Wood Trade and Microeconomics

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Trade and Comparative advantage

The idea of comparative advantage is among the major theories used in understanding international trade. This notion, at its simplest, suggests that a nations comparative advantage in some goods and comparative disadvantage in others comes about due to the national endowment of natural resources (Kletzer, 2002). These national natural resources mentioned here include weather, technology, labor force, and productivity. Based on this, therefore, a country will indicate a tendency to export goods where their natural endowment allows for the expansion of output with minimal sacrifice of domestic goods.

In relation to wood and timber, the comparative advantage due to the natural resources in the Mediterranean region has contributed to the trade-in wood and timber (Merlo & Croitoru 2005). Due to this advantage, it has been noted that in France, forest and wood chain industries contribute almost 1.5% of total French employment and a much as 6% of agricultural and industrial employment.

This is based on the fact that France is a forest country and, as such, is the largest producer of sawn hardwood in Europe (Merlo & Croitoru 2005). This is mainly possible due to the abundance of forests in the country and the Mediterranean region in general.

Negative Externality

In relation to microeconomics, a negative externality occurs when a competitive market undertakes a decision, and this decision has some effect on an independent third party (Taylor & Weerapana 2009). An example of a negative externality is the case of air pollution when companies are too inclined to use air-polluting fossil fuels for production as opposed to non polluting energy such as solar power. In relation to wood and international trade, an example of a negative externality is seen in the negative impact on the environment that comes about due to the practice of leasing of woodland in developing companies at low prices (Arnold 2008). It has been observed that portions of rainforest can be leased for below $2 million per hectare with the potential loss of significant forest cover in these regions.

Inelastic/elastic demand/supply

It has been observed that according to the law of supply, a positive relationship exists between price and quantity supplied (Sexton 2008). Based on this relationship, therefore, it is often helpful to know the degree to which a change in price will affect the quantity supplied. This change can be measured by considering the price elasticity of supply (Sexton 2008). For example, it has been noted that US timber used for construction material competes with Japanese timber in Japan. The competitive relationship between logs from these locations can be characterized by price elasticity (Yoshimoto & Yukutake, 1999).

There has been a greater demand for foreign timber within Japan due to the fact that foreign timber is considerably cheaper. The relative cross-price elasticity of US timber, when compared with that of Japanese timber, was estimated to be 1.83 based on statistics from 1960 to 1973 (Yoshimoto & Yukutake, 1999). This suggests the timber market was very elastic. This is due to the fact that a 10% increase in prices of Japanese timber would result in an 18.3% increase in demand for US timber. Based on this cross-price elasticity, it is possible to observe that the timber market is very elastic.

Substitution and elasticity

It has been reported that in microeconomics, the degree of substitution between a product and related products is crucial in determining its price elasticity of demand (Pagoso, Dinio, & Villasis 1997). An important element to consider with regard to substitution is the number of competing products available in the market. Based on this, if there are more substitute products, then the greater the loss of market share when the price increases (Pagoso, Dinio, & Villasis 1997). It has already been mentioned that the price of timber with regard to supply is largely inelastic due to unavailability of substitute products in the construction industry (Cubbage 1986).

Trade restriction

With regard to international trade restrictions refer to measures that are put in place to reduce or eliminate illegal trade practices. IN addition to that tariffs may also be put in place to preserve employment or assist in addressing environmental issues. An example of trade restrictions in the international timber trade is seen in the requirement to put in place public procurement guidelines (Tacconi 2007). These measures are aimed at reducing trade in illegally acquired timber in the international market. Despite the noble goals of such guidelines it has been observed that many countries are yet to enforce them fully.

Gain from trade/losses from trade

In international trade there is an automatic gain of financial resources made whenever a country exports a specific product to another market or country (FAO 1994). However, there are also instances where there are losses from trade in products. An example of such losses with regard to timber can be seen in the degree of environmental degradation that results from deforestation to support trade. This position has seen the emergence on bans on timber and wood products from regions that do not practice sustainable approaches in production of these products (FA 1994).

Technology change

With respect to microeconomics it has been observed that technological change in primarily influenced by reduction of costs (Newmark 2009). In the early 19^th century timber was largely used in the construction of railway lines and it was foreseen that a crisis was likely to arise due to the increased demand for timber to support the expansion of railway lines. In response to this the railroad industry made efforts to discover substitute technology that could replace timber and avert a crisis if timber prices increased (Newmark 2009). Following this change in technology a major crisis was averted and timber prices were maintained at reasonable levels.

Production and cost

In order to produce timber that can be sold at a reasonable cost it is essential to consider the relation between production and costs. In relation to this it has been observed that the production process can affect the final cost of the product (Sessions 2007). For this reason therefore the production of economically viable timber products requires consideration of the harvesting alternatives. Some considerations include distance from the mill, terrain, road construction costs, etc (Sessions 2007).

Short run/Long run profit

The profitability of a firm within an industry over time is affected by several factors. For example profitability may not be the same in the short run when compared with the long run (Arnold 2007). This is possible due to the fact that at the current time many companies may be engaged in the business thus driving down profitability. This may change in time due to the exit of other competitors thus increasing profits (Arnold 2007). Just as in the case of elasticity, profits can be affected by introduction of substitute products (Cubbage 1986).

