Foundations in Aquaculture
Economics
Dr. Craig Kasper
Outline
• Objectives: provide a basic understanding of
the microeconomic factors which influence farm
establishment, production and sales of aquatic
products
• Application of economic principles to a practical
setting
The Next Few Weeks…
We will focus heavily on Aquaculture
Economics…
1) introduction to economics
2) business planning/financial analysis
3) marketing
Foundations of Agriculture
Economics
• Let’s face it. Our complex world always changes!
• Globalization, industrialization, and mechanization has all
contributed to convenience and speed that only Danica
Patrick could appreciate!
Foundations of Agriculture
Economics
• Production methods in agriculture have changed
dramatically.
• How??
Ag. Econ Intro.
• Aquaculture is no stranger to this either (ponds,
raceways, cages, recirc, etc.)
• Managers of today’s farms must be efficient and
knowledgeable with respect to economic,
marketing, and financial issues.
• To be competetive, you must think and act
globally.
• Aquafarmers must master technical aspects of
production and economics to survive in today’s
world.
Understanding Economics
• By understanding how your resources can be used to
satisfy the needs and desires of people, you can
appreciate economics.
• We must be aware of individual consumers and
producers needs.
• All our resources are finite!
• Most goods and services are also finite– hence, the
continuing need for “green” technology devleopment.
Scarcity: The Bottom Line
• Scarcity: finite resources cannot supply
all the goods needed to satisfy affluence
(lust).
• REM: If we had it all, no one would be
interested in use of resources (or anything
Gore, Obama or anyone else has to say).
• Guess what? If scarcity doesn’t exist,
everything is free!
To Avoid Scarcity…
• Allocation: partitioning something, and/ or
providing an alternative use
• “Best use” must agree with individual and
social objectives
• Scarce resources must be partitioned
between competing uses (fish meal: swine,
chicken, aquaculture).
“Choose, but choose wisely…” (Knight, Indiana Jones and the Last Crusade)
• It’s nearly impossible to placate all your desires,
you must choose.
• Even if human action was rational, you would
likely satisfy your wants before your needs
(impulse).
• Choice is fundamental to economics
• “I don’t have time to go cut the weeds at the ponds,
I’d better go feed the fish!”
Choose…
• Thus, when you don’t want to do something, you generally choose to
do something you like instead (shopping or fishing vs. homework or
studying for exams).
• Time is also finite! One must choose how to spend it (Human
nature??) 1440 Rules!!
• We have the greatest freedom on how we spend our income (and that
isn’t much freedom).
• For example: Manager asks “How much do I invest in technology vs.
How much do I save for a rainy day?”
• Also: people often say they cannot afford to buy something when
they really mean they prefer to buy something else.
Goals
• Goals: ends, or objectives may seem infinite
• We must prioritize to achieve them.
• Thus, economics might be viewed as the science of choice-making.
• It considers allocating finite resources between competing
alternatives!
Homework Assignment #2
As potential aquaculturist, make a short list
(10 items) of resources and what are some
competing alternatives (i.e., how else could
you use these resources)?
Due next week!
How to Achieve a Goal: Scale of Preference
• Rem: Economics assumes we are rational and make
equally rational decisions!
• However, we usually make the one yielding the
greatest satisfaction!
• Implies all have our own preference scale!
• Preference scale: A list of unsatisfied wants arranged
in order of preference.
Scales of Preference
• Example: Buy feed and/or chemicals?
• Oops! We have a budget!
• Example: What if we throw in politics? Deciding
between funding a large-scale fisheries project vs. a
large-scale aquaculture project?
• Reality: You may find that your decision must be
made among an infinite number of combinations, not
just two alternatives.
Production Transform Curve
Investment in Fisheries
Unattainable
A
Slope of Curve
A2
E2
E1
A1
Attainable
O
Production
Possibility Frontier
B2
B1
Investment in Aquaculture
B
Opportunity Costs
• Since the production transformation curve
slope is concave downwards, it illustrates the
cost of increasing the expenditure on one
commodity in terms of sacrificing
consumption (purchase) of other goods
• It is the value of one item in terms of the other
(opportunity cost)
• Opportunity cost: money lost by producing
item A instead of item B.
