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Consumer and Firm Theories and Competitive Behaviour

Consideration of a simple economy in which two output goods are produced using only labor, yielding three markets

Simple economy

China’s agricultural sector is a simple yet labor-intensive economy. In the simple economy which is the agricultural sector, the cost of production and the prices of goods produced are mainly determined through the use of internal price control processes. This process is done thoroughly and cost-effectively which enhances a high level of efficiency, reliability, and cost-effectiveness. Agricultural production is a fundamental aspect of the bigger Chinese economic spectrum. The simple agricultural Chinese economy remains very competitive and crucial in enhancing the economic growth and development of the Chinese Republic (Cowell, 2006; Begg, Fischer, & Dornbusch 2000).

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Agriculture, being a simple and fundamental aspect of the Chinese economy has increasingly managed to yield three major markets that have also continued to shape the development and growth of several markets. The two output goods include farm products and fish. While many other aspects of the Chinese economy do exist, it is evident that China’s agricultural sector is a simple economy that has continuously been driven by the unwavering desire by the Chinese farmers to enhance agricultural productivity. Better still; the Chinese economy has continued to enjoy steady growth and development in its simple yet very strategic investment strategies (Begg, Fischer, & Dornbusch 2000; Needham 1986; Tversky, 1986; Needham 1986).

In China’s agricultural economy, labor plays a significant role in shaping the degree to which the production of goods and services is undertaken. Crop production and fishing are the two outputs of the Chinese simple economy. Production of fish and distribution of crops have continued to greatly shape the degree to which the Chinese population perceives the agricultural sector. This fact also becomes evident in that proper planning and implementation of strategic agricultural mechanisms are fundamental to the success and constant improvement of the agricultural economy (Armson & Ison 2003).

Although the Chinese economy is also known to heavily rely on technology and the industrial sector, Coase (1960) explains that the Chinese agricultural economy is quite significant as it heavily determines the degree to which crop production is undertaken. Agriculture is a crucial sector in the overall Chinese economy. The Chinese economy employs more than 300 large-scale and small-scale, farmers. According to Cowell (2006), the Chinese agricultural economy heavily relies on the existence of cheap labor to stimulate crop production and fishing. Inefficient agricultural strategies and high poverty levels combined with a high population growth rate have immensely contributed to the existence of cheap labor. The availability of cheap and readily available labor is essential as it improves the level of production by ensuring that efficiency and cost-effectiveness in the production process are enhanced (Begg, Fischer, & Dornbusch 2000; Gulati & Fan 2007).

As a developing country that has a severe shortage of arable land, an agricultural economy that focuses on crop production and fishing in the Chinese republic has always been labor-intensive. The country’s economy has continued to be driven by the high-intensity level of labor which has increasingly been demanded by the agricultural financial system. Some farming methods have either been imported or developed thus enabling superior, cost-effective, and more efficient farming processes (Depken, 2005; Gulati & Fan 2007). Despite the continued use of seed drill that has enhanced row farming, it is evident that the use of cast iron tools and animals are mechanisms of pulling cattle-plow in the simple agricultural economy.

Crop production and fishing remain to be the major and most vital outputs of an agricultural economy. Though being a simple economy compared to other economies, China’s crop production is the output of the major tasks and responsibilities carried out about the overall farming processes. Though only 15% of the total Chinese land is appropriate for use in farming activities, the existence of a large workforce has ensured that farming is made possible. 1.2% of the Chinese arable land can support crop production. China has a major problem due to the existence of limited farming space. Farming outputs include rice, Chinese soybeans, cotton, wheat, white potatoes, sweet potatoes, fruits, and vegetables (Watts 2009; Spence 1973; Armson & Ison 2003). There exist oil seeds as they help to supply a large amount of edible and industrial oils thus boosting the level of crop production and fishing.

China’s agricultural sector produces fish. Fishing in the country accounts for slightly more than one-third of the total fish production of the entire world. The breeding of fish in lakes, ponds, and rivers accounts for nearly three-quarters of the total fish production output rate (Needham 1986). The distribution of fish production patterns in the Chinese Republic is shaped along with the dense population distribution patterns. Aquaculture is mainly distributed in urban markets in the lower and middle Zhu Jiang Delta and Yangtze Valley (Spence 1973). Aquaculture thrives in the Chinese Republic purely due to the availability of intensive labor that is readily available in the country. The currency of a given economy plays a significant role in ascertaining the country’s level of growth and development (Gulati & Fan 2007). The Chinese Yuan, which is popularly referred to as Renminbi, is highly used in economic transactions that relate to the agricultural sector in the country. Unlike in global economies, Begg, Fischer, and Dornbusch (2000) make it clear that simple economies have uniquely identified characteristics that shape the degree to which readily available labor is utilized in shaping the overall business strategies of any given economy.

