Foundations in Aquaculture Foundations in Aquaculture EconomicsEconomics

OutlineOutline• Microeconomic factorsMicroeconomic factors• Macroeconomic factorsMacroeconomic factors• EconomiesEconomies• Application of economic principles to a practical Application of economic principles to a practical

settingsetting

The Next Few Weeks…The Next Few Weeks…

We will focus heavily on Aquaculture We will focus heavily on Aquaculture Economics…Economics…

1)1) introduction to economicsintroduction to economics

2)2) business planning/financial analysisbusiness planning/financial analysis

3)3) marketingmarketing

Foundations of Agriculture Foundations of Agriculture EconomicsEconomics

• Let’s face it. Our complex world always changes!Let’s face it. Our complex world always changes!

• Globalization, industrialization, and mechanization has all contributed to Globalization, industrialization, and mechanization has all contributed to convenience and speed that only Danica Patrick could appreciate! convenience and speed that only Danica Patrick could appreciate!

• Production methods in agriculture have changed dramatically. Production methods in agriculture have changed dramatically.

• Aquaculture is no stranger to this either (ponds, raceways, cages, recirc, etc.)Aquaculture is no stranger to this either (ponds, raceways, cages, recirc, etc.)

• Managers of today’s farms must be Managers of today’s farms must be efficientefficient andand knowledgeableknowledgeable with respect to with respect to economic, marketing, and financial issues.economic, marketing, and financial issues.

• To be competetive, you must think and act globally.To be competetive, you must think and act globally.

• Aquafarmers must master technical aspects of production and economics to Aquafarmers must master technical aspects of production and economics to survive in today’s world.survive in today’s world.

Understanding EconomicsUnderstanding Economics

• By understanding how your resources can be used to By understanding how your resources can be used to satisfy the needs and desires of people, you can satisfy the needs and desires of people, you can appreciate appreciate economicseconomics..

• We must be aware of individual consumers and We must be aware of individual consumers and producers needs.producers needs.

• All our resources are finite! All our resources are finite!

• Most goods and services are also finite– hence, the Most goods and services are also finite– hence, the continuing need for “green” technology devleopment. continuing need for “green” technology devleopment.

Scarcity: The Bottom LineScarcity: The Bottom Line

• ScarcityScarcity:: finite resources cannot supply finite resources cannot supply all the goods needed to satisfy affluence all the goods needed to satisfy affluence (lust). (lust).

• REM: If we had it all, no one would be REM: If we had it all, no one would be interested in use of resources (or anything interested in use of resources (or anything Al Gore has to say).Al Gore has to say).

• Guess what? If scarcity doesn’t exist, Guess what? If scarcity doesn’t exist, everything is free!everything is free!

To Avoid Scarcity…To Avoid Scarcity…

• AllocationAllocation:: partitioning something, and/ or partitioning something, and/ or providing an alternative useproviding an alternative use

• ““Best use” must agree with individual and Best use” must agree with individual and social objectivessocial objectives

• Scarce resources must be partitioned Scarce resources must be partitioned between competing uses (fish meal: swine, between competing uses (fish meal: swine, chicken, aquaculture).chicken, aquaculture).

““Choose, but choose wisely…Choose, but choose wisely…” ” (Knight, (Knight, Indiana Jones and the Last Crusade)Indiana Jones and the Last Crusade)

• It’s nearly impossible to placate all your desires, It’s nearly impossible to placate all your desires, you must you must choosechoose. .

• Even if human action was rational, you would Even if human action was rational, you would likely likely satisfysatisfy your wants before your needs your wants before your needs (impulse).(impulse).

• ChoiceChoice is fundamental to economics is fundamental to economics

• ““I don’t have time to go cut the weeds at the ponds, I don’t have time to go cut the weeds at the ponds, I’d better go feed the fish!”I’d better go feed the fish!”

Choose…Choose…

• Thus, when you don’t Thus, when you don’t wantwant to do something, you generally choose to to do something, you generally choose to do something you like instead (shopping or fishing vs. homework or do something you like instead (shopping or fishing vs. homework or studying for exams).studying for exams).

• Time is also finite! One must choose how to spend it (Human Time is also finite! One must choose how to spend it (Human nature??)nature??)

• We have the greatest freedom on how we spend our income (and We have the greatest freedom on how we spend our income (and that isn’t much freedom).that isn’t much freedom).

