Introduction to Agricultural & Resource Economics
Introduction to Agricultural & Resource Economics ARE 201
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This 12 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 13 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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Lecture 3 Earning 1 First background on a quotsupply curvequot shows how much is produced or offered of something compared to price of that something Idea is if producers can receive more from the price they39ll want to produce and sell more Can also think of this for labor Labor supply shows how many people want to work at a job when different salaries are offered for that job Expect that the higher the salary the greater the labor supply 1 20 1 00 80 60 40 20 annual salary 5 8 10 13 18 millions of workers 2 Fundamentals Salary or wage is a price just like the price of a bushel of corn or the price of a gallon of gasoline A salary is the price of labor the price paid to hire someone for a stated time period Like any price a salary is determined by the interaction of the supply of labor and the demand for labor These supply and demand curves look like any supply and demand curve More people will offer their labor for hire the higher the salary of the job and more businesses will want to hire labor the lower the salary of the job Where demand and supply curves come together intersect gives equilibrium in the labor market the salary paid and the number of people hired From the perspective of a business its demand for labor depends on the revenue the worker can earn for the business So the demand for labor is a quotderived demandquot from what the business can make and sell using the workers Workers who earn more revenue for the business are more valuable and demand for these workers will be greater 3 Determinants of salary levels High salaries will result in labor markets where demand for the workers is high because the workers earn large revenues for the business and where few people can do that work Low salaries will result in labor markets where demand for the workers is low because the workers earn small revenues for the business and where many people can do that work Medium salaries in between high salaries and low salaries occur in labor markets where demand is high and supply is high revenue earned by workers is high but many people can do the work or where demand is low and supply is low revenue earned by workers is low but few people can do the work In pictures High Demand amp Low Supply High Salary 10005 Demand 39 Supply 1234567 10005 of workers Low Demand amp High Supply Low Salary 10005 1 2 3 4 5 6 7 10005 of workers The first graph would be an example of the labor market for professional athletes movie and TV stars CEOs and surgeons Demand is high because these workers can earn large revenues for the business Supply is low because few people have the innate skills or training to do the work The second graph would be an example of the labor market for cashiers fast food workers waiters and waitresses and day laborers Demand is low because the workers earn relatively small revenues for the business Supply is high because many people can do these tasks with little training The quotdistribution of incomequot refers to the percentages of workers in various income categories It will be determined by the mix of worker skills and demand for those skills Recently workers with more education have seen the fastest increases in their incomes 4 Labor market issues a Teacher salaries Salaries are in the quotmoderatequot range Supply is moderate because teaching does require a college degree but many people have the ability to complete the degrees Demand is moderate for two reasons First because the government controls most K12 education through the public schools parents who would be willing to pay a high salary for an exceptional teacher are restricted in their ability to do so But second it s difficult to draw a connection between a student s performance in K12 and their ultimate career and salary This is easier to do at the college level which is one reason why college teachers earn more than K12 teachers b Immigration Recent immigration has been predominantly of lower skilled workers So this has increased the supply of lower skilled workers and decreased their equilibrium wage rate c Minimum wage impacts With a minimum wage the government says businesses must pay a higher salary or wage than would result from the interaction of supply and demand 10005 1 2 3 4 5 6 7 1 0005 of workers In the above demand amp supply gure the equilibrium salary is 10000 at point 1 However the government imposes a minimum wage of 15000 Notice that one result of the minimum wage is businesses hire fewer workers corresponding to point 2 d Unions unions try to increase the wage rate of members by restricting supply only union members can do certain kinds of work Unions are more effective in quotclosed shopquot states that allow unions to control an industry that is they are allowed to require membership They are less effective in quotopen shopquot states where unions are not allowed to require membership e Labor and technology technology that makes workers more productive can reduce total employment This has been happening in manufacturing f Market work vs quothomequot work work in which you are directly paid is called quotmarket work Work where you aren39t directly paid is called quothome workquot One of the biggest societal changes in the last 50 years has been the movement of adult women out of home work to market work Main reason changing nature of work where women can do more jobs and are paid competitively meaning the cost of not working has increased g Will an increase in the wage rate always cause someone to work more Usually but not always May use some of increased income to quotbuyquot more free time more leisure The quotsubstitution effectquot of a higher wage rate motivates more work time the quotincomequot effect