael Walden in Fall. Since its upload, it has received 7 views. For similar materials see /class/223759/are-201-north-carolina-state-university in Agricultural & Resource Econ at North Carolina State University.
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Date Created: 10/15/15
Lecture 2 Buying 1 We buy things because they help us live and make us happy Economists use a catch all term utility to mean the bene t we get from buying something 11 Most of us quotwan quot or quotneedquot more than we can afford In economics we bring quotwan quot and quotneedquot together with what things cost us and talk about quotdemandquot quotDemandquot shows how much of something we purchase at a given price Remember price equals price per unit like price per gallon of gasoline or price per hamburger What economists think almost always happens is that people buy more of something when its price is lower and people buy less of something when its price is higher This is illustrated with a quotdemand curvequot 35 25 price per gallon P OUI UI 10 12 15 20 25 30 gallons of gas per week Exception People may buy more at a higher price if think the price will go even higher in the future houses today Can think of the demand curve as a comparison of bene ts and costs At 2 per gallon Joe buys 20 gallons of gas a week He doesn t buy 21 gallons because the 21st gallon is worth less to him than 200 given what else he could buy with 200 maybe a cheeseburger and fries So the demand curve shows that the quotmarginal utilityquot of an additional unit of something falls the more units you are already using So for Joe the marginal utility of the 21st gallon of gasoline is less than the marginal utility of the 16th gallon of gasoline Note marginal utility is just the increase in your utility from buying and consuming another unit of something As another example of quotmarginal utilityquot think of your summer break from school The first day or two you were really excited and enjoyed the days By the time summer was almost over you were perhaps bored and ready to go back to school 111 Other factors affect how much of something we buy 1 LA 4 Income people with more income usually purchase more at any price than people with less income if they do the product is called a quotnormal goodquot preople with higher income purchase less than people with lower income the product is called an quotinferior goodquot Examples might be second hand clothes fast food and inexpensive vehicles Implication for business diversifying for expansions and recessions Price of substitutes if the price of something else that can meet the same need drops less of the product being examined at any price will be bought Example if Pepsi and Coke are substitutes and the price of Pepsi falls and the price of Coke stays the same more Pepsi will be purchased and less Coke will be bought Likewise if the price of the substitute increases and the price of the product examined doesn t more of the product being examined will be purchased Price of complements complements are two products that people like to use together bacon and eggs coffee and cream burgers and french fries If the price of one of the complements changes purchases of the other will change too even if its price hasn39t So if bacon and eggs are complements and the price of bacon increases even though egg prices remain the same less eggs will be bought Similarly ifbacon prices fall more eggs are bought Preferences a quotcatchallquot factor Refers to in uences on purchases and use that aren39t based on prices and income Things like advertising peerpressure health concerns This is the reason celebrities are used to endorse products It39s the reason beef purchases fall if cases of quotmad cowquot disease are discovered The figure below shows how the demand curve changes for quot factorsquot like higher income an increase in the price of substitutes a reduction in the price of complements or an increase in preferences for the product Also the change in the demand curve is noted for quot factorsquot like lower income a decrease in the price of substitutes an increase in the price of complements or a decrease in preferences for the product ave rag e price per gallon 0 N OI 0 0 N1 20 gallons of gas per week 25 IV Purchasing Power of Dollars E Dollars decline in purchasing power over time as prices rise So to compare past dollar amounts to current dollar amounts an adjustment must be made We generally choose to keep the current dollar amounts today 2009 the same and adjust past dollar amounts to find their current 2009 purchasing power equivalent Formula to bring past dollar amounts to their 2009 purchasing power equivalent call this real 2009 dollars Past amount in year Y X CPI in 2009 2009 equivalent CPI in Yr Y For the CPI Consumer Price Index values go to wwwblsgov Table is updated each month An example of the