Foundations in Aquaculture Economics

1. Foundations in Aquaculture Economics Dr. Craig Kasper

2. 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

3. The Next Few Weeks… We will focus heavily on Aquaculture Economics… • introduction to economics • business planning/financial analysis • marketing

4. 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!

5. Foundations of Agriculture Economics • Production methods in agriculture have changed dramatically. • How??

6. Ag. Econ Intro. • Aquaculture is no stranger to this either (ponds, raceways, cages, recirc, etc.) • Managers of today’s farms must be efficientandknowledgeable 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.

7. 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.

8. 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!

9. 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).

10. “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!”

11. 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.

12. 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!

13. 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!

14. 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.

15. 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.

16. Production Transform Curve Unattainable A Slope of Curve A2 E2 Investment in Fisheries E1 A1 Attainable Production Possibility Frontier O B2 B1 B Investment in Aquaculture

17. 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.

18. Part 2: Types of Economics • Economics consists of macroeconomicsand 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

19. 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

20. 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

21. 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?)

22. 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

23. 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

24. 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.

25. 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.

26. 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

27. 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

28. 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

29. Market Economy • Competitive market: prices are determined by supply and demand • Pure marketor competitive economy exists when entire market is characterized by supply and demand. • Characteristics: • Consumer rules! and pays more for products in greater demand, less for those in lesser demand; (Full-sized trucks)

30. Market Economy • Resources efficiently allocated and conditions (survival) force producers to be efficient by selling at “market price” (ornamental fish) • 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)

31. 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)

32. Mixed Economic Systems • Most economic systems are neitherplanned (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

33. Part 4: Specific Functions of an Economic System • What to produce? • Organization of production • Output (distribution) • Short-run rationing • Economic maintenance and growth

34. (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)

35. (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

36. (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.

37. (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 overa time period until the next harvest

38. (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

39. 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

40. 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

41. 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

42. 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?)

43. 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

44. 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

45. 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)