Agribusiness and Economics Lecture Review

Flashcards covering key terms and definitions from agribusiness and economic lecture notes, perfect for vocabulary review.

Renting farm land on shares of production

A rental agreement where both the landlord and tenant share more risk as production is shared rather than a fixed cash payment.

Projected cash flow

A useful tool in estimating credit needs.

Elasticity of supply

Measures the response of a change in production.

Increase in U.S. dollar value

Leads to less costly imports to the U.S.

Main difference between cash and accrual accounting

Accrual accounting includes adjustments for capital assets.

Basis (in pricing)

The difference between a cash price at a particular location and the futures price.

Cash flow plan

A financial plan that should not include machinery depreciation.

Fixed cost

A cost that does not vary with the level of production, such as machinery.

Variable cost

A cost that changes with the level of production, also known as operating costs.

Solvency

Your ability to pay all debts if you liquidated your business.

Depreciation schedule

A financial document that should not include present market value.

Average fixed cost

Will decrease as output is increased.

Taxable income calculation method

Most farms calculate taxable income using the cash method.

Depreciation

An allowance for the decrease in value due to wear and tear, age, or obsolescence.

Cash flow planning

A good use is to obtain a loan.

Collateral

Livestock, land, and other personal property used to secure a loan.

Bull market

A market where small supplies and/or strong demand cause prices to rise.

Liability

Legal responsibility for damage or injury, often due to negligence.

Mortgage

A loan taken out by a farmer to purchase land.

Capital gain

A net gain from the sale of real or depreciable property.

Strong U.S. dollar

Reduces the demand for U.S. wheat exports.

Parts of a Net Worth statement

Assets, net worth, and liabilities are the three key parts, while expenditures are not.

Liquidity

The ability of a business to make enough cash to pay bills.

Farm business profit location

Found on the income statement for a year.

Capital investment

An investment in an asset intended to produce income, such as a dairy cow.

Debt

Another term for liability.

Risk reduction strategies

Crop insurance, hedging, options, and liability insurance are examples of tools for reducing risks.

Factors considered in budget analysis

Capital, Management, and Land are considered, but Weather is generally not a direct factor within the budget itself.

Factors of production

Labor is considered one of the four factors of production.

Formal written plan

The best format for a budget in a complex economy.

Whole farm budget

A management tool that shows the physical and financial plan for the entire farm or ranch business for a specified period of time.

Partial budget

A management tool that shows projected costs and net returns associated with some change in the farm business.

First step in developing a budget

Appraising the business.

Term debt coverage ratio less than one (1)

Indicates a business may need to borrow additional funds or sell assets to make scheduled payments.

Forward contract

Selling fall soybeans in May for fall delivery, guaranteeing a future price.

Futures contract (corn/soybeans)

One contract covers 5,000 bushels.

Elasticity

The percent change in quantity divided by percent change in price.

Put option

Gives you the right to sell underlying futures at a specific price.

Margin (futures trading)

The funds deposited with a broker to trade futures contracts.

Supply curve

Shows the relationship between quantity supplied and price.

Fixed price forward contract sale advantage

Eliminates the risk of lower prices for the seller.

Decrease in U.S. dollar value

Should increase exports from the U.S.

Pure competition

A market that has a uniform commodity with many buyers and sellers.

Hedging cattle price in futures market

To hedge, one would initially sell futures contracts expecting to buy them back when the cattle are sold.

Response to consumer behavior

Production of agricultural commodities and value-added services respond to consumer behavior.

Call option

An alternative to forward contracting that allows producers to benefit if prices increase.

Minimum wage

An example of a price floor.

Supply and demand both decrease

When both supply and demand decrease equally, the quantity decreases, but the effect on price is indeterminate.

Expectations of a shortage

Will have the effect of increasing demand.

Demand decreases

When demand decreases, the equilibrium quantity decreases.

Decrease in supply

Will usually result in an increase in market equilibrium price and a decrease in equilibrium quantity.

