Agricultural Economics

1
AgEc 301 Agricultural Economics I
Dr. Chris McIntosh Fall 2006
2
Contact Information

• Chris McIntosh
• mcintosh_at_uidaho.edu
• 208-589-4485 (mobile)
• Ag. Science 27

3
Housekeeping

• Discussion of syllabus and course outline
• Attendance policy
• Exams
• Questions?

4
Managerial Economics

• The application of economic theory and methods to
  business decision making.
• Prescribes rules for improving managerial
  decisions
• Describes the economic consequences of managerial
  behavior

5
Managerial Economics
6
(No Transcript)
7
(No Transcript)
8
Decision Making

• To establish appropriate decision rules, managers
  must understand the economic environment in which
  they operate.
• Managerial economics offers a comprehensive
  application of economic theory to decision making.

9
The Theory of the Firm

• The basic model of business behavior
• Profit maximization
• Cost minimization
• Expected value maximization
• Length of run???

10
Value of the Firm

• The value of the firm is the present value of the
  firms expected future net cash flows
• A dollar one year from now is worth less than a
  dollar today
• Future income projections must be discounted

11
Present Value

• The present value of expected profits is simply
  the expected profit stream discounted back to the
  present.

12
Present Value

• The present value formula can be written

or
Where TR is Total Revenue and TC is Total Cost
13
Opportunity Cost

• The interest rate chosen for use in the present
  value formula represents the opportunity cost
  associated with money.
• It may or may not equal prevailing lending or
  savings rates.

14
Managerial Decisions

• Decisions are often made subject to constraints
  imposed by technology, resource scarcity,
  contractual obligations, laws and regulations.
• The basic element of managerial economics is
  constrained optimization

15
Limitations of the Theory

• Do managers optimize?
• Finding the sharpest needle in the haystack
• Do managers satisfice?
• Finding a needle sharp enough to sew with

16
Limitations of the Theory

• Can all decisions be explained by these
  behaviors?
• Utility maximization
• Social responsibility
• Managers may walk a fine line between
  responsibilities to employees, share holders, and
  society

17
Measures of Profit

• Profit is typically defined as the residual of
  sales revenue minus the explicit costs of doing
  business
• Accounting profit?
• Economic profit?

18
Accounting profit

• The typical definition of profit is what we
  call accounting profit.
• Accounting profit does not account for
  opportunity costs

19
Economic Profit

• Economists refine the definition or profit to
  reflect such things as entrepreneurial effort,
  capital, and other resources provided by
  management for which some compensation should be
  provided.

20
Economic Profit

• Includes risk adjusted normal rate of return
• The minimum return necessary to attract and
  retain investment

21
Variability of Profit

• Profits may fluctuate wildly
• Profits are often measured as a percentage of
  sales revenue (called profit margin)
• The normal rate of profit is typically assessed
  in terms of returns on stockholders equity

22
Why do Profits Vary Among Firms?

• Frictional Profit Theory
• Monopoly Profit Theory
• Innovation Profit Theory
• Compensation Profit Theory
• Any or all of the above?

23
The Role of Profits

• Above normal profits serve as a signal that a
  firm or industry should increase production.
• Profits provide an incentive for innovation,
  efficiency, and in the allocation of scarce
  resources.

24
The Role of Business

• Firms exist to serve social needs.
• Provide a combination of goods and services (good
  and bad)
• Bid for resources (land, labor, capital)
• Competes for customer dollars

25
The Role of Social Constraints

• Potential difficulties arise from an
  unconstrained market economy.
• Regulated monopolies
• Anti-trust
• Environmental regulations
• Labor laws
• The fallacy of composition