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by: Norbert Terry


Norbert Terry
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Class Notes
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This 49 page Class Notes was uploaded by Norbert Terry on Thursday October 15, 2015. The Class Notes belongs to ARE 012 at North Carolina State University taught by Staff in Fall. Since its upload, it has received 25 views. For similar materials see /class/223768/are-012-north-carolina-state-university in Agricultural & Resource Econ at North Carolina State University.

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Date Created: 10/15/15
Introduction to Economics Economics is a Way of Thinking a Thought Process You already know and use some of the economic principles we will discuss 9 Your informal economic education began when your parents gave you your rst dollar to spend 0 You had to choose the combination of economic goods and services commodities to buy that would give you the greatest satisfaction utility When you were younger and learning about the concept of money from your parents they probably gave you a dollar one day to buy what you wanted to purchase in a store I used to help a friend out in the evenings at a convenience store in Cary NC when I first started teaching at NC State Young children would come into the store and go right to the candy counter They clutched their four quarters tightly in their little hands and would stare at that candy trying to gure out what they wanted and how much Then it would start Mister how much is this I would tell them and they would put the candy back down Then again Mister how much is this I would tell them and they would put it back down Mister how much is this This question and answer session would go on for several minutes until junior figured out what he she wanted for their dollar What were those youngin s doing Well they had a budget constraint the four quarters in their little hands They were trying to figure out the combination of candy that they could buy with their dollar that would give them the biggest belly ache they could get Seriously they were selecting the combination of economic goods they could buy subject to their budget constraint that would give them the most utility Do we do anything radically different now that we have all grown up I don t think so Our budget constraints are larger and our toys and candy are more expensive but the process we go through is basically the same Common Knowledge in our Economic System That all commodities have a price determined by a market legal or illegal 0 Usually price is thought of as the monetary sacri ce that must be made to obtain a commodity We usually think of piice as the monetary sacn ce that we must make to obtain a commodity but is it the true cost of obtaining that commodity The monetary price of a commodity may not be the true or total cost of obtaining the economic good or service 0 Bag Lunch vs Buying Lunch 9 Living on Campus vs Commuting 0 Eating Out vs Eating at Home The monetary price of a commodity may not be the full cost of obtaining the commodity Let s take a look at a few examples Is bringing a bag lunch to school really cheaper than buying your lunch at school On the surface it may appear that a bag lunch would be cheaper but upon closer examination it might not be You have to prepare your bag lunch which requires time either in the morning or the evening before you go to bed You had to go to the store and purchase the components for your bag lunch You may need a refrigerator to store some of those lunch components in And you will probably have to wash a utensil or two after preparing your bag lunch All of these steps or processes requires your time Now you lug that bag lunch all over campus in the morning and have to remember not to leave it under your seat after class Depending on the value that you place on your time and the hassle of preparing and keeping up with your lunch you may decide that buying your lunch at school is actually cheaper Living on campus versus commuting from offcampus which is cheaper If you live on campus the need for a motor vehicle is practically nonexistent Your room rent on campus includes your utilities with the exception of your phone and perhaps cable TV Choosing the meal plan means you don t have to go to the grocery store cook or wash any dishes If your roommate unks out or quits school your share of the rent remains the same when you live on campus As a matter of fact more students wanted to live on campus this year than in recent years past which caused quite a problem for many rst year Ag Institute students this fall Could lower cost be the reason The monetary price of a commodity may not be the true or total cost of obtaining the economic good or service Bag Lunch vs Buying Lunch Living on Campus vs Commuting Eating Out vs Eating at Home What about eating out at a restaurant versus preparing and eating a meal at home Let us assume that you are married with a couple of kids You and your spouse both work At the end of your work day do you feel like preparing a meal Cleaning up after that meal How about spending your evening at the grocery store or even one afternoon on the weekend at the grocery store The kids want you to spend some time with them too Again how much you value your time and what you spend that time on may make eating out cheaper for some folks than eating at home If people did not place a high value on their time many landscapers of the mow blow and go variety would be hard pressed to find some work I never thought thatI would consider paying someone to mow my grass As responsibilities at work have increased with the arrival of grandchildren as well as a desire to maintain recreational interests that provide me with great satisfaction there are more demands on my time Now I am starting to consider that the two hours I spend mowing the lawn