AEDE 711

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AEDE 711

• Production and Consumption in Agricultural,
  Environmental, and Development Economics
• Instructor Brent Sohngen
• 322 Agr. Admin
• 688-4640
• Sohngen.1_at_osu.edu
• Office Hours Monday, 1 3p
• Website http//aede.osu.edu/class/AEDE711/sohngen
  /
• TA Yoon Hyung Kim
• Room 244 Agr. Admin
• Kim.1933_at_osu.edu
• Office Hours Friday, 1 3p

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Objectives

• Learn how economics can be applied to
• Everyday problems consumers face
• Production decisions
• Policy analysis
• Get the basics in substantially more detail than
  undergraduate classes.
• Use calculus to solve economic problems
• Learn skills that will be useful in future classes

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Introduction

• Knowledge of economic theory provides a road map
  for
• Understanding how economy operates
• How individuals interact as groups of consumers
  and producers
• Road map describes how a decentralized system of
  resource allocation
• Can result in efficiently allocating limited
  resources
• Ability to understand economic theory and apply
  it to everyday choices
• Will help you understand the choices people make.
• Road map can aid us in addressing practical,
  realistic problems such as
• Environmental degradation
• Cartels
• Dishonest used car salespeople
• Discrimination

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Key Concepts in Economics

• Using resources in one way has an opportunity
  cost of not being able to use them in another way
• For example, opportunity cost of allocating time
  for studying is lost enjoyment of seeing a movie
  instead.
• Resources, including time, are scarce.
• Scarce resources change continuously through time
• E.g., Nonrenewable resources are declining
  renewable resources may increase or decline over
  time Human and physical capital will depreciate
  over time.
• Consumption of outputs (resources) is
  constrained. Prevents complete satisfaction.
• Objective of economics
• Maximize happiness for society as a whole (social
  welfare) subject to limited/scarce resources.
• What do we do in this class Applied Economics
• Combines economic theory with knowledge of
  institutions and environment to address practical
  problems.
• Problem oriented. Typically apply data to solve
  the problem.

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Examples

• How price of oil affects auto production
• Why a large increase in gasoline price results in
  little reduction in demand for gasoline
• Why a cattle rancher will stay in business even
  if she is losing money
• Why a firm with monopoly power can charge a
  higher price for its commodity than a competitive
  firm
• How to design markets for pollution control.
• How to assess the efficiency of alternative
  policies that could achieve the same result.

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Taxonomy of Economics

• Economics may be classified into a number of
  divisions
• Economic philosophy
• Positive and normative
• Major fields
• Micro and macro
• Theoretical and Applied

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Positive and Normative Economics

• Positive economics
• Concerned with what is, was, or will be
• Considers actual conditions that have occurred or
  will occur in an economy
• If two people disagree over positive statements
  in economics
• Should be able to settle their controversy by
  logical thinking and appealing to facts
• For example, the statement A 10 increase in the
  price of gasoline will have no effect on the
  number of vacationers going skiing, is a
  positive statement
• Can be tested by empirical research
• Number of skiers before price hike can be
  compared with number of skiers after
• Normative economics
• Concerned with what ought to be
• Involves value judgmentsstatements about what is
  good and what is bad, what ought to have
  occurred, or what ought to occur in an economy
• If two people disagree over normative statements
• They are disagreeing over value judgments and may
  not be able to reach an agreement
• For example, Only Bohemian residents should be
  allowed to vacation in Bohemia, is a value
  judgment that cannot be tested
• Empirical evidence cannot be used to destroy
  ones belief about the issue

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How will we do economics?

• Build relatively simple models of human behavior
• Consumer Utility theory and implications for
  demand.
• Producer Production theory and implications for
  firms/economy.
• Equilibrium analysis.
• Application of math to solve problems that give
  us insight into the fundamental issues of
  scarcity, constrained maximization, consumption,
  production, equilibriums, and welfare.

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Models

• Economics is based on belief that most behavior
  can be explained
• By assuming agents have stable, well-defined
  preferences
• Make rational market choices consistent with
  these preferences
• Economics is distinguished from other social
  sciences by its general acceptance of this belief
• Reality is simplified in different ways in a
  model
• For example, a map is a simplified model of
  world, but not all information about world can be
  placed on one map

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Models Use Assumptions

• Assumptions are assertions about system/model
  properties that are observable in real world
• Can be evaluated for their degree of realism
• Consider a model of consumer behavior with
  following assumptions
• Consumer is rational and attempts to maximize
  satisfaction (utility)
• Consumer has a fixed level of income
• Commodities (goods and services) vary
  continuously, and utility consumer derives from
  them is measurable
• Consumer has a given set of preferences for these
  commodities
• Commodity prices are constant
• In this model, variablescommodity prices,
  income, and consumer preferencesare assumed to
  influence consumers purchases of commodities
• Called exogenous variables
• Based on economic theory, we can develop a model
  where these exogenous variables cause change in
  other variables
• Called endogenous variables (in this case,
  consumers purchases)

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Scientific Method is Important!
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Economic analysis over time

• Relative emphasis on types of analysis has
  changed over time
• Early economists tried to explain what they saw
  with words and observation.
• Smith, Von Thunen, Ricardo
• During 20th century, economists applied
  mathematical reasoning in earnest
• Paul A. Samuelson, Kenneth J. Arrow, John Nash
• Applied mathematical reasoning to a minimum of
  data
• Later in 20th century, computing costs declined
  dramatically, thus reducing the relative costs of
  answering economic questions with data.
• Fogel, North, Sen, Heckman, McFadden,
• With data from the real world, it is often
  difficult to control for all important variables,
  so statistical applications still have some
  limitations.
• In last 20 years, economists have shown
  increasing interest in using controlled
  experiments to
• Assess fundamental assumptions
• Assess market structures, etc.
• Smith and Kahnemann
• Three apparent streams of analysis
• Mathematical modeling
• Econometric testing with real world data
• Experimental testing with data constructed from
  experiments.

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Tools

• Tools employed for developing theoretical models
  and deriving conclusions are prose, geometry,
  mathematics, and computer programming
• Prose is ordinary language of people in speaking
  or writing
• Geometry alleviated this limitationa picture is
  worth a thousand words"
• Geometry is an excellent tool for describing a
  model with two variables, such as price and
  quantity
• Unfortunately, geometry is limited by its
  dimensions
• Mathematics allows us to enter worlds of higher
  dimensions and explore their vast areas with
  models designed to provide insights into their
  workings
• Provides a more concise way to expressing the
  results.
• Computer programming allows us to solve problems
  when analytical solutions are not possible.