Agriculture Reference
In-Depth Information
habits may shift as incomes fall. Managers of food companies follow such developments
very closely.
Microeconomics
is the application of basic economic principles to decisions within the
fi rm. Every agribusiness faces tough questions when it comes to allocating its limited
resources. Managers must decide the best way to use physical, human, and fi nancial resources
in the production and marketing of goods and services to meet customers' needs and gener-
ate a profi t. Tools of economic analysis are essential to the manager who must make daily
business decisions. In fact, most of the management tools developed in this topic are based
on fundamental microeconomic concepts.
The successful agribusiness manager must assemble a variety of different types of
information, and then use that information effectively to make the best possible decisions for
the short- and long-run fi nancial health of the fi rm. A few years ago, if a fi rm made less
profi t, it might mean the fi rm's management had used poor judgment. In today's extremely
competitive marketplace, a poor decision may lead to failure of the fi rm.
Thus,
economics
studies how individuals, fi rms, and society choose to combine scarce
resources (land, labor, capital, and management) to satisfy unlimited wants and best
meet consumer needs. These four scarce resources are often referred to as the
factors of
production
, each of which must receive a payment or return. For example, labor is paid
a wage, while management typically receives a salary. Likewise, returns to land are often
referred to as rent and returns to capital are represented by interest payments. The way
market forces work to allocate returns to these factors is at the heart of a capitalistic
economy.
Our topic assumes that most students have some understanding of economics (although a
review of your microeconomics may prove helpful). Yet many students fi nd economic
concepts diffi cult to understand. In part, this is due to examples used in economic classes;
just what is a widget? In part, it arises because of confusing terminology and jargon. For
example, inputs, factors of production, and resources all refer to the same thing.
As such, the goal of this chapter is not to review a student's knowledge of economics.
Rather, in
Chapter 2
we highlighted the importance of gathering information and facts when
making decisions. A professional manager understands and uses economic concepts to inter-
pret information, both to assess the broader marketplace, and to improve the effectiveness of
their decision-making. Thus, in this chapter we will look at three key economic concepts and
explain their relevance for agribusiness managers. We consider profi t, supply and demand,
market equilibrium, price, income, and cross price elasticities.
Profi t
Profi t is a term used by both accountants and economists. However, accounting profi t and
economic profi t are different. The accountant looks at
accounting profi t
as the net income
that remains after all actual, measurable costs are subtracted from total revenue. Accounting
profi t is used as a performance measure about fi rm success. The economist agrees with the
accountant that actual costs must be considered. Economists, however, go further to calcu-
late
economic profi t
by also examining the opportunity costs of alternative uses for resources
within the fi rm. As such, economic profi t provides insights about the long-run potential for
an industry. If economic profi ts are positive, more fi rms will enter. If economic profi ts are
negative, some fi rms will choose to exit the market to fi nd more appealing (i.e., profi table)
ventures. Thus, the key to understanding the difference between accounting and economic
profi t begins by classifying costs as being explicit or implicit.