motivates less work time and more leisure time Depends which dominates h Don t ignore the value of quotmiddlemenquot people who don t directly make something but put buyers and sellers together or gather and present information They perform services that people value Good examples real estate agents insurance agents Lecture 4 Investing I Why Invest To transfer resources to the future and at least keep pace with in ation In ation erodes the purchasing power of dollars if keep quotmoney in a mattressquot it loses value II What Do You Look for When You Invest Want to earn the highest real interest rate nominal or observed interest rate minus in ation rate for the level of risk you39re willing to take Example of real interest rate Nominal or observed interest rate 10 In ation rate 4 Real interest rate 6 Risk chance of losing your invested money Reality Risk and real interest rate also called quotreal rate of returnquot usually go together the greater the chance you re willing to take with your investments the higher the potential reward you must receive Impact of taxes Taxes come quotoff the topquot they are charged on the nominal interest rate The quotafter taxquot nominal interest rate would be calculated as nominal rate tax rate x nominal rate Example Nominal rate 10 Tax rate 30 or 3 Aftertax nominal interest rate 10 3 x 10 7 Then can also talk about real after tax interest rate where take Aftertax nominal interest rate and subtract the in ation rate Aftertax nominal interest rate 7 In ation rate 4 Real aftertax interest rate 3 III Basic Kinds of Investments Stocks ownership of net assets of a company In ation hedges real estate precious metals collectibles Cash investments easily convertible to cash like moneymarket funds and very short term CDs certi cates of deposit Longterm bonds investments earning a fixed interest rate over a long period Each investment has performance tied to stages of the business cycle as shown below The business cycle is the irregular ups and downs of the macroeconomy measured by the characteristics of growth the in ation rate and interest rates The four stages of the cycle are early growth late growth early recession and late recession m Stage of Growth In ation rate Interest rates Business cycle Stocks Early growth Yes Low Low In ation hedges Late growth Yes but Rising Rising slowing Cash Early recession No Rising Rising Long term Late recession No Falling Falling bonds Stocks thrive when the economy is growing and both in ation and interest rates are low In ation hedges do best when the economy is still growing but the in ation rate is rising Cash investments are the best pick when the economy has stalled but in ation and interest rates are still rising because the cash investments will continually earn the higher interest rates Finally long term bonds excel when interest rates are falling Why because if an investor buys the fixed rate bond when interest rates have peaked and then holds them when new interest rates fall the value of the bond will increase IV Investment Strategies Accepting the fact that different investments perform well at different stages of the business cycle the question is how the individual investor deals with this There are two alternative approaches Active Management Try to perceive what stage the economy is in and then buy the type of investment that does best in that stage Benefit Make highest investment return this way Cost May incorrectly guess what stage economy is in and thus invest incorrectly Passive Management Realize it is very difficult to predict the economy so diversify investments among all the types Change allocation according to life cycle stage for example but always invest in each type diversification Eaer career Mid career Late career Retirement Stocks 20 55 40 10 In ation hedges 10 25 15 5 Cash 50 10 20 60 Long term bonds 20 10 25 25 V Other Investment Concepts Mutual funds a way of investing not a type of investing many investors pool their funds and hire a manager to pick the investments Taxfavored investments investments which get a taX break by having their interest earnings either not taxed or taxed at a lower rate Examples municipal bonds IRAs 401k plans Insurance and risksharing Purchase insurance to protect against large nancial losses that you can t predict or control Key is people know they are exposed to the risk but they don t know if they will suffer the loss So many people are motivated to contribute to a quotpoolquot of money that then goes to those suffering the loss VI Interest Rates Interest rates for short term investments generally of a year or less are call short term interest rates Interest rates for long term investments generally of several years are called long term interest rates Usually longterm interest rates are higher than shortterm interest rates The reason is the greater uncertainty or risk of investing money for a longer period of time A graph which shows the pattern of interest rates with the length of the investment is called a yield curve and it usually slopes upward with time Sometimes the yield curve attens meaning there is no difference between shortterm and longterm interest rates Often this means investors are forecasting a slower economy Also rarely but sometimes the yield curve becomes inverted meaning short term interest rates are higher than long term interest rates This is often interpreted as signaling an upcoming recession VII Present and Future Value Future dollars will be worth less than current or present dollars for two reasons in ation makes them worth less you could invest dollars today in something safe and have more dollars in the future So to compare future dollars to current dollars must adjust the future dollars We do this by calculating the present value of future dollars The discount rate is the interest rate used to make this calculation It gives the rate at which future dollars trade for current dollars So for example a discount rate of 5 means it takes 105 in one year to equal 100 today Discount