Lecture Handouts AGSCI5 MICAH PORCAL ARELLADO_ Course Instructor

MIDTERM COVERAGE FOR AGRICULTURAL ECONOMICS AND

MARKETING

1.1 Definition of Terminologies

ECONOMICS - the study of how people choose to use scarce or limited resources to produce
commodities
AGRICULTURAL ECONOMICS _ the application of economic principles in crop and animal science
MACROECONOMICS – a study of the economy as a whole; study of economy-wide activities such as
economic growth, business fluctuations, inflation, unemployment, recession and depression
In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as:
inflation,
price levels,
rate of growth,
national income,
Gross domestic product (GDP)
changes in unemployment. (Investopedia)
MICROECONOMICS - study of individual decision-making units such as individuals, households, and
firms
•Microeconomics - studies the implications of individual human action, specifically about how
those decisions affect the utilization and distribution of scarce resources.
•Microeconomics shows how and why different goods have different values, how individuals
make more efficient or more productive decisions, and how individuals best coordinate and
cooperate with one another.
POSITIVE ECONOMICS – seeks to understand behavior; answers the question, “What is?’
Example: The price of pork is Php 350.00
NORMATIVE ECONOMICS – biased; Analyzes and gives SOLUTION based on opinion or judgement
used in formulating policies; answers the question, “What should be?’
Example: The price of pork is high, maybe due to ASF so we should find a substitute good such as
chicken
ECONOMIC MODEL – the basic building block used by economist to conceptualize and simplify
economic activities based on theories and assumption, ceteris paribus
a simplified description of reality, designed to yield hypotheses about economic behavior that can
be tested
must contain a representation of the principal parts of the real thing, or it would not be
recognizable
Example: Perfectly Competitive Firm
ECONOMIC THEORY - a representation of a set of relationships that govern human behavior within
some portion of an economy

1.2 AGRICULTURAL ECONOMICS AS A SOCIAL SCIENCE

It describes, analyzes, explains and correlates economic behaviors which includes the production,
consumption and distribution of goods and services in a systematic way.

5 Basic Economic Problems

What to
produce?

How to For whom to

produce? BASIC produce?
ECONOMIC
PROBLEMS

How much When to

produce? produce?
Economic Goals

an economic state in which every resource is optimally allocated to serve

efficiency each individual or entity in the best way while minimizing waste and
inefficiency.

the fairness and distribution of economic wealth, tax liability, resources,

equity and assets in a society

the fundamental right of every human to control his or her own labor and
economic property. In an economically free society, individuals are free to work,
freedom produce, consume, and invest in any way they please.

an economic situation in which all available labor resources are being used
full in the most efficient way possible
employment

economic s the ability of individuals, households and communities to meet their basic and
essential needs sustainably; including food, shelter, clothing, health care,
security education information, livelihoods, and social protection.

economic an increase in the capacity of an economy to produce goods and services, compared from
one period of time to another. It can be measured in nominal or real terms, the latter of
growth which is adjusted for inflation

economic llows people the ability to access resources essential to life, including financial resources,
quality housing and food, and a job that provides a stable, living wage.
stability

FACTORS OF PRODUCTION (Economic Resources/Input)

LAND – everything above and beneath the land surface, payment is rent
LABOR – the physical and mental effort exerted in the production of goods and services,
payment is wages
CAPITAL – finished product such machineries, equipment and processed raw materials used to
produce goods and services payment is interest
MANAGEMENT/ENTREPRENEUR – one who organizes the other resources, payment is profit
 1.3 IDEOLOGIES IN ECONOMICS
 Capitalism/Market Economy = the government favors free enterprise (privately owned
businesses) to operate the marketplace/economy
Absence of central economic plan
Private ownership of property is allowed
Price System
Competitive condition
Profit motive
Concern of Capitalism
1. Everyone should have an equal chance
2. Equality of outcome is believed to be impossible
 Communism/Command Economy = involves a theory that gives ownership of all land and
productive facilities to the people; the government (or the “state”)
Government regulates the price of goods and services in the market
Government determines the type, quality and quantity of commodities to be produced
Factors of production are owned by the government
Government is the one that determines the goals of the economy, directs the production
and controls the distribution and consumption of output
 Socialism/Mixed Economy = the central govt. plays a strong role in regulating existing private
industry and directing the economy and allows some private ownership.
Price system
A private sector of small producing units while the public sector (government) oversees
the fulfillment of collective objectives
Freedom of choice in consumption
Freedom to pursue occupations
Concern of Socialism
1. People should be as equal as possible in: a) Income, b) Education and c)
Occupational status
2. Equality of opportunity is believed to be impossible
 Fascism- a political system of a one-man dictatorship
 Feudalism – an agrarian economic system in which the control of the land and specialization of
class roles is between land holders and pheasants
 Laissez Faire =government should not intervene in the marketplace/economy

