Principles of Agricultural Economics: Markets and Prices in Less Developed Countries (Wye Studies in Agricultural and Rural Development)

334 Pages·1989·3.61 MB·English

by  David Colman

Principles of agricultural economics
WYE STUDIES IN AGRICULTURAL AND RURAL
DEVELOPMENT
Solving the problems of agricultural and rural development in poorer countries
requires, among other things, sufficient numbers of well-trained and skilled
professionals. To help meet the need for topical and effective teaching
materials in this area, the books in the series are designed for use by teachers,
students and practitioners of the planning and management of agricultural and
rural development. The series is being developed in association with the
innovative postgraduate programme in Agricultural Development for external
students of the University of London.
The series concentrates on the principles, techniques and applications of
policy analysis, planning and implementation of agricultural and rural
development. Texts review and synthesise existing knowledge and highlight
current issues, combining academic rigour and topicality with a concern for
practical applications. Most importantly, the series provides simultaneously a
systematic basis for teaching and study, a means of updating the knowledge of
workers in the field, and a source of ideas for those involved in planning
development.
Editorial Board:
Henry Bernstein Director, Wye College External Programme
Allan Buckwell Professor of Agricultural Economics, Wye College
Ian Carruthers Professor of Agrarian Development, Wye College
Dr Johnathan Kydd Lecturer in Agricultural Economics, Wye College
Professor Ian Lucas Principal of Wye College
Other titles in this series
Peasant Economics
Frank Ellis
Extension Science
Niels Roling
Principles of agricultural
economics
MARKETS AND PRICES IN
LESS DEVELOPED COUNTRIES
DAVID COLMAN AND TREVOR YOUNG
Department of Agricultural Economics, University of Manchester
I CAMBRIDGE
UNIVERSITY PRESS
PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE
The Pitt Building, Trumpington Street, Cambridge CB2 1RP, United Kingdom
CAMBRIDGE UNIVERSITY PRESS
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© Cambridge University Press 1989
This book is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.
First published 1989
Reprinted 1990, 1992, 1993, 1995, 1997
Printed in the United Kingdom at the University Press, Cambridge
A catalogue record for this book is available from the British Library
Library of Congress Cataloguing in Publication data
Colman, David.
Principles of agricultural economics:
markets and prices in less developed countries.
David Colman and Trevor Young.
p. cm. - (Wye studies in agricultural and rural development)
Bibliography: p.
Includes index.
ISBN 0 521 33430 6 (hardback)
ISBN 0 521 33664 3 (paperback)
1. Agriculture - Economic aspects - Developing countries.
2. Agriculture prices - Developing countries.
I. Young, Trevor. II. Titles. III. Series.
HD1417.C63 1989
338.1'09172'4-dcl9 88-10297 CIP
Contents
Acknowledgements ix
1 Introduction 1
2 Economics of agricultural production: theoretical foundations 5
2.1 Introduction 5
2.2 Physical relationships 6
2.2.1 The factor-product relationship 1
2.2.2 The factor-factor relationship 13
2.2.3 The product-product relationship 16
2.3 Economic relationships 18
2.3.1 Economic optimum: the factor-product relationship 18
2.3.2 Economic optimum: the factor-factor relationship 19
2.3.3 Economic optimum: the product-product relationship 27
2.3.4 Economic optimum: the general case 28
2.4 Summary points 29
3 Product supply and input demand 30
3.1 Introduction 30
3.2 Product supply 31
3.2.1 The need for a dynamic specification 36
3.3 Demand for inputs 40
3.3.1 The competitive model of input demand 41
3.3.2 Asset fixity in agriculture 46
3.4 Conclusions 47
3.5 Summary points 48
4 Topics in production economics 49
4.1 Introduction 49
4.2 Efficiency of resource use 50
4.2.1 Technical, allocative and economic efficiency 50
4.2.2 * The myth of efficiency' 52
4.3 Technological change 53
vi Contents
4.3.1 Technological change in economic modelling 53
4.3.2 Sources of technological change 59
4.3.3 Adoption and diffusion of new technologies 60
4.4 Risk and uncertainty 64
4.5 Duality 66
4.6 Conclusions 69
4.7 Summary points 69
5 Theory of consumer behaviour 72
5.1 Introduction 72
5.2 The basic relationships 73
5.3 The analysis of consumer choice 76
5.4 Variations in the consumer's equilibrium 81
5.5 Income and substitution effects 85
5.6 Summary points 89
6 Economics of market demand 91
6.1 Introduction 91
6.2 Basic demand relationships 91
6.2.1 The market demand curve 91
6.2.2 The market demand function 92
6.2.3 Shifts in the market demand curve 94
6.3 Elasticities of demand 95
6.3.1 The own-price elasticity of demand 96
6.3.2 Cross-price elasticity of demand 100
6.3.3 The income elasticity of demand 101
6.4 Properties of demand functions 105
