Pork 101: The economics of hogs

Edward Lotterman - Agricultural Economist

Published April 1, 1996  |  April 1996 issue

Economics teachers who search for new or unusual classroom examples of real-life economic phenomena would do well to consider the current debate about changes in the hog industry, where articles in daily newspapers illustrate many concepts included in a college microeconomics course.

For example, the question of whether large hog operations have lower production costs involves the shape of the long-run average cost curve for the industry. This curve shows the minimum costs, or production, for the whole possible range of facility sizes. In the range where average costs drop with larger facilities, economies of scale exist. And if there is some range where average costs increase with larger facilities, diseconomies of scale are present.

The fact that demand for U.S. corn exports is affected by rising consumption of eggs, poultry and pork in Asia is an example of derived demand, the idea that demand for raw materials or intermediate goods depends on the demand for final goods.

If producing hogs does harm the environment or people who live near hog facilities, externalities are present. The external costs of hog production are the amount by which the social cost of hog raising is greater than the costs borne by the economic agent (facility owner) who makes the decisions.

When farmers in one state call for easier regulation in their state because they cannot compete with farmers in other states with fewer rules, they make the implicit argument that states are caught in a Prisoners' Dilemma, a situation in game theory which was first laid out by von Neuman and Morgenstern. In such a dilemma, society as a whole ends up in a sub-optimal situation because of mutual fears of what the other party will do. The same situation is argued to exist in state and local subsidies of new industries or professional sports teams.

Traditional economists in the early years of this century were fond of saying "It's all in Marshall," referring to the long-standing economics text penned in the 1880s by the British economist, Alfred Marshall. But contemporary economists need not go that far back, it's all in the National Hog Farmer.

Related articles, fedgazette, January 1999:
Contract pricing complicates hog markets
How much should pork prices drop?
Is agriculture in crisis?
The porcine slaughter of the innocents [Web only]