• For example: Manager asks “How much do I invest in technology vs. For example: Manager asks “How much do I invest in technology vs. How much do I save for a rainy day?”How much do I save for a rainy day?”

• Also: people often say they cannot afford to buy something when Also: people often say they cannot afford to buy something when they really mean they prefer to buy something elsethey really mean they prefer to buy something else

GoalsGoals

• GoalsGoals:: ends or objectives, may seem infinite ends or objectives, may seem infinite

• We must prioritize to achieve them.We must prioritize to achieve them.

• Thus, economics might be viewed as the science of choice-makingThus, economics might be viewed as the science of choice-making

• It considers allocating finite resources between competing It considers allocating finite resources between competing alternatives!alternatives!

• Homework Assignment #2Homework Assignment #2: As potential aquaculturist, make a short : As potential aquaculturist, make a short list of resources and what are some competing alternatives (i.e., how list of resources and what are some competing alternatives (i.e., how else could you use these resources)? Due next week!else could you use these resources)? Due next week!

How to Achieve a Goal: How to Achieve a Goal: Scale of PreferenceScale of Preference

• Rem: Economics assumes we are rational and make Rem: Economics assumes we are rational and make equally rational decisions!equally rational decisions!

• However, we usually make the one yielding the However, we usually make the one yielding the greatest satisfaction!greatest satisfaction!

• Implies all have our own Implies all have our own preference scalepreference scale!!

• Preference scale: A list of unsatisfied wants arranged A list of unsatisfied wants arranged in order of preference.in order of preference.

Scales of PreferenceScales of Preference

• Example: Buy feed and/or chemicals?Example: Buy feed and/or chemicals?

• Oops! We have a Oops! We have a budget!budget!

• ExampleExample: What if we throw in politics? Deciding : What if we throw in politics? Deciding between funding a large-scale fisheries project vs. a between funding a large-scale fisheries project vs. a large-scale aquaculture project?large-scale aquaculture project?

• RealityReality: You may find that your decision must be : You may find that your decision must be made among an infinite number of combinations, not made among an infinite number of combinations, not just two alternatives.just two alternatives.

Production Transform CurveProduction Transform Curve

B2

A1

O

Slope of Curve

Unattainable

E2

E1

A

B

AttainabAttainablele

Investment in Aquaculture

Investm

en

t in

Fis

heri

es

Production Possibility Frontier

B1

A2

Opportunity CostsOpportunity Costs

• Since the production transformation curve Since the production transformation curve slope is concave downwards, it illustrates the slope is concave downwards, it illustrates the cost of increasing the expenditure on one cost of increasing the expenditure on one commodity in terms of sacrificing commodity in terms of sacrificing consumption (purchase) of other goodsconsumption (purchase) of other goods

• It is the value of one item in terms of the other It is the value of one item in terms of the other (opportunity cost)(opportunity cost)

• Opportunity costOpportunity cost: money lost by producing : money lost by producing item A instead of item B.item A instead of item B.

Part 2: Part 2: Types of EconomicsTypes of Economics

• Economics consists of Economics consists of microeconomicsmicroeconomics and and microeconomicsmicroeconomics

• Microeconomics (Micro-)Microeconomics (Micro-):: the study of specific the study of specific economic units that make up an economic sector. economic units that make up an economic sector.

• Focus is on a single unit (or an aggregation of units), Focus is on a single unit (or an aggregation of units), always part of a wholealways part of a whole

• Studies Studies individualindividual farms, their relationships to each farms, their relationships to each other, and to the industry (economy) as a wholeother, and to the industry (economy) as a whole

• Macroeconomics (Macro-)Macroeconomics (Macro-):: entire entire economy is considered.economy is considered.

• How does an How does an economic systemeconomic system deal with deal with inflation, depression and unemployment.inflation, depression and unemployment.

• ExampleExample: Issues in aquaculture relative to : Issues in aquaculture relative to the rest of the economythe rest of the economy

• Macro-: forest; micro-: trees Macro-: forest; micro-: trees

Macro- ToolsMacro- Tools

• Macro- says whether (or not) a country is progressing Macro- says whether (or not) a country is progressing towards satisfying its population’s diverse needstowards satisfying its population’s diverse needs

• Therefore, must know the volume of goods and Therefore, must know the volume of goods and services that can be producedservices that can be produced

• Example: Example: GNPGNP, gross national product, gross national product

• GNPGNP = total market value of goods/services produced = total market value of goods/services produced by a country’s economy in one year, including unsold by a country’s economy in one year, including unsold inventoriesinventories