rate will vary by individual People who live quotmore for nowquot will use a higher discount rate whereas people who are quotmore forward lookingquot will use a lower discount rate Formula Present value Future value x present value converter Walden p 16 For your reference the present value converters on page 16 are the result of this calculation 1 1rn where r is the discount rate and n is the number of time periods The values quotrquot and quotnquot must be consistent with respect to time for example ifr is a rate per year n must be number of years or ifr is a rate per month n must be number of months See Walden Chapter 3 for examples Lecture 1 What Is Economics I The Economic Problem There are scarce resources but unlimited potential uses of those resources This scarcity forces tradeoffs between resource use Who is to decide how to allocate scarce resources Who decides what is produced and who gets what Alternatives Command Economy A central authority decides what is produced and who gets what Market or Price Economy Relies on individual selfinterest to decide how resources are used N E Prices are attached to alternative uses communicating their value and these prices guide resource allocation in a totally uncoordinated decentralized way the quotinvisible handquot Prices are a quotsignalquot Incentives are key If a business can make a pro t selling something they ll do it And if they can make more pro t they ll want to do more Conversely the higher the price of something the more costly it is for buyers so buyers will want to use less and conserve Example 1 Food housing and cars are needed to live and function in today39s society But the government central authority doesn39t control the production of these vital products Instead farmers produce food builders construct houses and auto companies make cars because they earn pro ts by doing so And the more pro t they make the more they ll want to produce Example 2 What if a hurricane wipes out many of the orange trees in Florida Less orange juice is available How is it decided who gets it In a command economy some central authority would In the market economy orange juice becomes more valuable so its price rises This causes buyers to collectively use less Example 3 Where to live Apartments and houses that are closer to NCSU cost more per square foot because faculty and students save commuting time and money if they39re close to the campus Conversely apartments and houses farther away from campus cost less per square foot because they don t save commuting time and money So for a central amount of money budgeted for housing faculty and students must decide which they value most closeness to campus or more space to live in II We Will Talk About the Market or Price System in this Course The two fundamental concepts in this system are Demand shows how much buyers purchase of something product or service as its price per unit varies result buy more at lower price buy less at higher price Supply shows how much producers make and sell of something product or service as its price per unit varies result make and sell more at higher price make and sell less at lower price The quotcoming togetherquot of demand and supply determines how much is produced and bought and at what price For 39 quot 39 39 39 and 39 39 39 is really about bene ts and costs Compare the bene t from buying a new shirt to the cost of not using that money in another way Or the owner of a pizza restaurant compares the bene t on pro ts of hiring more delivery persons vs adding more tables and chairs in the store The cost of anything is the value of what you can t buy with those same resources economists call this opportunity cost It should be clear that economics applies to individuals or households and businesses It also applies to government decisions But there are three problems for the government application politicians aren39t using their own money they may look at bene ts and costs differently than taxpayers politicians can divide bene ts and costs have one group pay the costs while another gets the bene ts politicians have short time horizons often just until the next election or end of their term so sometimes they try to accelerate the bene ts and delay the costs N E III Microeconomics the economics applied to households and businesses and their their interaction in the market market is simply where buyers and sellers come together Macroeconomics the economics applied to the national economy and government economic policy IV Three Common Criticisms of Market Economics 1 Those with more money resources can get more It s true that someone ea1ning 100000 a year can buy more than someone earning 10000 So is this fair One answer is quotyesquot ifthe person earning 100000 a year did so because society valued what they did more than the person earning 10000 Also most societies do redistribute some amount of income from the rich to poor in Us 500 billion annually 2 Money is the only thing that matters in a market economy Not really Money is just the convenient and easy way we measure resources But if something can39t be measured with money it doesn t mean it39s worthless 3 In a market economy what s to prevent businesses from charging extremely high prices to buyers and making huge pro tsgt Answer Competition more on this later V Other Key Economic Principles 1 Bene ts of something rise or costs fall get more of it Bene ts of something fall or costs rise get less of it 2 The ultimate impact of economic actions may not be seen immediately 3 Economics is not about money it s about choice Money is just a convenient measuring tool 4 Trade is key we specialize and trade Trade is a quotpositive sum gamequot only occurs if both sides buyer and seller see a net bene t at the time 5 Competition is buyer39s best friend if several rms are competing for the consumers business this will keep costs down and quality up 6 The value of a resource depends on when in time it occurs time value of money 7 The economic future is hard to predict