Food economics is important for the future of agriculture, nutrition, and health

This chapter motivates the study of economics through food, and of food through economics. We explain how lines and curves leading to points on a two-dimensional diagram can help us explain, predict, and assess individual choices and market outcomes, as well as the consequences of policy interventions. We then show how household surveys and other data sources give us observational data on actual outcomes, which we can represent visually as scatter plots or line graphs, and bar charts to see trends and patterns that would not otherwise be visible. We emphasize that analytical diagrams like Figure 1 represent the causal forces behind observed outcomes, with each line or curve showing alternative options that were not chosen due to the factors represented by the other lines or curves. In contrast, data visualizations like Figure 2 show a large number of observed outcomes, with each point having been created by variation in circumstances not shown on the chart. This approach allows instructors to discuss how the material being taught in class relates to other courses that students might take, for example, statistics or econometrics, to quantify patterns and potentially infer causality in data such as Figure 2, as well as potentially estimating lines and curves that might permit simulation modeling of counterfactual scenarios as in Figure 1.

People usually learn from mistakes and choose the best of their options for them

Chapter 2 explores the factors influencing individual choices in food consumption and production, using economic models to explain how people select their preferred choice from a limited set of options. It examines how prices, incomes, preferences, and production capabilities shape these choices, highlighting the concept of diminishing returns, whether in terms of indifference curves and utility for consumers or production possibilities and profit for producers. Students do not need the mathematics of optimization to understand how useful it can be to expect that each person has aspirations and preferences that guide their choices from their available options, given their individual circumstances. Other peoples' choices may not always be what we imagine we would have chosen if we'd been in their circumstances, but whole populations often have sufficiently similar preferences for economists to estimate average elasticities of demand, and from observed production we can estimate elasticities of supply.

An important aspect of food choice emphasized in the book is that people usually cannot see, taste, or smell how an item will influence their future health. Consumers can detect rancidity or mold and some other aspects of food safety before or soon after eating, and the total energy from each eating occasion is experienced within minutes, but other aspects of food's nutritional value must be inferred from a product's packaging, labeling, and other contextual clues. Consumers will pay for better health, so vendors sell items with health claims at a premium price, but the actual health effects of choosing one item instead of another are typically unknown to the buyer and may also be unknown to the seller. The fact that consumers cannot know and may be misled about each item's nutritional value is fundamental to the economics of food choice, and is introduced from the start of this book's explanation of consumer behavior.

The outcomes we see come from interactions between people and can be changed

Chapter 3 examines how market prices and quantities are determined through the interactions of producers and consumers, represented graphically through supply and demand curves as well as the external price in trade for any imports or exports. We derive those market diagrams from the previous chapter's individual choice diagrams, leading to the elasticities by which producers and consumers respond to changes in prices and incomes. From the start, we distinguish between market structures for tradables and non-tradables, showing how production meets consumption at each location for food services and bulky or highly perishable products, while foods that enter long-distance trade have production separated from consumption by the quantity traded.

In Chapter 3, explanation of market diagrams focuses on how predicted outcomes in terms of quantity and price are points of intersection between lines, using but not emphasizing economics jargon such as marginal quantities and equilibrium outcomes. Using simpler terminology can be helpful because students who are new to economics already have other meanings in mind for these words. For them, “marginal” usually means excluded or unimportant (whereas in economics the marginal unit is central to the analysis), and “equilibrium” usually means a desirable or well-balanced outcome (whereas in economics the equilibrium may involve very low levels of well-being).

We can use observed choices to infer changes in well-being and account for externalities

Chapter 4 introduces the concept of economic surplus as a measure of well-being that can be derived from observed behavior. One distinctive feature of this book is to teach economic surplus by starting with a toy model of an imaginary beachside village with five individual consumers named Ana, Bob, Cat, Deb and Ed, and also three fish producers called Fio, Gio and Hijo. This “Alphabet Beach Village” allows us to explain how each person's willingness to pay and marginal cost of production determines both their choices and their economic surplus derived from each market outcome. Using this setup we start with the outcome of perfectly competitive interactions among only the eight villagers, and then show how each of them would react and is affected by scenarios in which foreigners offer to buy or sell fish, resulting in exports or imports that create gains from trade and also alter the community's income distribution.