PositivePositive and Normative and Normative Economics: Economics: an insightan insight

• The logic of economics is intended to be used to analyze The logic of economics is intended to be used to analyze problems of individual and social problems of individual and social significancesignificance

• Theory is of no value if it does not lead to useful analyses of real Theory is of no value if it does not lead to useful analyses of real problemsproblems

• Policy decisionsPolicy decisions: recommendations concerning the : recommendations concerning the best best way way to resolve a problemto resolve a problem

• The best policy solution for a given problem will depend upon The best policy solution for a given problem will depend upon the goal of the decision makersthe goal of the decision makers

• Economists are Economists are notnot the decision makers, politicians are (hmm… the decision makers, politicians are (hmm…problem?)problem?)

PositivePositive Economics Economics

• Positive EconomicsPositive Economics:: describes the manner in which the describes the manner in which the economic unit functionseconomic unit functions

• It deals with the “what is”, apart from value judgements about It deals with the “what is”, apart from value judgements about “what should be”“what should be”

• Positive economics describes the functioning of a firm without Positive economics describes the functioning of a firm without attaching statements of good or bad (it worked, or it did not.)attaching statements of good or bad (it worked, or it did not.)

• disagreements are resolved by logical thought and by appealing disagreements are resolved by logical thought and by appealing to the factsto the facts

PositivePositive Economics Economics

• Economists may study the properties of a particular Economists may study the properties of a particular market - how prices and quantities are determined, the market - how prices and quantities are determined, the nature of the buyers and sellers, efficiency of the market.nature of the buyers and sellers, efficiency of the market.

• Disagreements are likely.Disagreements are likely.

• However, differences can be resolved by acquiring more However, differences can be resolved by acquiring more information on the market.information on the market.

• Appearing on TV, blasting the other economist, making Appearing on TV, blasting the other economist, making value judgements falls in the realm of value judgements falls in the realm of normative normative economicseconomics

Normative EconomicsNormative Economics

• Normative economicsNormative economics is prescriptive (rigid, dictatorial) is prescriptive (rigid, dictatorial)

• ““What oughta be” vs. “what is”What oughta be” vs. “what is”

• Disagreements in normative economics generally cannot be Disagreements in normative economics generally cannot be resolved by an appeal to the facts.resolved by an appeal to the facts.

• Why? Different premises between economists.Why? Different premises between economists.

• Everyone has varying preferences derived from many Everyone has varying preferences derived from many philosophical, social, and cultural backgrounds.philosophical, social, and cultural backgrounds.

• Hence: We all have our own set of goals, so do firms.Hence: We all have our own set of goals, so do firms.

PositivePositive and and NormativeNormative EconomicsEconomics

• Positive economics can make important Positive economics can make important contributions to normative matters because of its contributions to normative matters because of its descriptive nature (Using the facts, no way?!?)descriptive nature (Using the facts, no way?!?)

• Positive economics identifies and quantifies the Positive economics identifies and quantifies the relationships with individual economic units, such relationships with individual economic units, such as farms.as farms.

• It serves as a basis for making normative It serves as a basis for making normative judgements, and comparing one economic policy judgements, and comparing one economic policy to anotherto another

Part 3: Part 3: Economic SystemsEconomic Systems

• Economic systmes (types) are based on the method of Economic systmes (types) are based on the method of resource allocationresource allocation

• PoliticalPolitical systems systems ≠ ≠ economiceconomic systems systems

• Judged by which system produces the highest “standard of Judged by which system produces the highest “standard of living” available that resources and technology will permitliving” available that resources and technology will permit

• Insures that the benefits of producing certain types of goods Insures that the benefits of producing certain types of goods and services are available to maximize welfareand services are available to maximize welfare

• example: Figure 2-2, Jolly and Clonts, p30example: Figure 2-2, Jolly and Clonts, p30

Simplified Economic SystemSimplified Economic System

SPEND MONEY

PROVIDE GOODS/SERVICES

HOUSEHOLDS FIRMS

PROVIDE LABOR,MGMT, SOMETIMES LAND, ETC.

FIRMS PAY THE RENT, PROVIDE WAGES, HOUSEHOLDS GAIN INTEREST, PROFIT

Market EconomyMarket Economy

• A A competitive marketcompetitive market: prices are determined : prices are determined by supply and demandby supply and demand

• PuPure marketre market or or competitivecompetitive economy exists economy exists when entire market is characterized by supply when entire market is characterized by supply and demand.and demand.