table follows Consumer Pnee Index a All Urban Consumers Depanment of Labor a U s Bure u ofLabor Statistics Bureau ofLabor Statistics Data Changeoulpuloylinns mm 1997 v n 2mm v Mare Furmau e1uo1e graphs N39EW 39 m Data extracted on August7 2007 9 3012 AM Consumer Pnee Index eAu Urban Consumers 5911 Id cuuRuuuusAu Nae Seasonally Adjusted rea v3 cltv average Year an ehMarAprMay 591 1596 600 1602 1601 1 Jun 1 Jul Aug Sen Oct INnv Dee IAm 603 1605 8161 61616151613 0 616 43 63 0 1999 1 166 903 98 1992 1976 1968 195 2029 2039 20292018 2015 2018 201 208 352 2083 2079 2085 2089 2102 2100 207 2188 2199 21912188 2166 2124 208 111 2135 2148 2166 Frequently Asked Questions Freedom of Information Act Customer Survey Privacy amp Security Statement Linkinq to Our Site Accessibility Square Building Massachusetts Ave NE Do you he DC 202120001 5 Example Beth earned 35000 in 1997 Interms ofpurchasing power dollars in November 2008 what was the equivalent value Use annual CPI value for 1997 35000 X 2124 46318 1605 V The Life Cycle of Borrowing and Saving 1 Borrowing and saving are ways of transferring income to a point in time different than when the income was earned This allows spending and earning to be done at different times For most households net borrowing is done when the household is young so the household can quotlive above its current meansquot and afford things like a home furniture vehicles etc when those items are most valuable to the household UI So it is very usual for young families to have high debt loads Conversely net saving usually occurs when households reach middle age Debt loads are reduced and saving is increased particularly for retirement needs If middle and older aged household have very high debt loads they likely have a problem In deciding whether to borrow compare benefits and costs Bene t is being able to enjoy the product or service earlier than if waited to pay with cash Cost is the interest rate you must pay Also because future dollars are worth less than current dollars you will repay many more dollars than you borrowed The original amount of the loan you pay back is called the quotprincipalquot The rest is called quotinterestquot Loans where each payment is the same in dollar amount and each payment is part principal and part interest are called quotamortized loansquot In borrowing all interest rates aren t created equal Some borrowing is given quotfavorablequot treatment by the government because the interest you pay on the loan is deductible for income taxes To see what this means you must know your quottax bracketquot or quottax ratequot more on this later So if your tax bracket is 30 and the interest rate on the loan is 6 the quotaftertax interest ratequot is only 6 3 x 6 42 To see your financial status look at assets value of what you own liabilities value of what you owe net worth assets liabilities Resolving debt problems It39s like dieting households with debt problems need to restrain spending by using a budget similar to restraining eating while at the same time working to pay down on existing debt similar to exercising Sign that have too much debt especially if you39re middle age or older 20 rule you have a debt problem if more than 20 of takehome pay disposable income goes for debt payments other than debt on your main residence Getting out of debt how long it will take and how much will you need to pay see table and example in Everyday Economics pp 6667 Lecture 9 Market Change 1 Markets are rarely quotin equilibriumquot Something is always changing to change demand or supply remember the quotfactorsquot we talked about that shift the demand and supply curves One real bene t of economics is helping predict what happens to the equilibrium price and equilibrium quantity when something happens to change supply or demand There are two situations in which to examine these changes the quotshort runquot and the quotlong runquot The short run is the period of time during which the number of sellers is constant Changes in production only occur from a xed number of sellers The long run is the period of time during which the number of sellers can change so changes in production can also occur from either increases or decreases in the number of sellers Short Run a any factor that causes the demand curve to quotincreasequot more is bought at every price will cause equilibrium quantity and equilibrium price to both increase demand 2 price per gallon 100 40 13 15 17 millions of gallons Example An increase in income if oil is a normal good an increase in population a decrease in car prices cars and oil are complements an increase in natural gas prices oil and natural gas are substitutes or an increase in preferences for oil would cause the demand curve to move from demand 1 to demand 2 The equilibrium price increases from 20 to 40 and the equilibrium quantity increases from 13 million