2_11_NCE_theory_of_Agricultural.pptx - Frontier Theories of Agricultural Economics Neoclassical Economics(NCE as a Background Tsegabirhan W.Giorgis DoE

2_11_NCE_theory_of_Agricultural.pptx - Frontier Theories of...

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Frontier Theories of Agricultural Economics: Neoclassical Economics (NCE) as a Background Tsegabirhan W.Giorgis, DoE, CBE, AAU, 2019-2020 Academic Year, 1 st semester, November, 2019 11/15/2019 1
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NCE & Relevance of Assumptions “Assumptions are important tools in scientific enquiry, because they allow analysts to focus on one set of issues at a time . Introductory physics courses often begin with assuming a frictionless plane ; but during the course the assumption is lifted to deal with the effects of friction in reality . Similarly, training in neoclassical economics starts with the development of basic theorems of individual behavior and market interactions under controlled conditions in a virtual laboratory provided by the assumptions of perfect competition . A critical feature of the successful development and application of neoclassical economics is therefore an understanding of its basic assumptions and the ability to extend its analysis to situations in which particular assumptions, or sets of assumptions, do not hold .” (Kirsten F. Johann, Karaan A. S. Mohammad, Dorward R. Andrew, in Kirsten F. Johann, Dorward R. Andrew, Poulton Colin, and Vink Nick (eds); 2009, p. 36) 11/15/2019 2
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Core Assumptions of the Perfect Competition Model Core assumptions of the perfect competition model are : 1. Profit and utility maximization : These are the dominant objectives motivating producers and consumers, respectively. (p. 36) 2. Perfect information : Economic actors (individuals, households, firms, or government) have complete information . (Johann, et al. (eds)(IFPRI); 2009, p. 37) 3. Homogenous products 4. Ease of entry and exit and hence free capital mobility among markets, 5. Large numbers of firms and buyers 6. No economies of scale or production externalities 7. Complete set of markets : Perfect markets exist for all commodities (Johann, et al.(eds)(IFPRI); 2009, p. 37) 11/15/2019 3
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Core Assumptions of the Perfect Competition Model “Taken together, these assumptions generate a world of market- clearing equilibria with costless adjustments to shocks ; therefore, no risk of loss attached to current investment decisions . Goods are homogenous and exchange is anonymous , based purely on the price being charged for different goods and taking place in spot markets . In such a world there is no particular role for organizations and management .” (Johann, et al.(eds)(IFPRI); 2009, p. 37) “The major thrust of neoclassical economics has always been the extension of its analysis to address conditions in which some of these assumptions do not hold .” (Johann, et al.(eds)(IFPRI); 2009, p. 38) But are these the core assumptions that define the NCE theory of agricultural economics? What about the underlying philosophical principles, methodological approaches? 11/15/2019 4
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Introduction to Household (HH) Model Strictly speaking the claimed core assumptions whatever relevance they may have define the theory of the firm, hence may be relevant to the commercial farm-firms . They are not meant to explain the poor small-farmer typical of the agricultural system in the Less Developed countries, like Ethiopia.
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