1.4 Economic Theories

a. Classical Economic theory
Adam Smith
 Father of Modern Economics
 Wrote the book “ Wealth of Nations” 1776
 Advocated the laissez faire
David Ricard
 Proposed the labor theory
 Wrote the book Principles of Economy and Taxation
 Elaborated the theory of value, taxation and classical trade
Thomas Malthus
 English demographer
 theorized that economic problems are connected to population growth
John Stuart Mill
 Heir to David Ricard
 Principles of Political Economy (1848)
b. Neoclassical Economic Theory
Leon Walras
 Introduced General Economic System
Alfred Marshall
 Emphasized that price and output are determined by supply and demand
c. John Maynard Keynes – Father of Macroeconomics
 Published General Theory of Employment, Interest and Money in 1930s
d. Mainstream Economics (Post Keynesian)
-Hybrid of Neoclassical and Keynesian economics
e. Socialist Economics
Karl Marx – Labor Theory
Fredrich Engels – co-authored the Communist Manifesto with Karl Marx

II. MICROECONOMICS
2.1 Economics of Production and Cost
PRODUCTION THEORY – the process of transforming inputs into outputs
PRODUCTION FUNCTION - the technical relationship that transforms inputs (resources) into outputs
(commodities) -the physical relationship between inputs and outputs y = f(x)
Where; y = an output x = an input
Remember: A single value for y is assigned to each x. Notice also that there are two values for x (30 and
50) that get assigned the same value y

The relationship described here represents what is

known as a correspondence, but not a function.
Among the examples, what sets are considered a production function? And what makes them violate the
rule for a production function?
Example:
If x = 10, then y = 30.
If x = 20, then y = 60.
If x = 10, then y = 80.
Set A is not a production function because the same value of x which is 10 were assigned to different
value of y, 30 and 80

ENTERPRISE–refers to a single production activity

INPUTS – factors of production
(Land, labor, money, machines, tools, fertilizers, seeds etc.)
Fixed – inputs whose use rates does not change as the output level changes
Variable – inputs whose use rate changes as the output level changes
OUTPUT – goods and services produced using the input
GOODS – tangible commodity
SERVICES- intangible commodity

2.2 Production Economics Theory

TOTAL PHYSICAL PRODUCT (TPP) – total amount of output produced in physical units
MARGINAL PHYSICAL PRODUCT (MPP) – the rate of change in output as an input is changed by
one unit, holding all input constant; ∆y/∆x
AVERAGE PHYSICAL PRODUCT (APP) – measures the total output per unit of input used expressed
the “productivity” of an input associated with efficiency; y/x
LAW OF DIMINISHING RETURNS – states that as the use of an input increases, (together with other
fixed inputs), a point will eventually be reached at which the resulting additions to output decrease

Stages of a Production Function

Stage I – Productive Phase
Stage II- Diminishing Returns
Stage III-Negative Returns

Length of Run
- production process can be classified according to the length of run or time period being
considered

1. Long Run – A time span where all inputs to the production function is treated as variable
inputs
 2. Short Run - A time span during which some factors are variable and some factors are fixed
3. Immediate Run/Very short run - A period of time in which all inputs are fixed.

Physical Production relationship

1. Constant Returns - when each additional unit of input added to the production process yields a constant
level of output relative to the previous unit of input. Output increases at a constant rate.

2. Increasing Returns- when each additional unit of input added to the production process yields
an increasing level of output relative to the previous unit of input. Output increases at an increasing rate.

3. Decreasing Returns- when each additional unit of input added to the production process yields
less additional output relative to the previous unit of input. Output increases at a decreasing rate.
 4. Negative Returns- when each additional unit of input added to the production process results in
lower total output relative to the previous unit of input. Output decreases.

2.3 COSTS OF PRODUCTION

Profits [π] - Total revenue minus total costs. π = TR – TC. The value of production sold minus the cost of
producing that output

Total Revenue (TR) refers to how much money a fi rm earns from the sale of its output (Y). Multiplying
the number of units of output (Y) by the per-unit price of the output (P) yields total revenue:

TR=P*Y

Total Costs (TC) measures the payments that a fi rm must make to purchase the factors of production
 Explicit Costs
Payment to hired labor
Purchase of inputs
 Implicit Costs
Family labor
 Use of self-owned resources
Accounting Costs = explicit costs of production; costs for which payments are required.
Opportunity Costs = the value of a resource in its next-best use. What an individual or firm must give up
in order to do something/
Accounting Profits [πA] = total revenue minus explicit costs. πA = TR – TCA
Economic Profits [πE] = total revenue minus both explicit and opportunity costs. πE = TR – TC A –
opportunity costs.
“Economic profit is smaller than accounting profit”

