Agricultural household models Flashcards
why is agriculture important in agriculture
David Ricardo 1817
- food
- raw materials
- supports investment in other sectors (savings and tax revenue)
- industrialisation
- increases the demand for other products
why is agriculture important in agriculture
Simon Kuznets
- product contribution = without marketable surplus = food prices rise, increase wage bill, reduce profit, slow capital accumulation
- market contribution = provides demand for other sectors
- factor contribution = agriculture supplies labour and capital by savings and taxation
evidence that supports agricultural growth is important for poverty reduction
- reduces food prices
- increase farm employment - Mellor 10% output = 3-6% employment increase
- increase in nonfarm employment = multiplier effect - reduced imported foods = more local jobs
world bank quote on poverty
argicultre GDP growth is 2 times as effective in reducing poverty
- main driver on reducing poverty in low and middle income countries
- increasing crop yields by 10% recuses the number of African people living on less than 1 dollar a day by 9%
what is the neoclassical theory on farm production goal
to maximise profits
farmer is the individual decision maker - can vary inputs and outputs
what is profit maximising like in neoclassical farm model
produce where Marginal Value Product MVP = Marginal Factor Cost
- the marginal return of output = the marginal cost
what will happen if price of output increases in neoclassical farm model
farmers produce more
they consume less
make greater profit
why is the neoclassical farm model not a good model
- not a true reflection of agricultural hhs
- doesnt consider they are jointly engaged in consumption and production
- not always their goal to maximise profits
- tell from agricultral hh characteristics - profit maximisation is not their main goal
what are the characteristics of farm housholds
70% of population in developing countries are farm hhs
- dual nature = producer and consumer
- derive livelihoods from agriculture
- use family labour
- partial engagement in markets = only proprtion of output is sold - self provision in inputs - prices have seasonal cycle
- community = mutual insurance - can hold back entrepreunership
what is the Chayanov model
- achieves more accurate represenatation of hh = dual nature
- its predictive power relies on the demographics of the hh
- explains decisions wrt the amount of family work supplied and income required to meet consumption
- hhs care more about utility from leisure than income
who does the Chayanov model help explain
- net surplus family farm
- subsistence hh farm
- sharecropper farms
doesnt explain
- big commercial farms - dont consume their output and rarely supply their own inputs
what are the assumptions needed for chayanov model
no market for labour
farm output can be kept or sold
access to land
minimum level of consumption
explain the graph Chayanov
TVP
IC
Subjective wage level
- production function = diminishing = response of output to varying input
- locus of leisure and income that give the same utility levels
- slope of IC = the subjective wage level = determined by family size = can very across hhs
- Marginal utility of leisure and income tends to 0 = maximum labour and minimum consumption
at what levels do they produce at chayanav
when MPL = Subjective wage rate
what happens when increase the number of children in hh
- the number of workers and production function stay the same
- minimum consumption constraint rises
- IC becomes shallower = MUL/MUY - they get more happiness from extra income = more mouths to feed
- will accept smaller rise in income to compensate for loss of leisure
- subject wage decreases = self exploitation
what happens to Chayanov model when introducing labour market
- hire labour in or out
- level of farm output is not determined by subjective wage anymore - determined by profit maximisation with respect to wage rate
- when IC is above profit maximising optimum = hire out
- when IC is below = hire in
why is chanaynov a bad predictive model
only preductive power is on family size
- what about response to factors that affect PF
what is the barnum and squire model
predicts responses of hh to changes in domestic and market variables such as ouput price, input price, wage rate, technology
weakness of barnum and squire
Assumes competitive market
but developing countries dont live in environments with competitive markets
assumptions needed for b and s
market for labour
land is fixed
home activities combined with leisure
sell and keep output
uncertainty is ignored
recursive = sequentially go through the choices that hhs make
what is the profit effect
when farmers make more profit they feel more richer and can consume more of their own goods
profit effect role in determining the direction and strength of hh responses to changes in input and output prices
what happens when market price of output rises
- price ratio reduces = wage cost line shallower
- rise in output
- rise in full income = more output
- rise in hired labour
- decrease family work
- decrease home consumption = increase in market sales
- OR increase in home consumption = fall in market sales
what is the standard neoclassical approach
- increase in output price
- shallower wage cost line
- more output
- more hired labour
- less family labour
- more income
- reduced family consumption = because price has gone up
- increased market sales
what does fall / rise in marketed surplus depend on
- the shape of the IC
- will they increase or decrease consumption