The second half of Chapter 4 uses economic surplus to introduce externalities and government interventions. Introducing these aspects of economic analysis as soon as possible is helpful for the economics of food because it allows us to consider both positive and negative externalities from both production and consumption. We show that these externalities around supply and demand curves do not alter predicted market prices and quantities unless there is some kind of government intervention. We start with Coasian interventions based only on enforcing property rights over the externality and then illustrate real-world regulations on quantity using the examples of a city's food truck licenses (for a nontraded service) and USA sugar import quotas (for a traded commodity).

Lack of competition and coordination problems can reduce economic surplus

Chapter 5 introduces market structures other than perfect competition, starting with a single seller (monopoly) or single buyer (monopsony) who controls the quantity traded in a market. Our treatment of this topic begins with the observation that food systems are characterized by many farming households and individual consumers in each region, while farm inputs or food processing and distribution services are typically provided by larger enterprises (Figure 3). From the start, we emphasize how those larger nonfarm enterprises might grow through innovation and scale economics, gaining market share and competing with each other over a larger geographic area. We use the toy model of Alphabet Beach to show how a monopolist's choices would differ from the outcome of each individual acting independently, and then use the example of Walmart to describe how their cost reductions could lead to small local grocery stores being replaced by larger regional chains. We also use the example of the raisin marketing board to show how a nation-wide monopoly can be created by government policy, which in the case of a tradable product also requires controlling imports and exports at the border. The second half of Chapter 5 extends the analysis to strategic interactions between individuals, introducing the concept of a payoff matrix using the simple case of two people choosing between two options. This allows us to show how the payoff matrix of a classic prisoner's dilemma has been set by the police and the judiciary to elicit confessions, while other kinds of payoff matrices would lead to other outcomes.

Well-targeted policies and programs can offset market failures and improve well-being

Chapter 6 introduces the role of government, in the form of collective action leading to policies and programs that alter market outcomes, often motivated by market failures and demand for public goods and services. The chapter begins with the classification of goods and services as being excludable or nonexcludable, and rival or nonrival, leading to the foundations of public choice based on the aggregation of consumer willingness to pay for each kind of thing. We then introduce concepts of free ridership and rational inattention, and discuss challenges and complexities of collective action that are emphasized. The second half of Chapter 6 introduces the toolkit used by economists to guide the provision of public goods and services, in terms of cost-effectiveness analysis and preference elicitation using choice experiments and other tools for estimation of willingness to pay in nonmarket settings.

Insurance and redistribution are closely related and can help meet social goals

Chapter 7 is the midpoint of the book, where we pivot from economic principles to empirical observation. The first six chapters include many examples illustrated by analytical diagrams, while the remainder of the book introduces data visualization of findings from population surveys and administrative information. We begin that description of the food system with an analysis of deprivation and the close link between inequality, inequity, and risk over time. The text begins with how Mollie Orshansky and others developed the US poverty line in the early 1960s based on diet costs and household surveys from the 1950s and proceeds with a discussion of each type of data with links to their source so that students and instructors can make updated charts in future years. This work includes both inequality among individuals or households and inequity between groups, highlighting how innovations in measurement drive understanding over time. The second half of the chapter introduces risk and insurance and how food price dynamics create brief but extreme spikes during periods of scarcity. We show how and why food consumption in terms of energy per day changes relatively little over time, leading to an analysis of food insecurity and access to healthy diets.