Economies of scale

The scale of operation of an enterprise can be measured by the quantity of various inputs it utilizes (Baumol & Blinder 2011). Because of this factor an enterprise can make significant changes on its output and profitability. An enterprise can increase returns by making changes to scale in production (Baumol & Blinder 2011). In relation to the timber industry in Japan it was observed that some firms pursued economies of scale by increasing the size of operation or by improving the quality of finished products (Iwai 2002).

Economy of scope

It has been noted in microeconomics that by virtue of efficiency in producing a given product, firms are likely to enjoy cost advantages in production of related products (Hirschey 2009). This concept is seen to exist when the cost of producing products are interdependent such that it becomes less expensive for a firm to produce one product when it is already producing another. An example of economies of scope can be applied to the timber industry by considering opening a firm producing furniture alongside a saw mill. This approach will significantly reduce the complexity involved in the furniture production undertaking.

Indivisible setup cost

In the establishment of a production facility or a business there are certain costs incurred that are fixed. These fixed costs play a major role in influencing the cost of goods regardless of whether production is large or small scale (Mohanty 2005). An example of such indivisible setup costs includes the cost of construction, training, etc.

Long run competitive equilibrium

According to microeconomics it has been observed that when firms begin to create profits in a competitive industry, it will attract additional entrants into the industry (Endres 2011). Following the increase in firms it has been noted that the quantity supplied in the market increases and in response the price declines (Endres 2011). This decline continues until the price has reached the average cost of production. By this time the overall profit has been swallowed by the enlargement within the industry and the incentive to enter by external firms disappears (Endres 2011). At this point the system comes to a point of rest and the long term equilibrium has been reached.

Inherent /transferable competitive advantage

Competitive advantage refers to a trait or factor that provides an entity some preferred position with regard to business activity (Ellsworth 2002). An example of competitive advantage can be observed in the comparative advantage France has with regard to timber trade. This is also an inherent competitive advantage as it is based on natural endowment (Kletzer, 2002). Based on the need to compete it is possible for a firm to duplicate a competitors strategy to improve competitive position. In this regard transferable competitive advantage refers to the aspects that can be copied to improve competitive position (Henry 2008).

As it can be seen natural endowments cannot be transferred and transferable aspects could include marketing strategy, management, etc. An example of transferable competitive advantage is observed in the production of high quality products in the Japanese case highlighted (Iwai 2002).

References

Arnold, R. A. (2007). Microeconomics. Mason, OH: Thomson Higher Education.

Arnold, R. A. (2008). Economics. Mason, OH: South-Western Cengage Learning.

Baumol, W. J., &Blinder, A. S. (2011). Economics: Principles and Policy. Mason, OH: South-Western.

Cubbage, F. W. (1986). Factors Affecting Timber supply elasticity. Southern Forest Economic Workshop, New Orleans. Web.

Ellsworth, R. R. (2002). Leading with purpose: the new corporate realities. Stanford, CA: Stanford University Press.

Endres, E. (2011). Environmental economics: Theory and Policy. New York: Cambridge University Press.

Food and Agriculture Organization (FAO). (1994). The state of food and agriculture 1994. Rome: Food and Agriculture Organization of the United Nations.

Henry, A. (2008). Understanding strategic management. Oxford: Oxford University Press.

Hirschey, M. (2009). Managerial Economics. Mason, OH: South-Western Cengage Learning.

Iwai, Y. (2002). Forestry and the forest industry in Japan. Vancouver: UBC Press.

Kletzer, L. G. (2002). Imports, exports, and jobs: what does trade mean for employment and job loss? Michigan: W.E. Upjohn Institute for employment research.

Mead, W. J. (1966). Competition and Oligopsony in the Douglas Fir Lumber Industry. Berkeley: University of California Press.

Merlo, M., & Croitoru, L. (2005). Valuing Mediterranean forests: total economic value. Oxfordshire: CABI publishing.

Mohanty, G. S. (2005). Social & Cultural Geography. Delhi: Isha Books.

Newmark, C. (2009). Readings in applied Microeconomics: The Power of the Market. New York: Routledge.

Pagoso, C. M., Dinio, R. P., & Villasis, G. A. (1997). Introductory Microeconomics. Quezon city: Rex Printing Company Inc.

Sessions, J. (2007). Harvesting operations in the tropics. Heidelberg: Springer-Verlag Berlin Heidelberg.

Sexton, R. L. (2008). Exploring Economics. Mason, OH: South-Western Cengage Learning.

Tacconi, L. (2007). Illegal logging; law enforcement, livelihoods and the timber trade. London: Earthscan.

Taylor, J. B., & Weerapana, A. (2009). Economics. Boston, MA: Houghton Mifflin Company.

Yoshimoto, A., and Yukutake, K. (1999). Global concerns for forest resource: sustainable use and management. The Netherlands: Kluwer Academic Publishers.

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