Theory of Cost

• Total Cost (TC) – typically depicted as a function of output, TC=f(x), ceteris paribus represents
the least cost each output level.
• Total Fixed Cost (TFC) – sunk cost or overhead cost; does not changes as the amount of output
changes (Land rent and Interest on loans)
 • Total Variable Cost (TVC) – changes as the amount of output changes, upward sloping curve
starting from the origin (0,0); Fuel and transportation and Raw materials

• TC=TFC+TVC, graph is parallel to that of TVC, vertical distance between TC and TVC is TFC

• Marginal Cost (MC) – the rate of change in cost as output is changed by one unit; MC =
ΔTC/ΔY
• Average Cost (AC) – measures the total cost per unit of output used, also known as ATC-
Average Total Cost; ATC = TC/Y
• Average Variable Cost (AVC) – measures the total variable cost per unit of output used; AVC =
TVC/Y
• Average Fixed Cost (AFC) measures the total fixed cost per unit of output used; AFC = TFC/Y.

2.3 Price, Input and Output Determination in Perfectly Competitive Market

Industry
A group of firms that all produce and sell the same product
Relative prices rule: relative prices determine the optimal level of output, the optimal level of inputs,
and the cost-minimizing combination of inputs to use.
Perfect Competition
Under perfect competition, input and output prices are fixed and given (fixed cost, constant
prices) In a perfectly competitive market, no individual firm can influence the price charged for the
industry’s product. The product price is a constant. This refers to a price at a given place and at a given
point in time
A perfectly competitive market or industry has four characteristics:
(1) a large number of buyers and sellers,
 (2) a homogeneous product,
(3) freedom of entry and exit, and
(4) perfect information
Large number of buyers and sellers- Since numerous fi rms produce the same product, if one firm raises
the price of the product above the price charged by the other firms, no buyers would pay the higher price
and all of the customers would go to other firms
Homogeneous Product - a product that is the same no matter which producer produces it. The producer
of a good cannot be identified by the consumer.
For example:
Most agricultural products possess the same characteristic where buyers could not determine who
produced the commodity. The same is true for a meat, or a bunch of bananas, or kilos of meat etc.
Under a Perfect Competitive Market, we assume that there is that what we call the “freedom of entry and
exit” (no trade barriers) as well as Perfect Information or a situation where all buyers and sellers in a
market have complete access to technological information and all input and output prices.
Now who dictates the price of the commodity?
Price Taker = a firm so small relative to the industry that the price of output is fixed and
given, no matter how large or how small the quantity of output it sells. (Cannot influence
the price)
Price Maker = a firm characterized by market power, or the ability to influence the price
of output. A firm facing a downward-sloping demand curve.

Profit maximization using marginal revenue and marginal cost curves

1. MR = MC is the profit maximization condition
2. MC must cut MR from below
Definitions:
Marginal Revenue [MR] = the addition to total revenue from selling one more unit of output.
MR = ΔTR/ΔY.
Marginal Cost [MC] = the increase in total costs due to the production of one more unit of output.
MC = ΔTC/ΔY.
Average Revenue [AR] = the average dollar amount received per unit of output sold.
AR = TR/Y
 The Break-Even Point - At the break-even point, there are no economic profits or losses.
TR=TC
Shutdown Point is where the level of output at which marginal revenue (MR) is equal to average
variable costs (AVC)
Optimal input selection
Isoquant = a line indicating all combinations of two variable inputs that will produce a given level of
output.

Types of Isoquant
Perfect Substitutes = inputs that are completely substitutable in the production process
 Isoquant curve for Perfect Substitutes
Perfect Complements are resources that must be used together.

Isoquant curve for Perfect Complements

Imperfect Substitutes = inputs that are incomplete substitutes for each other in the production process

Isoquant curve for Imperfect Substitute

Marginal Rate of Technical Substitution (MRTS)

- the rate at which one input can be decreased as the use of another input increases to take its
place. The slope of the isoquant. MRTS = ΔX2/ ΔX1
Example:
MRTS AB = ΔX2/ ΔX1
MRTS AB = (2-3)/ (2-1)
MRTS AB = -1/1
MRTS AB = -1