to 15 million Market equilibrium moves from point 1 to point 2 b conversely any factor that causes the demand curve to quotdecreasequot less is bought at every price will cause equilibrium quantity and equilibrium price to both decrease ammox 00000 Price nerbarrelll N o 0 710131517 millions of barrels Now the equilibrium price is 10 and the equilibrium quantity is 10 million point 2 The decrease in demand could have been caused by a decline in buyer income a decline in population an increase in the price of complements cars a decrease in the price of substitutes natural gas or a decline in preferences for oil maybe due to environmental concerns c As you know the supply curve can also move For example a reduction in costs per unit or an improvement in technology will cause the supply curve to move quotdownquot as in the following gure The equilibrium quantity increases and the equilibrium price decreases Price per barrel millions of barrels With quotsupply 2quot the equilibrium price has fallen from 20 to 10 and the equilibrium quantity has increased from 13 million to 15 million Market equilibrium moves from point 1 to point 2 d Or an increase in costs per unit or a deterioration in technology will cause the supply curve to move quotupquot thereby increasing the equilibrium price and decreasing the equilibrium quantity again the move is from point 1 to point 2 140 120 5100 millions of barrels b Lon run Here the number of businesses can change in response to changes in pro tability except in the case of a monopoly that is only one producer in the market For example if an increase in world income causes the demand for oil to increase oil prices to rise and the pro tability of producing oil to increase then eventually oil producers will have an incentive to nd more oil and sell This increases the supply and lowers the price until pro tability returns to quotnormal levelsquot In terms of our graph g E demand 1 E supply 1 g demand 2 0 2 E 7 10 13 15 17 millions of barrels Where demand 2 and supply 1 intersect is the higher price for oil and the higher pro tability point 2 Supply 2 represents the quotincreasequot in supply of oil due to its increased pro tability The intersection of demand 2 and supply 2 is now the new equilibrium point 3 Notice the price has fallen back to 20 per barrel It wouldn t necessarily have to fall this low but it would fall from where it was 40 per barrel Another good example of this is rental housing for students As the student population at NCSU increased the demand for student rental housing increased and rents and pro tability rose Eventually this motivated developers to build or convert more units to rental housing This brought rents and pro tability back down On the other hand if demand decreases and price and pro tability decline supply will eventually decrease which ultimately increases prices and pro tability suppy1 710131517 millions ofbarrels The original equilibrium is the intersection of demand 1 and supply 1 point 1 Demand declines to demand 3 and at the intersection with supply 1 the price is lower and the quantity is also lower point 2 Then supply is reduced to supply 3 and at the nal equilibrium of demand 3 and supply 3 the price rises back up but quantity is even lower point 3 This scenario happened in the oil market in 2000 and 2001 A worldwide recession reduced income and reduced demand Oil prices plunged to 10barrel In 2002 and 2003 this motivated oil producers to reduce supply and increase price 3 What happens with a xed supply Well obviously there s no ability to change supply so this is why prices can uctuate wildly in such markets Price changes are totally driven by demand changes Pro tability can rise and fall and there s no ability of producers39 to change supply 4 Government restrictions on price What happens if the government or some other body imposes a quotprice ceiling quot where the equilibrium price can t be above a certain level Ifthe ceiling is below the equilibrium price then a permanent shortage occurs meaning the quantity buyers want to purchase is less than the quantity businesses want or produce and sell The shortage is effectively eliminated by quotother costsquot increased waiting time ore maybe cheating and quotundergroundquot markets Price per barrel 4 5 7 10 13 15 17 millions of barrels In the gure the equilibrium price is 20 per barrel but the legal price ceiling is 10 per barrel At 10 per barrel buyers want more than businesses will sell There s also the opposite situation a price oor Here the government says the price can t be below a certain level A permanent surplus results The government will have to buy up the surplus to maintain the price oor Below the price oor is at 65 per barrel and the quantity buyers want to purchase is much less than the quantity sellers want to produce and sell The surplus of about 8 million barrels 