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Like the Chinese agricultural economy, Depken (2005) explains that there are several worlds simple, small, or emerging economies such as the Chinese agricultural economy that are labor-intensive. The primary, secondary and tertiary aspects of a simple economy like Chinese agriculture plays an important role in determining the degree to which such economies can enhance productivity and overall output of the goods and services in question. Although attempts have been made to transform China from a labor-intensive market to a capital intensive developing economy, Needham (1986) is of the view that the simple agricultural sector has continued to be labor-intensive. Through the use of linear thinking strategies, the Chinese economy has been steadily transformed thus resulting in a high level of efficiency, cost-effectiveness, and reliability. Its agricultural sector has indeed been well known to heavily rely on labor. Understanding the economics of the labor market is important and very critical for the success of the Chinese simple agricultural sector (Akerlof, 1970). Through the use of intensive cheap labor, the Chinese agricultural economy, whose two major outputs are farming and fishing, has been able to yield three markets mainly fish, crop, and livestock markets. In the view of Armson and Ison (2003), China has a very large livestock population. Pigs and fouls dominate this population. The rural agricultural sector has pigs, camels, and goats as the major livestock while mules, horses, cattle, donkeys, and water buffalos form another crucial category of livestock market in the country.

Neoclassical consumer theory and the theory of the firm Neoclassical consumer theory

Pareto optimality or efficiency refers to the economic approach that helps to streamline the process of income distribution and economic efficiency. The Pareto efficiency concept is pegged on the belief that no single person, organization, or issue can be improved without adversely affecting the state or situation of the other (Vijay, 1991). The application of classical models of business strategies in understanding consumer behaviors helps to fully understand how consumers in any given economy respond to the demand for products and services. Consumers’ analysis of value and utility based on their analytical value of the available products and services highly shape the preference levels of existing products.

As an economy of very rational decision-makers, it is evident that the demand for either fish or crop farming output of agriculture can be based on the degree to which consumers value the products. The neoclassical consumer theory emphasizes product preferences, demand, and the existence of buyers. The purchases are aimed at enhancing either production or consumption of the products. It is possible that the demand for products in the three yielded markets could result in a Pareto efficient allocation (Nash, 1951). The neoclassical consumer theory works towards enhancing effective consumer prediction and the ability to determine future market demand-supply. By treating the concepts of the outcome, state, belief, desire, and action as inferior, this theory brings out the fact that the achievement of Pareto optimality in the Chinese agricultural economy is no longer practical. Better still, the ordinal utility remains to be a relevant aspect of ensuring that all the three markets that benefit from agricultural outputs of fishing and crop production remain competitive and in line with the Pareto efficient allocations (Tversky, 1986).

Based on the initial allocation of resources, the Pareto optimality is a low-level approach t of enhancing efficiency. The optimality aims at enhancing greater and better levels of efficiency without having to result in the existence of social and economic distribution of scarce resources. In the case of the simple Chinese agricultural economy, the concept can be equated to the cost-effective distribution of agricultural resources of plant production and livestock at the expense of the agricultural market. Lack of possible resource reallocation strategies poses the danger of having an obscure and ineffective resource allocation that is based on a single market (Depken, 2005). The fishing, farming, and livestock markets of the Chinese agricultural simple economy have a unique trend through which agricultural prosperity and realization of cost-effective processes are realized.

Theory of the firm

The theory of the firm asserts that consumer rationality and preference are closely intertwined notions that affect many markets. Even though fish and crops are produced by the strict use of labor, the aspect of homogenous demand and context-dependence cannot be ignored. It is vital for consumers to explicitly reveal their preferences to facilitate proper planning and strategic allocation of scarce resources. About the concept of the theory of the firm, it is clear that any firm, enterprise, or organization operates with the core aim of maximizing profit margins. In the case of the Chinese simple agricultural economy, it is evident that fish farming and crop production which are the outputs of agriculture in the country only bring economic benefits by yielding economic profits. This fact is sure proof that in any economy, whether complex or simple, businesses interact in different markets to establish demand patterns and pricing strategies. Consequently, resources are allocated in a manner likely to ensure that farmers in the simple agriculture economy maximize the net profits and also present an opportunity for consumers to capitalize on their general efficacy. This concept clearly explains how the theory of the firm and the neoclassical consumer theory predicts that competitive behavior in all markets results in Pareto efficient allocations (Watts, 2009).

Consumer Theory

The consumer theory plays a vital role in educating people on the fact that China does not produce cheap consumer products and low quality industrial raw materials. The country’s labor-intensive economy can be enhanced through the use of high-quality agricultural development strategies. The theory offers vital risk avoidance and management strategies that are relevant to the operations and development mechanisms of the Chinese market. As revealed by the consumer theory on the use of consumer intensive strategies and enhancement of greater performance levels, arable land use highly depends on the size and development strategies of the political and economic authorities in the country. The government’s policies stipulate how specific sections of a town or city can be utilized. Global points of view that explain land rates can help to determine the level of efficiency and cost-effectiveness in the manner in which arable land and urban areas are developed, the manner of land use, and the rental fees for the rental houses in such areas implemented (Guo, 2008).

