Economics of Agribusiness
Week 1
Agriculture and horticulture = industries producing agricultural and horticultural products.
Agri-complex / agribusiness (food industry)
● Based on domestically produced raw products
● Based on domestically produced and imported raw products
Value added
● Net versus gross value added by firm or industry
● Net and Gross Domestic Product = national sum of value added
● National Income = GDP corrected for net income earned abroad
Notes
- External effects are not taken into account (e.g. pollution)
- Income is not utility
- Income distribution is not taken into account
- Non-valued production is not taken into account (e.g. raising children)
GDP - capital depreciation = NDP
- Capital depreciation is very hard to determine
Employment
● Source of income
● Source of taxes
Notes
- Working is a way to earn income but often involves negative utility
- Created by subsidies
Balance of payments / balance of trade
● Exports are a source of foreign currencies
● Export balance = exports - imports (often seen as a sign of competitiveness)
Notes
- Income earned with exports is important not the exports as such
- The Netherlands is a large exported but a large share of it concerns re-exports
,Emissions of pollutants
● Greenhouse effects: CO2 (Carbon dioxide), N20 (Nitrous oxide), CH4 (methane)
● Acidification: NOx, nitrogen, oxides, SO2 (Sulphur dioxide), NH3 (Ammonia)
● Eutrophication: N nitrogen & P phosphorus
● Fine dust
Week 2
Firm = organisation that transforms inputs into outputs
Output = grown or manufactured commodities and services
Inputs = factors of production - resources used in production like labour, capital goods,
energy and materials.
Variable inputs = quantity can be adjusted in short run e.g. raw materials
Quasi-fixed inputs = quantity fixed in short run but can be adjusted in long run e.g. family
labour and capital goods or land.
Characteristics of agricultural production
1. Main market form (farm-level) is perfect competition.
a. Individual producers are price takers in input and output markets
2. Farms are too small to do research. Supplied by others (agencies/companies)
3. Time-lag between decision to produce and realised production. Varies by sector.
4. Seasonality of production -> fluctuating output prices and limited operation.
5. Uncertainty
a. Weather risks
b. Diseases and pests
c. Policy
6. Joint production (milk and meat, crop rotation)
Production function
● Production set = all technologically
possible combinations of inputs and
outputs
● Production function = the boundary of the
production set, describing the relation
between inputs x and output y
In case of multiple outputs:
● Distinguish variable and quasi-fixed inputs
● Only scarce inputs & physical outputs considered
,Characteristics production function
● Neoclassical assumptions
○ Continuous / smooth
○ Increasing in inputs
○ Concave in inputs
● Marginal product change in output for a 1 increase in input
● Production elasticity
Economies of scale
● parameter :
○ Increasing returns to scale u > 1
○ Constant returns to scale u = 1
○ Decreasing returns to scale u < 1
Production function
- 2 inputs (capital, labour)
- Concave to the origin
Isoquant
- Convex to the origin
- Slope represents ease of substitution
Marginal Rate of Technical Substitution MRTS
Substitution elasticity
● Measure of the convexity of the isoquant
● By how many percent does the ratio of inputs increase if I increase the MRTS by 1%
○
, Profit maximisation
● Profits = total revenues of output - total costs of inputs
○
● Single input case optimum
○
● Value of Marginal Product = Marginal costs
○ VMP = MC
Multiple inputs and outputs
● Variable inputs X1, X2 etc
● Quasi-fixed inputs Z1, Z2 etc
● Short run optimisation of profits subject to technology constraint (transformation
function) given level of quasi-fixed inputs
○
○ Subject to:
● Optimise over Yj and Xi
○ For given Yj minimise costs (set optimal Xi)
○ Choose the profit maximising level of output
Cost minimisation: 2 inputs
● Costs
● Iso-cost line
● Slope Isoquant
● Minimum costs where iso-cost line is tangent to isoquant
Graphical solution:
Slope of isoquant = Marginal Rate of
Substitution
Week 1
Agriculture and horticulture = industries producing agricultural and horticultural products.
