Saturday, June 15, 2013

The Corn Belt is expanding at the expense of Wheat. If you are a teacher or student of economics you will be interested in my analysis of how this affects the PPF for Corn and Wheat...

Here is a nice example of how changing conditions ("exogenous variables") alter opportunity costs as they are illustrated on a Production Possibilities Frontier.  Read this excerpt and my discussion continues below.

U.S. Corn Belt Expands to North

Warmer Climate, Hardier Seeds Help Crop Gain on Wheat, North Dakota's Staple

"...Wheat has long dominated the windswept farm fields of the northern Great Plains. But increasingly, farmers here are switching to corn, reflecting how climate change, advancements in biotechnology and high corn prices are pushing the nation's Corn Belt northward.
The shift, which is occurring in northern Minnesota and Canada's Manitoba province as well, shows how warming temperatures and hardier seeds are enabling farmers to grow corn in areas once deemed inhospitable to the crop. As a result, North Dakota's farmers, who produced 4% of last year's U.S. corn crop and are benefiting from high prices for other crops, are invigorating the state's agricultural economy at the same time its energy sector is thriving...."
The general assumption in the PPF model is resources used for one purpose are not easily adaptable or convertible to alternative uses. Some land is more suited for wheat production and if a farmer tries to use some of that land for corn production instead, then it will be increasingly costly to do so in terms of the amount of wheat that land could have produced.

Example:  If I grow wheat on acreage more suited for wheat production and then try to grow some corn instead it might take 4 acres I used to grow wheat to get 1 acre equivalent yield in corn.  In other words, to get 1 acre yield in corn I gave up 4 acres yield in wheat.  That is pretty costly.

The highlighted and underlined portion of the above excerpt suggests that the listed factors have served to reduce the opportunity costs for planting more corn by making wheat resources MORE adaptable to the alternative use of producing corn.

Hey, look, I made some graphs to show this!!

Currently this farmer is producing a bundle of corn and wheat at Point "A".
 Assume she wants to produce another acre worth of corn.  According to the PPF if she does this it is going to cost her 4 acres worth of wheat. We are at Point "B" now.
 Lets assume that the factors listed in the article reduce the opportunity costs of producing corn to just 2 acres worth of wheat. So instead of moving to Point "B" she moves to Point "C" on her PPF.
 The way I read this now is the PPF above Point "A" is going to be less "bowed" (indicating ever increasing opportunity costs as you move along it) and more "constant".
There will be MORE potential yield of corn per acre of wheat given up than there was before.  So, now every time the farmer gives up 2 acres of wheat production, the yield in corn will be greater than before. (I use 15 as an outlier). As the farmer moves along the Red section of the PPF they still give up bushels of wheat to get more corn but it is less costly than before ("ceteris paribus").
Note: Not built to scale so the numbers on the vertical and horizontal axis are not perfect.  Also, keep in mind the numbers reference potential yield in bushels of wheat and corn per acre.  I am not suggesting corn acreage is increasing from 12 to 15.
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