Potential difficulties

Assumptions concerning consumers and producers

The analysis and deliberations of the above Chinese agricultural economy is based on the assumption that the Chinese population’s consumption pattern is based on a linear changing pattern. The Chinese middle-class population is estimated to have a uniform and steady change in the manner in which the middle and low-income earners acquire and manage their finances. It is expected that a reduction of the Chinese poverty level would promote the country to an improved economic growth rate and in turn enhance the consumption, demand, and supply of the agricultural produce. These assumptions have the risk of exposing the agricultural economy to increment of prices of the production materials.

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The assumption of the existence of a linear production and consumption pattern could also hinder the efficiency and growth strategy of the entire economy as it could lead to the emergence of more economic gaps due to the overdependence on agriculture as the foundation of the country’s economy. To the producers, it is believed that they would maintain a steady investment effort towards revamping the agricultural sector and thus ensure that agricultural productivity is improved. The competitiveness of the three agricultural markets is also built on the assumption that the country’s expenditure on agricultural produce would have a steady growth pattern to ensure that the fishing sector is enhanced.

The usefulness of Pareto efficiency

The three markets in the analysis are not necessarily competitive. The markets which specialize in fish, livestock, and crop farming are competitive. In line with the Pareto efficiency principles, it is evident that such markets play a crucial role in ensuring that both short term consumer and producer motivation and profit maximization approaches are addressed. The fact that Pareto optimality or efficiency is an economic approach that helps to streamline the process of income distribution and economic efficiency does not imply that it does not have any limitations. The Pareto efficiency concept is built on the belief that no single person, organization, or issue can be enhanced without degrading the state of the other. The Pareto efficiency metric does not reveal vital social and economic issues that help in making rational economic decisions.

Efficiency in the economy is hindered by the poor economic development strategy of the agricultural sector. The agricultural economy does not always have a ready market as is evidenced by the suffering and tribulations of the farmers in Anhui, Xinjiang, Shandong, and Zhejiang who always suffer a lot in their attempt to market their farm outputs. This fact is mainly due to the lack of timely and efficient information on the market conditions. Probable changes that need to be implemented in the business environment should be analyzed and implemented (Jared 1999). Nonetheless, Pareto efficiency helps in ensuring that different aspects of social welfare are fully addressed. Enhancement of food safety is a challenge that has continued to derail the growth and development of the simple agricultural economy of the Chinese Republic. In line with the Chinese simple agricultural economy and the use of the Pareto efficiency mechanisms, it can be argued that the theory of the firm has continued to be relevant as the attempted shift from a labor-intensive economy has been contained to minimize the risk levels due to such a paradigm shift (Begg, Fischer, & Dornbusch 2000). The usefulness and application of the Pareto efficiency mechanism have the potential challenge of focusing on the implementation of stringent operational strategies that could hinder farmers and economic stakeholders from being creative and innovative.

References

Akerlof, G A 1970, The Market for Lemons: Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics, vol. 15 no. 3, pp. 22-37.

Armson, R & Ison, R 2003, Juggling with complexity: searching for a system, Springer Publishers, The Open University.

Begg, D, Fischer, S & Dornbusch, R 2000, Economics, 6th Ed., McGraw-Hill Publishing Co, New York.

Coase, R H 1960, The Problem of Social Cost, Journal of Law and Economics, vol. 3 no.2, pp.12-23.

Cowell, F A 2006, Microeconomics: principles and analysis, Oxford University Press, Oxford.

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Depken, C 2005, Microeconomics Demystified: A Self-Teaching Guide, McGraw-Hill Publishing Co, New York.

Gulati, A & Fan, S 2007, The Dragon and the Elephant: Agricultural and Rural Reforms in China and India Edited, Johns Hopkins University Press, Baltimore.

Guo, H B 2008, Cultivation of lotus (Nelumbo nucifera Gaertn. ssp. nucifera) and its utilization in China, Journal of Genetic Resources and Crop Evolution, vol.56 no.3, pp. 32-45.

Jared, D 1999, Guns, Germs, and Steel: The Fates of Human Societies, W.W. Norton & Company, New York.

Nash, J 1951, Non-Cooperative Games, Annals of Mathematics, Second Series Journal, vol. 54 No. 2, pp.56-67.

Needham, J 1986, Science and Civilization in China: Volume 4, Physics and Physical Technology, Part 3, Civil Engineering and Nautics, Caves Books Ltd, Taipei.

Spence, M 1973, Job Market Signalling, The Quarterly Journal of Economics, vol. 87, No. 3, pp.23-40.

Tversky, A 1986, The Behavioural Foundations of Economic Theory, Cengage Learning, Connecticut.

Vijay, M K 1991, How Well Do We Know Pareto Optimality? How Well Do We Know Pareto Optimality? Journal of Economic Education, vol.11 No.3, pp.172–178.

Watts, J 2009, “China to plough extra 20% into agricultural production amid fears that climate change will spark food crisis”, Guardian News, 12 July, p.7.

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