Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter Three Economics for Agribusiness Managers - Coggle Diagram
Chapter Three
Economics for Agribusiness Managers
Learning Objectives
1. The differences between accounting profit and economic profit
2. How supply and demand interact to determine Market equilibrium
3. The causes shifts in market equilibrium
4. how agribusiness managers use price elasticity, income elasticity, and cross-price elasticity of demand
Introduction
Agribusiness firms operate within a larger economic environment
Understanding economics is essential for:
Effective decision-making
Predicting business trends
Supporting management strategies
Economics is divided into two key areas:
Macroeconomics
Key topics include:
National income
Gross Domestic Product (GDP)
Inflation
Unemployment
Interest rates
the broader economy —focuses on the “big picture” of the economy
Key Influencers in Macroeconomics:
Monetary policy – controlled by the Federal Reserve (the Fed)
Adjusts interest rates and money supply
Fiscal policy – controlled by Congress
Involves government spending and taxation
Microeconomics
– individual firms and markets/ applies economic principles to day-to-day business
decisions within a firm.
Agribusiness managers must allocate limited resources:
Physical, human, and financial
Goal: Meet customer needs and generate profit
Importance for Managers:
Economic analysis is essential for making informed decisions
Poor decisions in today’s competitive markets can lead to firm failure
Most management tools in this book are built on microeconomic concepts
Economics and Resource Use:
Economics studies how individuals and firms allocate scarce resources:
Land → earns rent
Labor → earns wages
Capital → earns interest
Management → earns salary
Profit
Two Types of Profit
Accounting Profit:
Net income = Total revenue – Explicit (measurable) costs
Used to assess firm performance
Economic Profit:
= Accounting profit – Implicit (opportunity) costs
Considers alternative uses of time, money, and resources
Indicates the long-term attractiveness of a business or industry
Types of Costs
Explicit Costs: Actual payments (wages, materials, utilities)
Implicit Costs: Opportunity costs of using owned resources (e.g., rent-free
property, unpaid labor, invested capital)
The Profit Motive
Acts as the driving force in a free market economy
Encourages:
Innovation
Efficiency
Risk-taking
Cost control
Ultimately aims to satisfy consumer demand
The Economics of Markets
Basic Concepts
Supply: Quantities producers are willing to sell at various prices over time
Law of Supply: As price ↑, quantity supplied ↑ (direct relationship).
Demand: Quantities consumers are willing to buy at various prices over time.
Law of Demand: As price ↑, quantity demanded ↓ (inverse relationship).
Market Representation
Tables (Schedules)
Graphs (Curves)
Equations (Functions)
Market Equilibrium
• Occurs where quantity supplied = quantity demanded
Inventory as a Signal
• Surplus (e.g., P = $35, Q supplied > Q demanded): signals price is too high
• Shortage (e.g., P = $25, Q demanded > Q supplied): signals price is too low.
Equilibrium (e.g., P = $30): no build-up or shortage; market is balanced.
Supply Shifters (6 Determinants of Supply)
1. Technology—increases productivity (shift right).
2. Input Prices – Higher costs shift supply left.
3. Weather—Droughts reduce supply (left); good weather increases (right).
4. Price of Other Products—Farmers switch crops based on profitability.
5. Taxes/Subsidies—Taxes reduce supply; subsidies increase it.
6. Number of Suppliers—More suppliers = more supply (right shift).
Demand Shifters (5 Determinants of Demand)
1
Income – More income = more demand for normal goods.
2. Tastes & Preferences—Influenced by trends, media, diets, etc.
3. Expectations – If prices are expected to rise, demand increases now.
4. Number of Buyers –Larger market = more demand
5.Prices of Substitutes/Complements
o Price drop in substitute = ↓ demand
o Price drop in complement = ↑ demand
Elasticities of Demand
Three Types of Elasticity
1. Price Elasticity of Demand (PED)
Perfectly Inelastic Demand (PED = 0)
Inelastic Demand (0 < PED < 1)
Unit Elastic Demand (PED = 1)
Elastic Demand (PED > 1)
Perfectly Elastic Demand (PED = ∞)
2. Income Elasticity of Demand (YED)
Negative Income Elasticity (YED < 0)—Inferior Goods
Zero Income Elasticity (YED = 0) — Income-Neutral Goods
Positive Income Elasticity (YED > 0) — Normal Goods
3. Cross-Price Elasticity of Demand (XED)
Positive Cross-Price Elasticity (XED > 0) — Substitutes
Negative Cross-Price Elasticity (XED < 0) — Complements
Zero Cross-Price Elasticity (XED = 0) — Unrelated Goods
Managerial Application
Helps agribusiness managers:
Forecast consumer responses
Optimize pricing decisions
Understand market positioning
Key Factors Affecting Elasticity of Demand
Availability of Substitutes
Nature of the Good
Proportion of Income
Time Period
Habitual Consumption
Definition of the Market
Durability of Goods
Brand Loyalty
Necessity vs. Luxury
Complementarity/Substitutability