Isocost Line = a line indicating all combinations of two variable inputs that can be purchased for
a given level of expenditure
TC = P1X1 + P2X2
Example: You were given a Php 10,000.00; how much Feeds and vitamins can you buy using
your budget. Provide the isocost formula. Find for the value of feeds first.
Given: Budget Php 10,000.00
Inputs:
Feeds – Php 50.00/kg (X1 )
Vitamins – Php 150.00 (X2 )
TC = P1X1 + P2X2
1. Substitute
10,000.00 = 50.00 F + 150.00V
10,000.00 = 50.00 F + 150.00V
2. Transpose to find the value of feeds.
10,000.00 - 150.00V = 50.00 F
3. Find the value of feeds
 (10,000.00 - 150.00V) = 50.00 F/50
200-3V=F
4. Isocost curve = F= 200 – 3V
200kg = feeds
0 pack=vitamins
Explanation:
You can buy 200 kgs of feeds if you choose not to buy vitamins, however; if you decide to buy
vitamins you have to substitute the number of vitamins to variable V. For example, you decided to buy 10
packs of vitamins, then we have to substitute it to know how much of the feeds can we buy.
Using the formula F= 200 – 3V; we substitute 10 to variable V
F=200 – 3(10)
F=200-30
F=170; Thus, with Php with 10,000.00 budget limit you can buy 170 kgs of
feeds and 10 packs of vitamins. Now we check;
10,000.00=Total kgs of feeds*price per kilo +number of vitamins*price per pack
10,000.00=170(50) + 10(150)
10,000.00=8,500.00+1,500.00
10,000.00=10,000.00

Production Possibilities Frontier [PPF] = a curve depicting all possible combinations of two outputs
that can be produced using a constant level of inputs.
Marginal Rate of Product Substitution [MRPS] = the rate at which one output must decrease
as production of another output is increased. The slope of the production possibilities frontier (PPF)
defines the MRPS. MRPS = ΔY2/ΔY1
Isorevenue Line . A line showing all combinations of two outputs that will generate a constant
level of total revenue

III. SUPPLY, DEMAND and ELASTICITY

• PRICE – the amount paid for a certain quantity and quality of good or services
• QUANTITY DEMANDED (Qd) how much of a good or service a buyer is willing to purchase
at a single specified price, in a given market, at a given time ; ceteris paribus, a point not a
relationship
• LAW OF DEMAND – negative/inverse relationship between Qd and Price; ceteris paribus;
people are willing to buy more goods if price is low
• DEMAND CURVE – downward sloping line
 • CHANGES IN Qd – refers to the change in the amount along the demand curve or to a change in
Price; rightward (increase in D) or leftward (decrease in D)

Change in Quantity Demanded showing in price from Qd1 to Qd2. The decrease in price (from 3
to 2) increases the quantity demanded from 3 to 4. the demand curve remains in its position. Change in
quantity demanded is brought about by change in price.

Shift in quantity demanded

Changes in demand showing the shifting of the curve. A shift of the demand curve to the right
means an increase in demand while movement to the left a decrease in demand. Such movement in the
demand curve are caused by changes in the determinants of demand.
SUPPLY

The amount of good or service that consumers are both willing and able to offer for sale all
possible prices in a given time period, ceteris paribus; a relationship, not a point
• Determinants of Supply
– Technology
– Cost of Production
– Number of Sellers
– Price Expectation
– Price of Related Goods
• QUANTITY SUPPLIED (Qs) - how much of a good or service a seller is willing to offer at a
single specified price, in a given market, at a given time ; ceteris paribus, a point not a
relationship.
• LAW OF SUPPLY – positive relationship between Qs and Price, ceteris paribus; sellers are
willing to produce more at a higher price
• SUPPLY CURVE - upward sloping curve
• Change in S – rightward (increase in S) or leftward (decrease in S)

Change in quantity supplied showing an increase in price from 2 to 4. The increase in price
increases quantity supplied from 2 to 4

• CHANGES IN Qs – refers to a change in the amount along the supply curve due to a change in
own P.
 Change in supply showing the shifting of supply curve to the right if there is an increase
in supply and to the left if there is decrease in supply. The movement of the supply curve are
cause by changes in the determinants of supply.
POINT of EQUILIBRIUM

ELASTICITY
- measure of responsiveness of Qd or Qs to changes in P, income etc.; percentage change
in Q in response to a 1% change in Price
• PRICE ELASTICITY OF DEMAND (Ed) – measures the responsiveness of demand to
changes in the commodity own price; measures the percentage change in the quantity demanded
resulting from 1% change in Price.
• Point elasticity method – measures the elasticity at only one point on the demand curve
• Arc elasticity method – measures in the elasticity between two separate points on the demand
curve; Ed = ( Qd/ P)*(average P/average Qd)
Types of Elasticity
If |E|= 0 then perfectly inelastic (i.e. the curve is vertical , so Qd does not change as P
change
If |E| < 1, then inelastic (i.e. D is relatively insensitive to small P changes)
If |E| = 1, then uni elastic
If |E| > 1, then elastic (i.e. relatively sensitive to small P changes)
If |E| = ∞ , then perfectly elastic (i.e. D curve is horizontal, so consumers are willing to
buy all at a particular P and none at any other prices)