16 million supplied minus 8 million purchased will have to be stored demand 39supply price floor Price per barrel 7 10 13 15 17 millions of barrels 5 Creative Destructionism the idea that markets are always changing and there is constant quotcreationquot at the same time there is constant quotdestructionquot So cars replace wagons planes replace trains digital cameras replace lm cameras and DCDs replace video tapes All of this happens as 39 39 are quot J to give better products 6 Multiplier the idea that economic change reverberates throughout the economy So if the local textile mill closes this will affect food and clothing stores and banks Or if Dell builds a factory in NC suppliers of computer parts and other businesses will see increased business A number the quotmultiplierquot tells us how much total change occurs in response to an initial change Ifthe multiplier is quot2quot it means the total impact on the economy is 2 for every 1 of initial change Lecture 10 International Markets 1 Why trade with other countries Same reasons people trade with each other because it s bene cial to do so But two speci c reasons when looking at international trade 1 Absolute Advantage Consider countries A and B A can make brooms N better and cheaper than B can make brooms whereas B can pump oil better and cheaper than A can pump oil So A trades brooms to B for oil Comparative Advantage A can both make brooms and pump oil better than can B However between broom making and pumping oil A does brooms the best So here it still makes sense for A to concentrate on making brooms and trade brooms to B for oil Example in class Your favorite professional athlete who is in excellent condition likely doesn39t mow the lawn at hisher home even though he or she could do it better than anyone else But the athlete hires someone to mow the lawn because the time the athlete would use for lawn mowing could be better spent practicing considering investments etc This is again the idea of opportunity cost 11 Tradeoffs in foreign trade 1 N E When trade with a foreign country does occur and domestic consumers switch from purchasing from domestic companies to purchasing from foreign companies domestic investors and workers in those domestic companies lose Presumably domestic consumers save money by buying from foreign companies So one approach is to tax away some of those benefits or gains and use the proceeds to compensate or assist the domestic workers who lose Example As a result of being able to purchase lower priced foreign made clothing it s estimated US consumers are saving 20 billion annually that is they are spending 20 billion less on clothes than they would have if they couldn t purchase foreign made clothing If they paid a 5 special tax on these purchases they would still be left with a gain of 10 billion annually but the other 10 billion could be spent assisting the displaced textile and apparel workers So this is a quotwinwinquot Issue of whether foreign workers are paid much less than US workers and whether this makes it impossible for US workers to compete a Are foreign workers quotunfairlyquot paid less Answer Must put their pay in context of their country39s cost of living For example pay of 1 per day in some foreign country might be enough for a reasonable standard of living since prices there are much lower than in the Us b Can higher paid US workers compete with lower paid foreign workers Answer Yes if the productivity output per hour of US workers is sufficiently higher What matter is worker output per hrwage per hr Example US wage 20 per hour US productivity 100 computer chips per hour Labor cost per chip 5 chips per 1 or 020 per watch Foreign wage 1 per hour Foreign productivity 4 computer chips per hour Labor cost per chip 4 chips per 1 or 025 per watch Conclusion US worker is actually cheaper 111 Trade Terminology from the perspective of the Us 1 Exports sales of goods and services from the Us to other countries Imports purchases of goods and services from other countries by the Us 2 CurrentAccountBalance trade in products and services Trade De cit US buys more products and services from foreign countries than it sells to foreign countries Trade Surplus US sells more products and services to foreign countries than it buys from foreign countries 3 CapitalAccount Balance comparison of investment ows Capital De cit US invests more in foreign countries than foreign countries invest in the US Capital Surplus Foreign countries invest more in the US than US invests in foreign countries 4 Interesting fact The balance on the current account will equal the balance on the capital account but of opposite sign That is if there is a trade deficit there will be a capital surplus of the same size Or if there is a trade surplus there will be a capital deficit of the same size What39s going on IfUS has atrade deficit foreigners