6.4.1 Homogeneity condition 105
6.4.2 The Slutsky equation and Slutsky symmetry 106
6.4.3 Engel aggregation 107
6.5 Dynamics in demand analysis 108
6.6 Conclusions 110
6.7 Summary points 112
7 Developments in demand theory 113
7.1 Introduction 113
7.2 ' New' theories of demand 113
7.2.1 Lancaster's model of consumer demand 113
7.2.2 Becker's model of consumer demand 119
7.3 Duality in demand analysis 121
7.4 Conclusions 122
7.5 Summary points 123
8 Equilibrium and exchange 125
8.1 Introduction 125
8.2 The definition of equilibrium 126
8.2.1 Partial vs. general equilibrium 128
Contents vii
8.2.2 Existence, uniqueness and stability of an equilibrium 130
8.2.3 Disequilibrium 132
8.2.4 Interference with equilibrium 134
8.3 Equilibrium in product markets 138
8.3.1 Comparative statics 138
8.3.2 Dynamics 146
8.4 Production and consumption activities within the agricultural
household 152
8.4.1 The theory of the agricultural household 153
8.4.2 The Z-goods model of the agricultural household 163
8.5 Conclusions 164
8.6 Summary points 165
9 Analysis of agricultural markets 167
9.1 Introduction 167
9.2 Degrees of market competition 168
9.2.1 Many buyers and sellers 168
9.2.2 Monopoly 170
9.2.3 Monopsony 181
9.3 Structure and functions of agricultural markets 186
9.3.1 Market institutions 187
9.3.2 Market functions 189
9.4 Simultaneous equilibrium at two market levels 190
9.5 Marketing margins and farm prices 193
9.6 Conclusions 195
9.7 Summary points 196
10 Welfare economics 198
10.1 Introduction 198
10.2 Competitive markets and Pareto optimality 200
10.2.1 The exchange efficiency criterion 201
10.2.2 The production efficiency criterion 203
10.2.3 The top level criterion 205
10.3 Reasons for policy intervention in markets 206
10.4 Welfare criteria for policy choice 209
10.5 Consumer and producer surplus 211
10.6 The problem of the second best 217
10.7 Conclusions 220
10.8 Summary points 221
11 Economics of trade 224
11.1 Introduction 224
11.2 Trade theory 226
11.2.1 Theory of comparative advantage 226
11.2.2 Heckscher-Ohlin theory of trade 232
11.2.3 Yen t-for-surplus 234
viii Contents
11.3 Trade equilibrium with no transport costs 235
11.4 Trade with international transport and handling charges 240
11.5 Terms-of- trade 245
11.5.1 Measuring terms-of-trade 246
11.5.2 Interpreting measures of the terms-of-trade 249
11.6 Trade intervention 253
11.6.1 The effects of imposing import tariff's on trade 253
11.6.2 Non-tariff barriers to trade 255
11.6.3 Reasons for trade in ter ven tion 257
11.7 Conclusions 258
11.8 Summary points 262
12 Food and agricultural policy 264
12.1 Nature and principles of policy 265
12.1.1 The elemen ts of policy 265
12.1.2 Classification of instruments of policy 268
12.1.3 Rules of policy 272
12.2 Analysing the effects of policy instruments 273
12.2.1 Partial equilibrium analysis 273
12.2.2 Classifying the effects of agricultural policy 282
12.3 Economic analysis of selected agricultural policies 285
12.3.1 Export taxes for Thai rice 285
12.3.2 Egypt's wheat procurement and distribution policy 290
12.4 Conclusions 294
12.5 Summary points 296
Notes 298
References 308
Index 314
Acknowledgements
Our warm appreciation is offered to the many colleagues who
attempted to keep us on a straight and narrow path in the preparation of
this book. Derek Ray, at Wye College, deserves particular mention for his
advice on structural and presentational issues. Also at Wye we would like
to thank both Henry Bernstein and Jonathan Kydd for their continual
support and advice. Among our immediate colleagues at Manchester
University, Martin Currie, Noel Russell, Ian Steedman and Colin Thirtle
all made telling and much appreciated responses to drafts of different
chapters of the book. Our thanks are also extended to Hartwig de Haen
at the University of Gottingen and Joachim von Braun at the International
Food Policy Research Institute for their correspondence in connection
with material presented in Chapter 12. Needless to say none of those
mentioned is in any way responsible for any tendencies to stray that the
book exhibits or for any of the errors that we may have committed. We
accept full responsibility for those.
To illustrate the significance of various concepts we have drawn upon
the work of others. The authors and publishers would therefore like to
thank the following who have kindly given permission for the use of
copyright material:
The Controller of Her Majesty's Stationery Office for a table from
Household Food Consumption and Expenditure 1985 \ the International
Bank for Reconstruction and Development for (i) a table from A Survey
of Agricultural Household Models by I. Singh, L. Squire and J. Strauss
(1986), (ii) a table from Agricultural Price Policies and the Developing
Countries by G. S. Tolley, V. Thomas and Chung Ming Wong (1982), and
(iii) a table from World Development Report 1986 \ the International Food
Policy Research Institute for diagrams and tables from The Effect of Food