• CharacteristicsCharacteristics::1. Consumer rules! and pays more for products in

greater demand, less for those in lesser demand;

Market EconomyMarket Economy

2.2. Resources efficiently allocated and conditions Resources efficiently allocated and conditions (survival) force producers to be efficient by selling at (survival) force producers to be efficient by selling at ““market pricemarket price””

3.3. Economic freedom is assured: a pure market Economic freedom is assured: a pure market economy requires high level of individual freedom of economy requires high level of individual freedom of enterprise, decisions as to what, how and for whom enterprise, decisions as to what, how and for whom items are produced lies in hands of producers items are produced lies in hands of producers

• Planned economyPlanned economy: opposite of market economy : opposite of market economy

Can a Market Economies be Can a Market Economies be Disadvantageous??? Disadvantageous??? Yes!!Yes!!

Competition can cause managers to Competition can cause managers to attempt monopolization of markets, fixing attempt monopolization of markets, fixing prices, false advertising, etc. (Car sales)prices, false advertising, etc. (Car sales)

The purely competitive market fails to The purely competitive market fails to support technological advances, maximum support technological advances, maximum efficiency not a group effortefficiency not a group effort

MixedMixed Economic Systems Economic Systems

• Most economic systems are Most economic systems are neitherneither plannedplanned (what will be (what will be produced, availability) nor purely produced, availability) nor purely marketmarket (competitive) (competitive) economieseconomies

• MixturesMixtures of both systems are common! of both systems are common!

• Some decisions are made by central gov’t (housing, Some decisions are made by central gov’t (housing, infrastructure, public services)infrastructure, public services)

• Gov’t can invest in mining and manufacturing to maintain controlGov’t can invest in mining and manufacturing to maintain control

• Mixed system gov’ts are usually there to insure proper Mixed system gov’ts are usually there to insure proper distribution of incomedistribution of income

Part 4: Part 4: Specific Functions of an Specific Functions of an Economic SystemEconomic System

1.1. What to produceWhat to produce

2.2. Organization of productionOrganization of production

3.3. Output distributionOutput distribution

4.4. Short-run rationingShort-run rationing

5.5. Economic maintenance and growthEconomic maintenance and growth

(1) What to Produce:(1) What to Produce:determined by marketdetermined by market

• Must know wants and needs of the community and to what Must know wants and needs of the community and to what degree they should be satisfieddegree they should be satisfied

• Must have a system of establishing value to the community Must have a system of establishing value to the community and reflects desires: and reflects desires: priceprice

• Value Value determined by price (sometimes)determined by price (sometimes)

• Urgency means higher prices!Urgency means higher prices!

• This situation tells us what to produce based on a market, This situation tells us what to produce based on a market, not what not what oughtought to be produced. to be produced.

(2) Organization of Production: (2) Organization of Production: organized by priceorganized by price

• Involves drawing resources from industries producing Involves drawing resources from industries producing goods that consumers value less and channeling them goods that consumers value less and channeling them into industries producing goods the community favors into industries producing goods the community favors (fish ofal into dog food).(fish ofal into dog food).

• Also involves efficient use of resources by individual Also involves efficient use of resources by individual firmsfirms

• Production organized by priceProduction organized by price

• Inputs used to achieve maximum economic efficiencyInputs used to achieve maximum economic efficiency

(3) Output Distribution: (3) Output Distribution: How big a How big a piece of the pie do I get??piece of the pie do I get??

• Distribution of product is simultaneous with Distribution of product is simultaneous with decisions of what to produce and organization of decisions of what to produce and organization of productionproduction

• Individuals with higher income obtain larger shares Individuals with higher income obtain larger shares of productof product

• Income distribution depends upon the distribution of Income distribution depends upon the distribution of resource ownershipresource ownership

• Improper channeling of resources is self-correctingImproper channeling of resources is self-correcting• Income differences from differences in resource Income differences from differences in resource

ownership are not self-correctingownership are not self-correcting• Society can impose forced corrections: taxes, Society can impose forced corrections: taxes,

subsidies, institutional changessubsidies, institutional changes

(4) Short-run Rationing: (4) Short-run Rationing: making making supplies lastsupplies last

• Here, the economic system makes provisions for Here, the economic system makes provisions for rationing commodities over the time period during which rationing commodities over the time period during which supplies cannot be changedsupplies cannot be changed