Supply increases

When supply increases, the equilibrium quantity will increase, and the equilibrium price will decrease.

Factors that decrease supply

Higher business taxes, higher resource costs, and fewer suppliers typically decrease supply.

Price floor

A minimum price set by the government, which can lead to a surplus if set above the equilibrium price.

Binding price ceiling

A maximum price set by the government below the equilibrium price, which can lead to a shortage.

Crude oil prices rise

The likely effect on gasoline is that the supply of gasoline decreases.

Tariff

A tax on imports.

Depreciation of the dollar

Means U.S. exports are cheaper for foreign buyers.

Appreciation of the yen versus the dollar

Means U.S. goods and services are more expensive for Japanese consumers.

Federal Reserve

The organization in charge of monetary policy in the U.S.

Long-run economic profit in competitive markets

In competitive markets, the long-run economic profit is zero.

Rise in maintenance costs

For an industry, this will likely lead to a decrease in expected returns.

Economic profit

Equal to accounting profit minus implicit costs.

Monopolies

Will always have economic profits (in the long run, due to barriers to entry).

Pollution

An example of an externality cost.

Increased environmental regulations

Will likely decrease pollution.

Optimal amount of pollution

The amount where the marginal benefit of pollution reduction equals the marginal cost of pollution reduction.

Immigration

Will likely lower wages (for some) and increase the number of jobs.

Industrial unions

Examples of inclusive unions, such as the United Auto Workers.

Perfect competition

A market structure where firms are price takers, it is easy to enter and exit the market, and firms produce a standardized product.

Long-run market outcomes of perfect competition

Results in efficient outcomes.

Monopoly market structure

Characterized by one firm, a unique product, and that one firm being a price maker.

Oligopoly market structure

Best described by a few large firms with significant barriers to entry.

Budget deficit

Occurs when government spending is greater than tax receipts.

Law of Demand

States that when prices increase, consumers buy less.

Proportional or flat tax

Results in the same tax rate being applied regardless of a person’s income level.

Federal deficit

Will have the effect of increasing the national debt.

Perfectly inelastic demand

If the price increases on a product with perfectly inelastic demand, the quantity demanded stays the same.

Increase in price for a normal good

Results in less quantity demanded.

Price of a substitute rises

If the price for a substitute product like peanut butter rises (assuming jam supply is constant), the demand for jam will likely increase.

Lower price

Most likely indicates less scarcity of a product.

Partnership liability

In partnerships, each partner is liable for the partnership debts of his or her partner.

Sole proprietorship (characteristics)

Best described as having one owner with unlimited liability, who typically does most of the management.

Corporations

The type of firm that has the largest assets in dollar value.

Interest rates rise (effect on bond prices)

If interest rates rise, bond prices will decrease.

Stock

A share in the ownership of a corporation.

Financial planning principle

Careful evaluation of alternatives is the best way to get the most from your money.

New product pricing

The price of a product when it is new on the market is usually the highest it will ever be (skimming strategy).

Consumer information

Businesses need to supply consumers with accurate information.

Impulse purchase

A purchase made on a whim without using a decision-making process.

Equilibrium price

The price at which the quantity supplied exactly equals the quantity demanded.

Capitalist economic system

An economic system where people, rather than the government, make economic decisions and own resources.

Budget worksheet

A planning document on which you record your expected income and expenses.

Expenses

Include items such as car payments, clothes, and telephone bills.

Fixed expense

An expense that remains the same each period, like a monthly apartment rent.

Simple interest

Interest paid annually at the end of the year on the average balance or initial principal only.

Principal (investment)

The original amount of money placed into a certificate of deposit or investment.

Tax-deferred retirement savings plan

A 401(k) plan or an Individual Retirement Account (IRA) is an example.

Capital gain (stock)

The profit you earn from selling stock at a higher price than you paid for it.

Credit rating

A measure of your credit worthiness.