Part 2: Types of Economics
• Economics consists of macroeconomics and
microeconomics
• Microeconomics (Micro-): the study of specific
economic units that make up an economic sector.
• Focus is on a single unit (or an aggregation of units),
always part of a whole
• Studies individual farms, their relationships to each
other, and to the industry (economy) as a whole
• Macroeconomics (Macro-): entire
economy is considered.
• How does an economic system deal with
inflation, depression and unemployment.
• Example: Issues in aquaculture relative to
the rest of the economy
• Macro-: forest; micro-: trees
Macro- Tools
• Macro- says whether (or not) a country is progressing
towards satisfying its population’s diverse needs
• Therefore, must know the volume of goods and
services that can be produced
• Example: GNP, gross national product
• GNP = total market value of goods/services produced
by a country’s economy in one year, including unsold
inventories
Positive and Normative
Economics: an insight
• The logic of economics is intended to be used to analyze
problems of individual and social significance
• Theory is of no value if it does not lead to useful analyses of real
problems
• Policy decisions: recommendations for the best solution
• The best policy solution for a given problem will depend upon
the goal of the decision makers
• Economists are not the decision makers, politicians are...
(hmm…problem?)
Positive Economics
• Positive Economics: describes the manner in which the
economic unit functions
• It deals with the “what is”, apart from value judgements about
“what should be”
• Positive economics describes the functioning of a firm without
attaching statements of good or bad (it worked, or it did
not...very black and white!)
• Disagreements are resolved by logical thought and by appealing
to the facts
Positive Economics
• Economists may study the properties of a particular
market - how prices and quantities are determined, the
nature of the buyers and sellers, efficiency of the market.
• Disagreements are likely.
• However, differences can be resolved by acquiring more
information on the market (data driven)
• Appearing on TV, blasting the other economist, making
value judgements falls in the realm of normative
economics
Normative Economics
• Normative economics is prescriptive (rigid, dictatorial)
• “What oughta be” and not “what is.”
• Example:
Imagine a scenario in which manufacturing jobs are being
lost while jobs in the fields of nursing and computer
programming are being gained. An economist or politician
may claim that the loss of the particular class of jobs in
manufacturing erodes the "foundation" of a country.
Normative Econ.
• Disagreements in normative economics
generally cannot be resolved by an appeal to the
facts.
• Why? Different premises between economists.
• Everyone has varying preferences derived from
many philosophical, social, and cultural
backgrounds.
• Hence: We all have our own set of goals, so do
firms.
Positive and Normative
Economics
• Positive economics can make important
contributions to normative matters because of its
descriptive nature (Using the facts, no way?!?)
• Positive economics identifies and quantifies the
relationships with individual economic units, such
as farms.
• It serves as a basis for making normative
judgements, and comparing one economic policy
to another
Part 3: Economic Systems
• Economic systmes (types) are based on the method of
resource allocation
• Political systems ≠ economic systems
• Judged by which system produces the highest “standard of
living” available that resources and technology will permit
• Insures that the benefits of producing certain types of goods
and services are available to maximize welfare
• example: Figure 2-2, Jolly and Clonts, p30
Simplified 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 Economy
•
Competitive market: prices are determined by
supply and demand
•
Pure market or competitive economy exists
when entire market is characterized by supply
and demand.
•
Characteristics:
1. Consumer rules! and pays more for products in
greater demand, less for those in lesser demand;
(Full-sized trucks)
Market Economy
2. Resources efficiently allocated and conditions
(survival) force producers to be efficient by selling at
“market price” (ornamental fish)
3. Economic freedom is assured: a pure market
economy requires high level of individual freedom of
enterprise, decisions as to what, how and for whom
items are produced lies in hands of producers
•
Planned economy: opposite of market economy
(supply and demand do not dictate entire market,
price or production)
Can a Market Driven Economy be
Disadvantageous??? Yes!!
Competition can cause managers to attempt
monopolization of markets, fixing prices, false
advertising, etc. (ADM soybeans, SONY
electronics, cars)
The purely competitive market fails to support
technological advances, maximum efficiency not
a group effort. (Not everyone has equal access
either)
Mixed Economic Systems
• Most economic systems are neither planned (what
will be produced, availability) nor purely market
(competitive) economies
• Mixtures of both systems are common!
