Key economic concepts

Several concepts will come up repeatedly so we will review them at the outset.  They will also be explained later in context, but it’s a good idea of get familiar with them early.  Economists are always talking about efficiency.  What does this mean and why is it important?

Quite often efficiency and equity are compared. Efficiency or an efficient solution occurs when there is no waste, and when resources are used in the best way possible.  Efficiency also means that if we were to reallocate resources – divide them up differently – we could not improve on the situation. Equity, on the other hand has to do with fairness, and who has access to resources.  Let’s look at efficiency first

The article below has to do with nutrient efficiency – getting the best nutrients to the plant at the right time.  This also translates into economic efficiency because it improves yield and ultimately provides the biggest return to the farmer.

Figure 2: Example of nutrient efficiency and its relationship to economic efficiency

Figure 2-2: Example of nutrient efficiency and its relationship to economic efficiency. Source: http://www.agriculture.com/crops/fertilizers/what-you-need-to-know-about-in-furrow-technology. Permission: This material has been reproduced in accordance with the University of Saskatchewan  interpretation of Sec.30.04 of the Copyright Act.

Any improvement in technology or reallocation of resources or inputs that generates a better solution would be considered to be more efficient.  It means using less input to produce the same amount of output or producing more output using fewer inputs.  In either case, you are getting more for less.

The news article above discusses better ways to ensure plants get the nutrients they need to improve crop yield.  If the value of the output covers the cost of changing nutrient delivery, the outcome is considered more efficient.

The article below can be accessed in full by clicking the link in the resources section.  It talks about grazing efficiency and what it means rangeland protection and cattle production.  Efficiency in this case is about getting the most out of the resource so that it’s not damaged and can continue to provide nutrients for both wildlife and cattle in the long-term.

Figure 2-3: Article from Utah State University regarding grazing efficiency. Source: https://digitalcommons.usu.edu/cgi/viewcontent.cgi?article=3039&context=extension_curall Permission: This material has been reproduced in accordance with the University of Saskatchewan  interpretation of Sec.30.04 of the Copyright Act.

Making the best decision about grazing is complicated and requires knowledge about plants/forage, where it is located, the topography, how much cattle eat and how many animals (both wild and domestic) the ecosystem can support.

Let’s look at the production of gluten free flour to make food for people with Celiac disease (sometimes spelled Coeliac).  Let’s assume that the process of making such food is based on sound economic decisions where resources are combined in a way as to be efficient.  The cost of production is a little higher because the flour has to undergo different processing thus making the price higher.  Consumers who are afflicted by celiac disease must then pay higher prices for their food.  While the process of making the food is efficient, is it fair that celiac people should have to pay higher prices?  Equity – treating people the same – is a difficult issue in economics because there is no mechanism to measure fairness.

The article from New Zealand discusses the fact that all people are not treated the same.  People who must buy gluten-free products must pay more.

Figure 4: Questions of equity arise around higher prices for gluten free products

Figure 2-4: Questions of equity arise around higher prices for gluten free products. Source: http://www.stuff.co.nz/business/money/83102687/coeliac-suffers-hard-hit-by-high-glutenfree-prices. Permission: This material has been reproduced in accordance with the University of Saskatchewan  interpretation of Sec.30.04 of the Copyright Act.

Imagine that the government decided to spread the costs so that gluten free and non-gluten free products costs the same.  That means that buyers of regular bread would pay more and that the price would be the same as the gluten free bread, which would cost less than the current high price.  Would you say this is fair?  It might be fairer for the people with celiac disease, but not for the ones without.  So you can see that adjusting prices doesn’t result in a more efficient solution, it serves only to reallocate resources.  When you take from one group and give to another, you don’t change the total outcome, only the distribution.  What’s fair for one group is unfair for another.

For reasons listed above, the study of economics is generally concerned with efficiency.  It is possible to estimate efficient outcomes, and to determine who pays more or less and the amount. When it comes to saying who “should” pay more or less, the matter is left to public policy where social objectives might have more to do with equitable distribution than efficient production.

Provide one example of an efficient outcome versus an equitable outcome.

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Very closely related to efficiency and equity is the idea of positive and normative economics.  Positive economics has to do with “what is;” it is objective and focuses on facts and measurements.  We can say there are 430,000m ha of land under cultivation.  We can say the cost of building a new dam is $1.6 billion. Normative economics has to do with what “ought” to be; we should do this or that, and is subjective.  It also means that people are not going to agree, that arguments are generally based on value judgements and that arguments cannot be settled.

A normative statement would be, “There are 430,000m ha of land under cultivation but it’s not enough,” and “we should build a new dam at the cost of $1.6 billion.”  The normative statements are subjective and difficult to argue about.  The positive statements are merely facts.

Your studies in this class and future economics classes will likely focus on positive and objective outcomes and measures.  If you were to take class in politics or sociology, you would likely be concerned more with normative and subjective issues where an efficient outcome was not necessarily the goal.

We could also state that the world should use more renewable energy, we should conserve resources and manage biodiversity better.  While these might be noble goals, they are still opinions.  What we can do is back up these arguments with facts. Of course it’s important to note that our predictions will rely on facts, and models, and that if we don’t have the correct assumptions, our estimates might be incorrect.

One final point for this section about “the dismal science.”  It sort of relates to the discussion about but might be erroneous.  Economics has always been known as the dismal science and it’s likely got something to do with the focus on efficiency rather than equity.  For example, I am trained as a forest economics and I study wildfire.  I was interviewed a few years ago when a fire destroyed many houses in the city of Kelowna, BC.  The economic facts are that it costs millions of dollars to save a few houses, and only thousands of dollars to rebuild those houses if we don’t protect them and let them burn.  So, can you guess the efficient solution?  Yes, it’s to “let it burn.” This is what I was saying in a radio interview just before the moderator talked to a family who lost their house.

While the above story alludes to the dismal in dismal science, it’s really not.  Check out this article by Derek Thompson to find out why economics is not so bad.