Introduction to Agricultural & Resource Economics
Introduction to Agricultural & Resource Economics ARE 201
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This 16 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 M. Walden in Fall. Since its upload, it has received 6 views. For similar materials see /class/223763/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 6 Price and Revenue Elasticity 1 Although demand curves are downward sloping and supply curves are upward sloping their degree ofquotsteepnessquot or quot atnessquot can vary 2 What does this mean A quotsteepquot demand curve like 1 D 20 30 4D 50 q uantity means consumers don t change their purchasing behavior as much as with a more quot atquot demand curve like price 10 20 30 40 50 quantity Likewise with a quotsteepquot supply curve like price 10 20 30 40 50 q uantity businesses don t change their production as much when price changes as with a more quot at supply curve like price 10 20 30 40 50 q uantity Steep demand curves are more likely with quotnecessitiesquot and quot atquot demand curves are more likely with quotluxuriesquot A steep supply curve is more likely for products or services that take a long time to develop pharmaceuticals surgeons electricity whereas a at supply curve is more likely for products or services that can be quickly produced food clothes 3 Economists have developed measures of the relative steepness or atness of demand and supply curves For demand curves the measure is called price elasticity of demand a Measured as proportional change in quantity boughtproportional change in price This will be a negative number 0quot Ifthe number is a quotfractionalquot negative number that is between 0 and 1 then the demand curve is relatively steep and we call it price inelastic Ifthe number is a quotlargequot negative number like 15 3 35 technically a number smaller than 1 remember 2 is quotsmallerquot than 1 then this demand curve is relatively at and we call it price elastic Ifthe price elasticity of demand is exactly 1 it is called unit elastic 0 BIG SIGNIFICANCE OF THIS FOR BUSINESS If demand curve is price inelastic then increasing the price will increase revenues to the business Revenues are P x Q Price inelastic means when P rises Q falls but the drop in Q is not large so the new P x Q is larger I ll give an example later But if the demand curve is price elastic then increasing the price will decrease revenues Price elastic means when P rises Q falls a lot so the new P x Q is smaller d Example 1 Mr Pizza sells 200 pizzas per week when he prices each pizza at 10 whereas he sells 150 pizzas per week when he charges 15 per pizza Formula for price elasticity of demand change in quantitv sold average quantitv sold change in price average price 50175 028 07 5 1250 040 This demand curve is price inelastic so revenue increases when the price is increased Revenue at 10 per pizza 10 x 200 2000 Revenue at 15 per pizza 15 x 150 2250 Example 2 The CAT bus system has 5000 weekly riders when each ride is priced at 1 The CAT bus system has 3000 weekly riders when each ride is price at 120 Using the formula the price elasticity of demand is calculated as 20004000 50 277 20 110 18 This demand curve is price elastic so revenue decreases when the price is increased Revenue at 1 1 x 5000 5000 Revenue at 120 120 x 3000 3600 If the demand curve is price inelastic then what39s to prevent the business from constantly increasing price to increase revenues There are two reasons First is competition If other competing businesses don t follow the business constantly increasing its price will lose customers Second is the fact that as the price rises and quantity sold falls demand curves tend to become price elastic 4 Price elasticity of supply Measures how the quantity produced by business changes when the price changes Will be a positive number businesses supply more when the price increases and they supply less when the price decreases Is price inelastic if the number is between 0 and 1 and is price elastic if the number is greater than 1 Formula change in guantity produced average guantity produced change in price average price Example 1 When the price of corn is 2 per bushel farmers grow 5 million bushels When the price of corn is 250 per bushel farmers grow 11 million bushels Price elasticity of supply 6 8 075 341 price elastic 50 225 022 Example 2 When their average salary is 100000 there are 1 million surgeons When their average salary is 250000 there are 12 million surgeons Price elasticity of supply 02 11 018 021 price inelastic 150000 175000 086 V39 Income Elasticity Measures how quantity purchased changes when income of the buyer changes Positive for normal goods negative for inferior goods Calculation change in quantitv sold average quantitv sold change in income average income Example 1 Marla buys 3 steaks a month when her income is 30000 but she buys 7 steaks a month when her income increases to 50000 Calculation 45 08 16 Steakis anormal good 20000 40000 05 Example 2 Marla buys 10 fast food hamburgers a month when her income is 30000 but she buys 6 fast food hamburgers when her income is 50000 Calculation 4 8 05 l0 Therefore a fast food hamburger is an 20000 40000 5 inferior good 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