are accumulating US dollars and those dollars are used to purchase US investments assets Or if US has a trade surplus US is accumulating foreign monies and those monies are used to purchase foreign investments assets Notice the impact on US jobs If for example the US has a trade de cit US jobs are lost from US consumers buying from foreign companies But a trade de cit means a capital surplus which means foreigners are investing in the US and this in turn creates other jobs 5 Exchange rate is a price between the currencies of two counties Usually expressed in terms of how many units of a foreign currency are obtained for one US dollar Example Exchange rate of quot2quot for the British pound means 1 US dollar trades for 2 British pounds Like any price an exchange rate can uctuate In general The US dollar becomes quotstrongerquot meaning get more units of a foreign currency for one US dollar when the US in ation rate drops andor US real interest rates rise real interest rate observed interest rate minus in ation rate Conversely the US dollar becomes quotweakerquot meaning get fewer units of a foreign currency for one US dollar when the US in ation rate rises or US andor US real interest rates fall Is a quotstrongquot dollar good and a quotweakquot dollar bad No there are quotplusesquot and quotminusesquot of each A strengthening dollar makes imports cheaper including travel to foreign countries so US consumers gain but it also makes US exports more expensive in foreign countries so US exporters lose A weakening dollar makes imports more expensive so US consumers lose But it makes US exports less expensive in foreign countries so US exporters gain 6 Purchasing power parity The idea that the exchange rate between two currencies will end up at a level where people can purchase the same product in the two countries at the same price Example A Big Mac costs 2 in the US If it costs 4 pounds in the UK then the exchange rate should settle at 1 US dollar 2 British pounds 7 Restrictions on trade and trade pacts tariff a taX on imports quotas a limitation on the quantity of an imported product and service trade pact a treaty specifying the terms of trade between countries eg NAFTA GATT CAFTA Lecture 11 Taxes 1 Average Tax Rate taxes paid divided by income of taxpayer For US average tax rate is around 30 2 Marginal Tax Rate change in taxes paid divided by change in income For a at tax where all income is taxed at the same rate the average tax rate and the marginal tax rate will be the same But for many taxes especially the income tax where the percentage of income paid in taxes increases with increases in the taxpayer s income the marginal tax rate will not be the same as the average tax rate The marginal tax rate is the more relevant economic concept because it tells the taxpayer how hisher taxes change with changes in income 7 example 7 how much additional taxes will be paid from a pay raise 3 FICA federal insurance contribution act taxes Fund Social Security and Medicare Employee and employer both pay equal amounts Self employed person pays entire amount For 2005 Medicare part is 145 on all ea1nings paid by both employee and employer For 2005 Social Security part is 62 on all earnings up to 90000 also paid by both employee and employer Why stop at 90000 Because Social Security retirement bene ts paid back to the person don t increase beyond 90000 So notice Marginal tax rate for Medicare is always 145 Marginal tax rate for Social Security is 62 up to earnings of 90000 and then 0 for earnings above 90000 4 Individual income tax Is example of tax where marginal tax rate usually is different than the average tax rate Terms Gross income total income before any adjustments Taxable income income on which tax is paid after adjustments Personal exemption reductions to gross income based on number of persons in the household in 2005 each personal exemption was worth 3200 Deduction reductions to gross income based on approved types of spending like home mortgage interest payments some health care expenditures etc in 2005 a single person could take a standard deduction of 5000 So taxable income gross income minus personal exemptions minus deductions Tax brackets ranges of taxable income to which different marginal tax rates apply Example Federal income tax 2005 single person subject to change by the government Taxable income range Tax rate 0 7300 10 730129700 15 29701 71950 25 71951 150150 28 150151 326450 33 over 326450 35 Let s say Joe Smith who is single has gross income of 100000 How much does he pay in federal income taxes Taxable income 100000 3200 5000 91800 Tax calculation 7300 x 10 730 29700 7300 22400 x 15 3360 71950 29700 42250 x 25 10563 91800 71950 19850 x 28 5558 Total 20211 Notice this means Joe s average tax rate is 20211100000 or 202 However his marginal tax rate is 28 because his next dollar of