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Introduction to Agricultural and Natural Resources

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Title: Introduction to Agricultural and Natural Resources


1
Introduction to Agricultural and Natural Resources
  • Introduction to Production and Resource Use
  • FREC 150
  • Dr. Steven E. Hastings

2
Introduction to Production and Resource Use
  • This Outline Covers the First part of Chapter 6
    in Penson et al.
  • Major Topics
  • Production Decisions
  • Types of Resources
  • The Production Function TPP, AVP and MPP
  • Impact of Technology
  • Value Relationships
  • Firms Demand for an Input
  • An Application of Eqi-marginal Return
  • Summary

3
Important Concepts
  • Production Decisions
  • Important Concepts
  • Production the process of transforming
    resources into goods and services (again, soil to
    corn flakes)
  • Resources - inputs (land, management, capital,
    etc.)
  • Goods and Services provide satisfaction to
    consumers
  • Important Questions
  • What to produce? How to produce? How much to
    produce?

4
  • Types of Resources (Inputs)
  • Many ways to distinguish resources.
  • By type land, labor, capital and management.
  • Fixed and Variable this distinction is based
    on the concept of the producers planning
    horizon, which varies by producer and/or good or
    service.
  • A fixed input can not be changed in the
    short-run.
  • A variable input can be changed in the short
    run.
  • In the long-run all inputs are variable.

5
  • The Production Function
  • A model that represents the physical
    relationship between inputs (fixed and variable)
    and output.
  • Mathematically Yf(X1 / X2, X3Xn held
    constant)
  • Verbally Y is the maximum amount of a good that
    can be produced with increasing amounts of X1
    holding all other inputs, X2, X3Xn, constant
    given a state of technology.
  • Graphically see Table 6-1 and Figure 6-1

6
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7
The Production Function
8
  • Product Curves
  • Total Physical Product (TPP)
  • Average Physical Product (APP) TPP/X1
  • Marginal Physical Product (MPP)
  • ? TPP / ? X1
  • In a normal shaped production function, MPP
    captures the Law of Diminishing Marginal
    Productivity as additional amounts of a
    variable input are added to a set of fixed
    inputs, the MPP will increase, reach a maximum,
    and then decrease.
  • Mathematically, MPP is the slope (rise over run)
    of the TPP.

9
  • Stages of Production (I, II and III) the APP
    and MPP allows us to start to narrow in on the
    optimum amount for the producer to produce.
  • Stage I - APP is increasing (efficiency is
    increasing) and MPP gt APP (getting more from an
    additional unit than the average unit).
    Irrational to produce in this area can increase
    net revenue by moving to Stage II.
  • Stage II - APP gt MPP and MPP is positive.
    Rational area to produce in.
  • Stage III - MPP is negative. An additional input
    reduces TPP. Irrational to produce in this area.

10
Stages of Production
11
  • Effect of New Technology
  • New technology shifts the production function
    in a variety of ways. See Figures 3-2 and 3-3
    (old book).
  • Typically, allows producer to get more output per
    unit of input over at least some range of
    production.
  • Examples
  • the assembly line for car production (1908)
  • new seed varieties The Green Revolution (1945)
  • new pesticides and herbicides
  • robotic welders

12
Impact of New Technology
13
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14
  • Value Relationships
  • Physical values (bushels of corn, for example),
    allow you to identify a range of possible optimal
    input levels Stage II.
  • To identify the exact amount, need to convert the
    output (bushel of corn) to dollar value of the
    output (the value of a bushel of corn).
  • This is done by scaling (or multiplying) TPP, APP
    and MPP by the price of a bushel of corn what a
    bushel of corn can be sold for in the market.
  • This converts
  • TPP to Total Value Product or TVP.
  • APP to Average Value Product or AVP, and
  • MPP to Marginal Value Product or MVP.
  • TVP, AVP and MVP are Dollar Values ()
  • See Table 6-5 and Figure 6-6.
  • For graphing purposes, the vertical axis is now
    in Dollars.  

15
Value Relationships
Correction 5 is 3 4 In Table 6-5.
16
  • Most Useful Concept
  • Marginal Value Product (MVP) - the amount added
    to "revenue" when an additional unit of the
    variable input is used.
  • MVP ?TVP / ?X1 change in the value of output /
    unit change in input or
  • MPPinput Poutput
  • One Final Thing The Cost of the Input
  • Marginal Factor Cost (MFC or MIC) measures the
    addition to total cost of an additional unit of
    an input.
  • MFCinput is equal the market price of the input.

17
  • Optimum Amount of a Variable Input to Use
  • Then optimum amount of a variable input is being
    used when 
  • MVPinput MFCinput
  • The cumulative net benefit (the total revenue
    over the total cost of using the variable input )
    is maximized!
  • See Table 6-5.

18
  • A Firms Demand for a Variable Input
  • It is the quantity of an input the firm would
    buy at alternative prices.
  • Specifically, the firm's demand curve for an
    input is the MVP curve (within Stage II of
    production), ceteris paribus.
  • The firm's demand for an input is a derived
    demand. That is, it is derived from the demand
    for the output produced by the input.
  • Factors that cause the demand for an input to
    change are
  • Change in demand (and price ) of the output
  • Change in the productivity of the input
  • Change in the price of other inputs (substitutes
    and complements)

19
Firms Demand for an Input
20
An Application of the MVP Concept
  • Use of a Resource to Benefit Society
  • The fixed amount (1 million gallons) of water in
    a reservoir can be used to irrigate corn on a
    nearby farm or as a coolant in a nearby plant
    that makes Xs (any product).
  • You are hired by society and put in charge of
    allocating the water?
  • How should the water be allocated between the two
    uses?

21
Information Needed
  • If water used to grow corn -
  • If water used to make Xs -

22
Flip the Right Graph!


  • Water to Farm
  • Water to Plant
  • What is the
    optimum allocation? Why?

23
Principle of Equi-marginal Returns
  • Principle of Equi-marginal Returns a scarce
    resource should be allocated between alternative
    uses so that the marginal returns (in this case,
    MVPs) are equal in the alternative uses.
  • What if local environmentalists want to keep the
    water in place for aesthetic purposes? What
    about fisher-men, -women?
  • What are the implications for how society should
    allocate scarce resources?
  • Land?
    Cars?
  • Water? gtgtgt gtgtgt TVs?
  • Forests?
    Food?

24
Introduction to Production and Resource Use
  • Summary
  • The combination of physical and value (dollar)
    relationships between inputs and output allows
    us to make fundamental decisions regarding
    resource use and allocation in our economic
    system.
  • Lecture Sources Text and Miscellaneous Materials
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