Food choices are made for many reasons, often without knowing how foods affect health

Chapter 8 extends the framework of consumer behavior introduced in Chapter 2, introducing the toolkit of behavioral economics to address preference reversals between each person and their future self. The chapter begins with the cognitive challenge of overcoming confirmation bias in the selection of what we observe and motivated reasoning in how we interpret those observations. We then describe how those cognitive challenges contribute to both status-quo bias when comparing existing conditions to a potential alternative and present bias when choosing between things now and things in the future. These aspects of behavioral economics are drawn graphically, while data visualizations about actual food choice and health are presented in later chapters after the introduction of macroeconomics and development over time. The second half of Chapter 8 is devoted to interventions for behavior change, using indifference curves and budget lines to show the relationship between in-kind food aid and cash transfers for recipients who do or do not spend some of their own money on each product in addition to the quantities provided by aid. An important feature of our diagrams showing program impacts for infra- and extra-marginal recipients is to draw them for both desirable products that are given to recipients, as in fruit and vegetable consumption by Supplemental Nutrition Assistance Program and Special Supplemental Nutrition Program for Women, Infants, and Children  recipients, and also exclusion of potentially harmful products from eligibility, such as rules against the use of SNAP benefits for unhealthy foods.

Agriculture and food are part of a circular flow of money for things within each country

Chapter 9 introduces macroeconomics, which then allows us to address how periods of growth and recession influence the use of nutrition assistance and other social safety nets. Like other economics textbooks, we use the standard circular-flow diagrams to show how national income accounting tracks value added, income, and expenditure, but then provide numerical examples and data from the food system, including cost shares for consumer spending in the United States. The second half of Chapter 9 shows how trends and fluctuations in the US economy relate to the use of SNAP benefits, connecting growth and recessions to unemployment. We include detailed data on US employment at and around minimum wages to show its importance for food system jobs, and show detailed data on US jobs in each subsector of the food economy to show seasonality and trends in the number of workers in agriculture, food manufacturing, retailing, and food service, followed by data on US labor force participation, earnings, and unemployment to address trends and fluctuations in well-being and disparities between demographic groups.

Demographic and other changes drive agricultural transformation and dietary transition

Chapter 10 examines long-term economic growth and the four major transitions that are associated with it: demographic, structural, food system, and nutritional. We use tables and charts to show how these transitions from lower to higher incomes, schooling, and longevity relate to agriculture, food, and nutrition. Our text explains how innovation and accumulation of capital in all its forms, stimulated by potential returns to new investment, lead to a declining share of employment in farming, as populations use their time and natural resources to produce and consume a wider range of goods and services in the food sector as well as other domains. The second half of Chapter 10 focuses on how economic development plays out in terms of trends in food consumption and diet quality, globally and within the United States.

Trade and investment can help countries meet their needs, altering income distribution

Chapter 11 focuses on spatial interconnections between countries and regions, including how globalization and trade policies create linkages between local and global food systems. This analysis begins with comparative advantage, and how prices in trade are formed by the interaction of supply and demand between exporters and importers. We show how transport costs influence trade, and provide example data on costs for bulk grain shipments to various destinations by truck, train, and boat, as well as illustrative price data for a country that might oscillate between self-sufficiency and importing or exporting a particular crop. That leads to actual data on the extent of international trade in agriculture and food, and data on policy interventions as monitored by the Organization for Economic Cooperation and Developement, World Trade Organization and other organizations. The second half of this chapter turns to value added along supply chains, describing how food flows from producing regions to consumers through terminal markets and distribution networks. This section also provides farm census data on farm sizes around the world, in terms of both land area and the number of employed or family workers per farm. These data reveal how each region has farm sizes determined by what family members can afford to operate in that place, which may also influence what foods are grown and how they are produced. The chapter concludes with an accounting framework through which to add external costs and benefits to market values, and thereby consider net social values and cost/benefit ratios of each product in each place.

Innovations are induced by changing needs, linking climate and sustainability to health

Our concluding chapter addresses the process by which new technologies and institutional arrangements arise and spread. We start with the concept of induced innovation, by which we explain the pace and direction of change in terms of inventors and entrepreneurs attempting to develop new things they believe will be increasingly valuable in the future. We then describe the tension and complementarity between agroecology and agribusiness, as farmers seek to manage both natural resources and purchased inputs, and policy interventions might or might not address externalities associated with various kinds of agricultural activity. The second half of Chapter 12 describes the somewhat similar challenge for food markets to meet nutritional needs, emphasizing the challenge of collective action and the opportunities for individuals to help improve outcomes by aligning consumer demand with requirements for long-term health, climate resilience, and environmental sustainability.