• Some decisions are made by central gov’t (housing,
infrastructure, public services)
• Gov’t can invest in mining and manufacturing to
maintain control
• Mixed system gov’ts are usually there to insure
proper distribution of income
Part 4: Specific Functions of an
Economic System
1.
What to produce?
2.
Organization of production
3.
Output (distribution)
4.
Short-run rationing
5.
Economic maintenance and growth
(1) What to Produce:
determined by market
• Must know wants and needs of the community and to what
degree they should be satisfied!
• Must have a system of establishing value to the community
and reflects desires: price
• Value determined by price (sometimes)
• Urgency means higher prices!
• This situation tells us what to produce based on a market,
not what ought to be produced. (Positive vs. Normative)
(2) Organization of Production:
organized by price
• Involves drawing resources from industries producing
goods that consumers value less and channeling them
into industries producing goods the community favors
(fish ofal into dog food).
• Also involves efficient use of resources by individual
firms
• Production organized by price
• Inputs used to achieve maximum economic efficiency
(3) Output Distribution:
How big a
piece of the pie do I get??
• Distribution of product is simultaneous with
decisions of what to produce and organization of
production.
• Individuals with higher income obtain larger shares
of product.
• Income distribution depends upon the distribution of
resource ownership.
• Society can impose forced corrections: taxes,
subsidies, institutional changes.
(4) Short-run Rationing: making
supplies last
• Here, the economic system makes provisions for
rationing commodities over the time period during which
supplies cannot be changed
• Known as “short-run” or “market period” rationing
• Supply must be spread over consumers
• Supply must be stretched over a time period until the
next harvest
(5) Economic Maintenance and
Expansion
• Every economy must maintain and expand its
productive capacity
• Maintenance: keeping the productive power operating
through provisions for depreciation (maintaining max
productivity in the face of break-down!)
• Expansion: continuous increase in kind and quantity
of the nation’s resources, together with continuous
technological improvement
Part 5: Aquacultural Economics
• The aquacultural economist applies the analytical models
of traditional economics to aquacultural problems
• Old definition of aquaculture: the science and art of fish
farming
• Sophisticated production techniques, products marketed
all over the world
• Aquacultural inputs and storage are becoming a major
portion of our economy
Aquacultural Economics
• Aqua-economics was originally begun as a study of
costs and returns for ag. farms
• Focused on management problems
• Modern field is composed of specialists who study
marketing, farm management, finance, accounting,
product transportation, farm cooperatives and law.
• Many study more than one aspect
Aquacultural Economics
• Both major areas of economics (micro - and macro-)
have applications in aquaculture
• The problems of production on individual farms are
important
• However, aquaculture is not really independent of
the other areas of the economy!
• Budgetary decisions made by the Federal Reserve
Board send shock waves back through the
agribusiness marketing system to every farmer
Aquaculture Economics
• Aquaculture economics: deals with rearing of
desirable aquatic organisms under controlled
or semi-controlled conditions for economic or
social benefits (cheaper protein).
• Of special concern:
– utilization of scarce resources (land, labor,
capital and management)
– production of aquatic organisms under managed
conditions
– satisfy human want (need?)
Aquacultural Economics
• The logic of economics is not the whole of aquacultural
economics
• To be effective the ag economist must also understand the
biological nature of aquacultural production
• If you study the costs of fish farming enterprises, you must also
understand the technical management problems of animal
husbandry…
• The best practitioners of the art of aquaeconomics are those
who both understand theory and know how to use it in a
practical setting
Goal of Aquaculture Economics
• Widely accepted goal: increase efficiency in aquaculture
• Basic goal: produce fish, shrimp, etc. without wasting
resources!
• To meet this goal, the required output must be produced
with the smallest amounts of scarce resources
• Goal: increasing efficiency, profitability, and efficiency of
resource use in all society
Homework Assignment #3
• Compare the aquaculture industry to that of standard
agriculture
• Choose a type of aquaculture production you might be
interested in (e.g., catfish fingerlings, shrimp postlarvae,
etc.)
• List differences between the two in terms of production
methods, production cycling or scheduling,
environmental influence, etc.
• Prepare this in tabular form (3 columns, several rows)