could be spent elsewhere and provide me with more utility than the value of the money that I would sacri ce to pay someone to mow the lawn for me Introduction to Economics Definition of economic A social science concerned with the way an individual or society CHOOSES to employ limited resources having alternative uses to produce economic goods and services for present and future consumption Remember Microeconomics Micro theory price theory primarily studies the economic behavior of individual decision making units such as consumers resource owners and business rms in a free enterprise economy At times micro economics will study economic behavior at the industry level Macroeconomics Macro theory studies the aggregate level of economic activity such as the economic systems total output total level of unemployment and the general price level for the economy as a whole Let39s take this definition apart and analyze it Think of economics as being a core area surrounded by outlying extensions into areas more usually associated with other disciplines Core Area is Considered a SOCIAL SCIENCE I Turf Management I Landscape Tech Livestock Mgmt conomics The core area economics is considered a social science because it deals with human activity Because it Deals with Human Activity Economics deals with a limited range of human activity characterized by RATIONAL BEHAVIOR and the interaction ofindividuals upon one another through the mechanism known as a MARKET Rational Behavior An action well suited to achieve speci c goals within the limitations and capacities of an individual You learn from your mistakes and do not repeat them Limited Resources Resources are also called quotfactors of production quot or quotinputs quot o LIMITED implies the concept of SCARCITY o For all practical purposes human wants may be regarded as limitless Do we ever have enough goods and services Scarcity Scarcity simply means that there is not enough FOP39s in the world to create all of the goods and services that people desire at a PRICE 0 Scarcity The supply of resources available at any particular time only allow for the production of a small fraction of the goods and services that people desire Factors of Production Inputs Inputs gt Production Process gt Output Resources factors of production inputs are all economic synonyms having the same meaning llesources AKA quotfactors of production quot 0r quotinputsquot 9 LAND gtlt Property Resources 0 CAPITAL oLABOR mmml O ENTREPRENEURSHIP eSOurces Management Land and capital are often referred to jointly as property resources Labor and entrepreneurship are often referred to collectively as human resources or human capital LAND OAll raw materials available in nature ie land coal timber rivers air sh etc Nonrenewable resources Renewable resources Nonrenewable resources would include oil coal natural gas gold silver platinum copper etc Renewable resources would include timber water grasslands wildlife etc CAPITAL Man made aids to the production process Tools machinery and buildings used to produce other goods and services A pickup truck used for business purposes would be considered capital A pickup truck used to go to the beach for vacation is considered a durable consumer good LABOR All the human physical and mental skills that can be used in the production of goods and services Generally the greater your physical and mental abilities are the higher your earnings in the labor market ENTREPRENEURSHIP Also known as MANAGEMENT The ability to organize Production innovate and take risks Ability to collect information and analyze that information to solve problems or create opportunities A successful entrepreneur acquires land labor and capital in the appropriate proportions to produce a product or service in such a way as to earn a pro t What does a entrep d0 O Takes the initiative in combining land labor and capital in order to produce a good or service 0 Undertakes basic decisionmaking for the business 20 What does a entrep do OTakes risk of losing money or going bankrupt oForms a business and introduces new products and techniques of production 21 Owners of resources receive payments 0 LAND receives RENT 0 CAPITAL receives INTEREST O LABOR receives WAGES 0 MANAGEMENT receives PROFIT The payment land receives is referred to as rent When you let someone else use land that you own your receive rent What about when you use land that you own to produce a commodity do you incur any economic cost Yes you do The cost is an opportunity cost The next best alternative to using your land to produce a commodity is to rent the land to someone else Ifyou were to grow a crop of corn on your land and you calculated your return to be 35 per acre but you could have rented that land to a neighbor for 40 per acre did you really make a pro t I don t think so I think you lost 5 per acre Just think about it You could have rented that land out popped a cold one and relaxed the whole growing season with 40 per acre in your pocket No hassles no worries This is just another way to look at the many ways to consider your alternative uses of resources that you control The return to capital is referred to as interest Yes interest If you use 10000 that you have saved to purchase a used backhoe and frontend loader what have you given up the opportunity to earn on your 10000 Yes the interest you could have earned on that money had you left it in the bank So before you purchase that backhoe and frontend loader you better pencil your decision out to ensure that the backhoe and frontend loader will increase your pro ts by at least the rate of return that you could have earned on your money in the bank This is why we call the return to capital interest 22 Owners of resources receive payments 0 LAND receives RENT 0 CAPITAL receives INTEREST O LABOR receives WAGES 0 MANAGEMENT receives PROFIT The payment labor receives for use in the production process is rather