Agriculture Reference
In-Depth Information
3
Economics for agribusiness
managers
Objectives
•
Explain the differences between accounting and economic profi t
•
Understand how supply and demand interact to determine market equilibrium
•
Learn what causes market equilibrium to shift
•
Explain how agribusiness managers use price, income, and cross price elasticity of
demand
Introduction
In the fi rst two chapters, we outlined the importance of the agribusiness sector and discussed
what it means to be a manager. It is also important to understand that agribusiness fi rms
operate within a broader economic environment. To be effective decision-makers, agribusi-
ness managers must understand the economics of the world in which they operate. Economic
principles are useful to predict business trends and serve as the basis for many management
decisions. The study of economics includes two different areas: macroeconomics and
microeconomics.
Macroeconomics
focuses on the “big picture” view of the economic system. If you have
taken a course in macroeconomics, you have studied topics like national income, gross
domestic product, infl ation, unemployment, and interest rates. The Federal Reserve System,
or “the Fed,” can affect the economy by changing monetary policy, which focuses on
interest rates and the supply of money to the economy. Likewise, Congress can impact the
economic system through fi scal policy, which includes government spending and taxing
programs.
Agribusinesses are greatly affected by macroeconomics because global demand for
various food and fi ber products is constantly changing. General economic conditions are
infl uenced by such factors as weather, government policies, and international developments.
Macroeconomics is concerned with how the different elements of the total economy interact.
An individual fi rm has relatively little impact on the total economy. However, skill at
anticipating and interpreting the macroeconomic environment is critical to the success of
any agribusiness manager.
For example, the Fed may use monetary policy to raise interest rates to fi ght infl ation.
Since interest rates have an important impact on purchases of tractors, combines, and other
farm machinery, so farm equipment manufacturers pay close attention to interest rates. Food
consumption patterns are also affected by the economy's health. In a boom period, more
expensive, luxury food items may sell well. However, during a recession, food purchasing