earnings will be taxed at 28 5 FICA and income taxes combined North Carolina has an individual income tax also Iwon t give you the details but tax rates range from 5 to 7 Therefore if someone for example has 80000 of taxable income and gets a 1000 pay raise notice how much would be deducted in FICA and income taxes 765 for FICA say 7 for NC income taxes and 28 for federal income taxes for a total marginal tax rate of almost 43 NH 6 Sales tax A state tax on retail spending Everyone pays the same rate but since everyone doesn t spend the same percentage of their income rate as a percentage of income can vary In particular if lower income households spend a higher percentage of their income than higher income households sales tax paid as a percentage of income can be higher for lower income households than for higher income households Example m m Income 20000 100000 Spending 20000 70000 6 tax on spending 1200 4200 Tax as of income 6 42 But some economists say Sally will simply spend the 30000 she saved later and so in the long run everyone pays the same of income 7 Classification of taxes Proportional the tax paid as a percentage of income is the same for all levels of income Progressive the tax paid as a percentage of income increases as the taxpayer s income increases example federal individual income tax Regressive the tax paid as a percentage of income decreases as the taxpayer s 9 income increases example sales taX TaX incidence Businesses also pay taxes such as sales taxes and income taxes on their pro ts The question is who ultimately pays these taxes Are businesses able to directly pass these taxes on to buyers or will businesses reduce pro ts or reduce worker wages to pay the taxes This is the question of tax incidence In summary there are three entities that can effectively pay business taxes owners of the business including shareholders for corporations workers at the business or consumers of the business s products Answer depends on our old friend price elasticity of demand In a nutshell if the demand curve is price inelastic then buyers are not very sensitive to price changes and the business will be able to pass along most of their taxes to buyers in the form of higher prices Alternatively if the demand curve is price elastic then buyers will signi cantly reduce their purchases when price increases and so businesses will pay most of their taxes in the form of lower wages for workers and lower pro ts for owners Lecture 8 Buyers and Sellers Put demand and supply together to get quotequilibrium pricequot price at which the quantity of the product or service often called a quotgoodquot desired to be purchased by buyers exactly equals the quantity of the product or service desired to be produced and sold by sellers The corresponding quantity is called the quotequilibrium quantityquot The equilibrium price and equilibrium quantity together is called the market equilibrium demand supply Price per barrel 7 10 13 15 17 millions of barrels In the gure above at a price per barrel of 20 sellers want to produce and sell 13 million barrels and at that same price buyers want to purchase 13 million barrels The equilibrium price is 20 and the equilibrium quantity is 13 million barrels point 1 Ifthe price was higher say at 80 per barrel sellers would want to produce and sell 17 million barrels but buyers would only purchase 7 million barrels so there would be a quotsurplusquot and sellers would gradually reduce the amount they produced and price would fall At the same time as the price fell buyers would purchase more This process would stop when the quotequilibrium pricequot was reached Conversely if the price was lower say at 5 per barrel buyers would want to purchase 17 million barrels but sellers would only produce 7 million barrels so there would be a quotshortagequot and as the price rose sellers would produce more and buyers would purchase less Again this process would stop when the quotequilibrium pricequot was reached This interaction between buyers and sellers is called a quotmarketquot So we can talk about the oil market the gasoline market the rental housing market etc When the equilibrium price is the prevailing price a market is said to be quotin equilibrium quot Anytime there is a quotdemandquot for something there will likely be a quotsupplyquot and therefore a quotmarketquot Laws making markets illegal may not do so they may just change the relative demand and supply Illegal markets usually have higher prices than legal markets because illegal markets must include the costs related to violating the law However this means that sellers in illegal markets who successfully avoid the law can often make very large profits And because there is not the normal entry by competitors into illegal markets those large profits can sometimes be sustained
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