obvious Labor receives wages salaries and commissions Entrepreneurship or management receives any residual amount left over after paying for the other factors of production This residual amount if any is referred to as prof1t Successful managers are rewarded with profits unsuccessful managers end up with losses If losses are too great a manager will relinquish the resources that he has control of to be reallocated to managers that will use the resources efficiently and earn profits 23 Limited resources have alternative uses CHOICES must be made How will these scarce resources be used 1 Will we use oil to make gasoline plastic fertilizer etc 2 Use fertilizer to raise corn soybeans tobacco cotton turf hostas tulips etc 24 Limited resources have alternative uses 3 Use corn to feed people feed hogs to produce pork feed beef cattle to produce beef feed dairy cattle to produce milk What directs the use of resources to produce certain commodities Does price allocate or steer resources in the direction that earns them the greatest return I think so If the price of beef cattle increases relative to the other uses of corn then beef cattle producers will want to use more corn as they expand their herds More corn will be allocated to beef cattle since the return to corn in beef cattle production will be higher than in alternative uses Typically beef cattle producers will bid the price of corn up until the corn market reaches a new equilibrium at a higher price This higher price of corn may cause hog producers to cut back on hog production because of the higher price of corn thus freeing corn supplies to beef cattle producers The power of prices to ef ciently allocate resources and commodities never ceases to amaze me And the fact that prices are determined by individuals interacting with each other in a market is truly remarkable 25 HOW DO WE ALLOCATE THESE SCARCE RESOURCES 0 WHAT SHOULD WE PRODUCE 0 HOW MUCH OF EACH GOOD OR SERVICE SHOULD WE PRODUCE What should we produce Only those commodities for which consumers are willing to pay a price per unit suf ciently high enough to cover at least the full cost of producing them will be supplied by producers in the long run The full cost of production includes all eXplicit accounting costs and implicit opportunity costs How much of each good or service should we produce If consumers offer higher prices consumers can normally induce producers to increase the quantity of a commodity that they will supply per unit of time If consumers offer lower prices consumers normally induce producers to decrease the quantity of a commodity that they will supply per unit of time 26 ECONOMICS So far we have determined that economics is the study of the allocation of scarce resources to satisfy unlimited human wants 27 Produce economic goods and services for present and future consumption 9 Factors of production are used to produce things that people want 9 These quotthingsquot are known as commodities Commodities consist of goods and services 28 Goods are Tangible Items that Consist of oEconomic Goods Consumer Goods Durable Goods last 3 years or longer Nondurable Goods last less than 3 years Capital Goods 9 Free Goods Economic goods always have a prices associated with them Price is a rationing mechanism used by our society to equate demand consumption and supply production Economic goods eXist when the quantity of the good desired by consumers exceeds the quantity made available by producers when the price is equal to zero People cannot have all of the good that they want at this zero price so society must ration out what is available Price increases above zero until an equality is reached between consumption and production A free good on the other hand is available in quantities in excess of what people desire at a zero price free Here the quantity available to consumers in greater that the quantity of the good desired by consumers at a price equal to zero 29 Economic Goods Tangible items in which the Quantity demanded by society exceeds the quantity available at a price equal to zero QdgtQsP0 30 Consumer Goods Are Economic Goods used directly by consumers to generate satisfaction Durable consumer goods consist of items such as washing machines dryers clothing toasters microwaves your personal vehicle etc that last three years or longer Nondurable consumer goods consist of items such as bread milk toothpaste soft drinks paper towels etc that last less than three years 31 Capital Goods Manmade goods used to produce consumer goods Remember capital goods are one of the factors of production as well 32 Free Goods Tangible items in which the Quantity available exceeds the quantity demanded at a price equal to zero QdltQsP0 Can you think of any free goods in our society today 33 Services Are Intangibles Such as mowing custom combining education tractor repair income tax serviceslandscape planning hair cuts etc 34 Production The act of making goods and providing services 35 Consumption The act of using goods and services to satisfy needs and wants 36 Present Consumption Consumption Within a short period of time also referred to as short run consumption Short run and long run are concepts that have particular meanings in economics meanings that are often different from every day usage of the terms In microeconomics the short run is the time period in which one or more important conditions cannot be changed A rm may make decisions in the short run because its building lease runs for another year or two or because its workers have a threeyear labor contract Workers may make decisions in the short run because they have a xed commitment such as wanting to stay put until children nish high school Thus most of the rm s workers may accept a pay cut in the short run but once their xed commitments are gone the long run response may be different For some rms or individuals the short run may be only a week or a month while for