Agri-complex / agribusiness (food industry)
● Based on domestically produced raw products
● Based on domestically produced and imported raw products
Value added
● Net versus gross value added by firm or industry
● Net and Gross Domestic Product = national sum of value added
● National Income = GDP corrected for net income earned abroad
Notes
- External effects are not taken into account (e.g. pollution)
- Income is not utility
- Income distribution is not taken into account
- Non-valued production is not taken into account (e.g. raising children)
GDP - capital depreciation = NDP
- Capital depreciation is very hard to determine
Employment
● Source of income
● Source of taxes
Notes
- Working is a way to earn income but often involves negative utility
- Created by subsidies
Balance of payments / balance of trade
● Exports are a source of foreign currencies
● Export balance = exports - imports (often seen as a sign of competitiveness)
Notes
- Income earned with exports is important not the exports as such
- The Netherlands is a large exported but a large share of it concerns re-exports
,Emissions of pollutants
● Greenhouse effects: CO2 (Carbon dioxide), N20 (Nitrous oxide), CH4 (methane)
● Acidification: NOx, nitrogen, oxides, SO2 (Sulphur dioxide), NH3 (Ammonia)
● Eutrophication: N nitrogen & P phosphorus
● Fine dust
Week 2
Firm = organisation that transforms inputs into outputs
Output = grown or manufactured commodities and services
Inputs = factors of production - resources used in production like labour, capital goods,
energy and materials.
Variable inputs = quantity can be adjusted in short run e.g. raw materials
Quasi-fixed inputs = quantity fixed in short run but can be adjusted in long run e.g. family
labour and capital goods or land.
Characteristics of agricultural production
1. Main market form (farm-level) is perfect competition.
a. Individual producers are price takers in input and output markets
2. Farms are too small to do research. Supplied by others (agencies/companies)
3. Time-lag between decision to produce and realised production. Varies by sector.
4. Seasonality of production -> fluctuating output prices and limited operation.
5. Uncertainty
a. Weather risks
b. Diseases and pests
c. Policy
6. Joint production (milk and meat, crop rotation)
Production function
● Production set = all technologically
possible combinations of inputs and
outputs
● Production function = the boundary of the
production set, describing the relation
between inputs x and output y
In case of multiple outputs:
● Distinguish variable and quasi-fixed inputs
● Only scarce inputs & physical outputs considered
,Characteristics production function
● Neoclassical assumptions
○ Continuous / smooth
○ Increasing in inputs
○ Concave in inputs
● Marginal product change in output for a 1 increase in input
● Production elasticity
Economies of scale
● parameter :
○ Increasing returns to scale u > 1
○ Constant returns to scale u = 1
○ Decreasing returns to scale u < 1
Production function
- 2 inputs (capital, labour)
- Concave to the origin
Isoquant
- Convex to the origin
- Slope represents ease of substitution
Marginal Rate of Technical Substitution MRTS
Substitution elasticity
● Measure of the convexity of the isoquant
● By how many percent does the ratio of inputs increase if I increase the MRTS by 1%
○
, Profit maximisation
● Profits = total revenues of output - total costs of inputs
○
● Single input case optimum
○
● Value of Marginal Product = Marginal costs
○ VMP = MC
Multiple inputs and outputs
● Variable inputs X1, X2 etc
● Quasi-fixed inputs Z1, Z2 etc
● Short run optimisation of profits subject to technology constraint (transformation
function) given level of quasi-fixed inputs
○
○ Subject to:
● Optimise over Yj and Xi
○ For given Yj minimise costs (set optimal Xi)
○ Choose the profit maximising level of output
Cost minimisation: 2 inputs
● Costs
● Iso-cost line
● Slope Isoquant
● Minimum costs where iso-cost line is tangent to isoquant
Graphical solution:
Slope of isoquant = Marginal Rate of
Substitution