• Known as Known as “short-run”“short-run” or or “market period”“market period” rationing rationing

• Supply must be spread over consumersSupply must be spread over consumers

• Supply must be stretched overSupply must be stretched over a time period until the a time period until the next harvestnext harvest

(5) Economic Maintenance and (5) Economic Maintenance and ExpansionExpansion

• Every economy must maintain and expand its Every economy must maintain and expand its productive capacityproductive capacity

• MaintenanceMaintenance: keeping the productive power : keeping the productive power operating through provisions for depreciationoperating through provisions for depreciation

• ExpansionExpansion: continuous increase in kind and : continuous increase in kind and quantity of the nation’s resources, together with quantity of the nation’s resources, together with continuous technological improvementcontinuous technological improvement

Part 5: Part 5: Aquacultural EconomicsAquacultural Economics

• The aquacultural economist applies the analytical models The aquacultural economist applies the analytical models of traditional economics to aquacultural problemsof traditional economics to aquacultural problems

• Old definition of aquaculture: the science Old definition of aquaculture: the science and artand art of fish of fish farmingfarming

• Sophisticated production techniques, products marketed Sophisticated production techniques, products marketed all over the worldall over the world

• Aquacultural inputs and storage are becoming a major Aquacultural inputs and storage are becoming a major portion of our economyportion of our economy

Aquacultural EconomicsAquacultural Economics

• Aquaeconomics was originally begun as a study of Aquaeconomics was originally begun as a study of costs and returns for ag farmscosts and returns for ag farms

• Mainly dealt with management problemsMainly dealt with management problems

• Modern field is composed of specialists who study Modern field is composed of specialists who study marketing, farm management, finance, accounting, marketing, farm management, finance, accounting, product transportation, farm cooperatives and lawproduct transportation, farm cooperatives and law

• Many study more than one aspectMany study more than one aspect

Aquacultural EconomicsAquacultural Economics

• Both major areas of economics (micro - and macro-) have Both major areas of economics (micro - and macro-) have applications in aquacultureapplications in aquaculture

• The problems of production on individual farms are The problems of production on individual farms are importantimportant

• However, aquaculture is not really independent of the other However, aquaculture is not really independent of the other areas of the economyareas of the economy

• Budgetary decisions made by the Federal Reserve Board Budgetary decisions made by the Federal Reserve Board send shock waves back through the agribusiness marketing send shock waves back through the agribusiness marketing system to every farmersystem to every farmer

Aquaculture EconomicsAquaculture Economics

• Aquaculture economicsAquaculture economics, in specific, deals , in specific, deals with rearing of desirable aquatic organisms with rearing of desirable aquatic organisms under controlled or semi-controlled under controlled or semi-controlled conditions for economic or social benefits conditions for economic or social benefits (cheaper protein).(cheaper protein).

• Of special concern are the allocation and Of special concern are the allocation and utilization of scarce resources (land, labor, utilization of scarce resources (land, labor, capital and management) in the production capital and management) in the production of aquatic organisms under managed of aquatic organisms under managed conditions to satisfy some human wantconditions to satisfy some human want

Aquacultural EconomicsAquacultural Economics

• The logic of economics is not the whole of aquacultural The logic of economics is not the whole of aquacultural economicseconomics

• To be effective the ag economist must also understand the To be effective the ag economist must also understand the biological nature of aquacultural productionbiological nature of aquacultural production

• If you study the costs of fish farming enterprises, you must also If you study the costs of fish farming enterprises, you must also understand the technical management problems of animal understand the technical management problems of animal husbandryhusbandry

• The best practitioners of the art of aquaeconomics are those The best practitioners of the art of aquaeconomics are those who both understand theory and know how to use it in a who both understand theory and know how to use it in a practical settingpractical setting

Goal of Aquaculture EconomicsGoal of Aquaculture Economics

• Widely accepted goal: Widely accepted goal: increase efficiency in aquacultureincrease efficiency in aquaculture

• Basic goal: produce fish, shrimp, etc. Basic goal: produce fish, shrimp, etc. without wasting without wasting resources!resources!

• To meet this goal, the required output must be produced To meet this goal, the required output must be produced with the smallest amounts of scarce resourceswith the smallest amounts of scarce resources

• GoalGoal: increasing : increasing efficiencyefficiency, , profitabilityprofitability, and efficiency of , and efficiency of resource use in all societyresource use in all society