others the short run may be years The exact length of the short run depends on the length of the xed commitments people face in a given situation The material above has been excerpted from Introduction to Economic Principles by Mabry and Ulbrich McGrawH ill Book Company 1989 ISBN 0070447977 page 16 37 Future Consumption Consumption outside the short period of time long run consumption The long run is the time period in which anything can be changed or in which individuals and rms are fully able to respond to economic incentives and take advantage of economic opportunities The long run has no speci c time frame it is simple the time period that is long enough to allow full response to changing incentives The material above has been excerpted om Introduction to Economic Principles by Mabiy and Ulbrich McGrawH ill Book Company 1989 ISBN 0070447977 page 17 38 Price RATIONS consumption over time given a certain income Grocery Store Example This afternoon let s assume that you hear a radio broadcast indicating that Food Lion off ofAvent Ferry road is having a special sale Everything in the store will have a price 0 or it is free What will happen Will it be a mad house Will people go bonkers How long will items remain on shelves Will employees be able to stock the shelves as fast as people will be removing items from the shelves Will trucks be able to bring commodities from the warehouse as fast as people will cart commodities out of the store Will the shelves be bare in a very short time Will f1ghts break out as two people try and grab the last loaf of bread at the same time Will normally peaceful law abiding people turn into What will be left at the Food Lion for consumption tomorrow Prices ration consumption over time They allow for the matching of consumption and production Prices allow us to expect a ready supply of goods and services tomorrow Prices help keep us peaceful and law abiding in our encounters with others The power of prices is amazing 39 SUMMARY Three key words in our definition and discussion 1 Scarcity 2 Choice 3 Time 40 Law of Scarcity Economic resources are scarce 9 There are never enough at any given time to produce all the things that people want at a price 0 O Scarce resources can be increased if at all only through effort and sacrifice 41 Choice O Scarcity forces every economic system every business every individual to make choices 0 A decision to produce one commodity frequently implies a decision to produce less of another commodity production possibilities curve 42 Choice o Often the decision to produce a particular commodity may lead to the decision to completely stop production of another 9 In other words some tradeoffs must be made since we do not have the resources to produce the variety and quantity of commodities we would like to produce 43 Choice PRICES assist us in determining which choices to make concerning 9 What to produce o How much to produce 44 Time Production requires time consumption requires time choice requires time adjustments to price changes or resource limitations requires time Nothing about economics is instantaneous ll 45 Time 0 There is always what we call a LAG in response to changes or shocks to the economic system 0 One of the functions of PRICE is to ration out resources and commodities over time 46 Time 9 Time itself is scarce Do we ever have enough time Think about that while you are taking a test Or while you are on vacation How often have we wished for more time Does time have a value Can we put a price on time Sure it does and sure we can I never thought I would ever consider paying someone to mow my lawn but over the last few years I have entertained the thought It takes me about two hours time to mow my KY3l tall fescue lawn In the spring my lawn may require two mowings per week What could I be doing with that time How much is my time worth Well I didn t decide to hire someone to mow my lawn but I did purchase a newer and larger garden tractor My old mower was a 16 hp gear box AllisChalmers with a 48 inch mowing deck My new mower is a 25 hp hydrostatic drive 54 inch cut Scott s made by John Deere The tighter turning radius on the new mower has virtually eliminated any hand trimming or push mowingproductivity gain and I can have the lawn nished in one hour I substituted a more productive more expensive modern machine for a less productive older machine and cut my mowing labor and mowing time in half I paid a price though That Scott s was not cheap But I value my time more today than I did even 5 years ago So to me the expensive machine was worth it 47 CONCLUSIONS 9 Economics is fundamentally concerned with choices or decisions concerning the use of resources factors of production 9 Problems of choice arise when there are alternative ways of achieving a given objective 48 CONCLUSIONS 0 Economics develops specific criteria which de ne the conditions for making the best use of society39s resources 0 We employ these criteria as guide lines for formulating and evaluating decisions I hope you saw the economic method at work in our discussion of time and the personal example that I shared with you How do the conclusions listed here relate to that mowing example Read over the conclusions again and the revisit the mowing example How does the mowing example illustrate that economics is fundamentally concerned with choices or decisions concerning the use of resources in this case capital and labor How does the mowing example illustrate that problems of choice arise when there are alternative ways of achieving a given objective How does the mowing example illustrate that economics develops speci c criteria which de ne the conditions for making the best us of an individual s or society s resources How does the mowing example illustrate that we employ the economic criteria as guide lines for formulating and evaluating decisions 49


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