2. FNR 407 Forest Economics William L. (Bill) Hoover Professor of Forestry 494-3580 743-4120 billh@fnr.purdue.edu

3. Economics Allocation of scarce resources to unlimited wants –Market –Other, e.g.? Quantity (Q) Price (P) Demand (D) Supply (S)

4. Demand Curve Schedule of amounts consumers are willing and able to buy at various prices –Why is curve negatively sloped Declining marginal utility Substitution effect –Not same as consumption P Q P1P1 Q1Q1 P2P2 Q2Q2

5. Marginality Given the function Y = f(X), –Marginal change is change in Y per unit change in X – ∆Y/ ∆X, or –dY/dX (first derivative of Y with respect to X Example –Y ≡ yield, X ≡ year –dY/dX = current annual increment –Y/X = mean annual increment

6. Supply Curve Schedule of amounts producers are willing and able to supply at various price levels –Marginal cost curve above average total cost P Q

7. Supply Curve Marginal cost (MC) curve above average total cost (ATC) Can’t cover all costs in long-run with price below ATC P1P1 MC ATC Price (P) P2P2 Q2Q2 Q1Q1

8. Forest Economics For forests decision making complicated by –Joint production –Externalities –Non-marketed outputs –Wide variety of “types” of owners

9. Joint Production Forest provides multiple “outputs” –Wood –Water –Wildlife habitat –Recreation, etc. How does a manager simultaneously determine appropriate level of output of each?

10. Externalities Positive - decision to do one thing results in unintended but positive result –e.g., attract new species of bird Purple Gallinule

11. Externalities Negative - decision to do one thing results in unintended but negative result –displace indigenous species of bird Indigo Bunting

12. Types or Owners Issue is mix of types of owners in an ecosystem –Public Federal State County Local –Private Industrial Non-industrial –Investor –Farmer –NGO (non-governmental organization), e.g. land trust

13. Context In Which Decisions Are Made Matters! What is affect of type of owner? –Public agency –Industrial firm –Private non- industrial (NIPF)

14. Public Agencies Management objectives set by large number and variety of interest groups Conflicts among interest groups difficult to resolve Political pressures may dictate budget and land use decisions

15. Industrial Firms Profit motivated Forest practices constrained by AF&PA Sustainable Forestry Program, public pressure, and regulations Most productive forest land Forest land is security for conversion facilities

16. NIPF Largest class of forest owner Highly variable motives for owning land Management of any type may be low priority Aesthetics and wildlife frequently a high priority

17. Perspective Matters Should managers base decisions on ? –each individual tree in a stand, –the stand as a whole, or –the whole forest (multiple stands) –the ecosystem

18. Perspective Matters Decisions based on a single tree –Diameter limit –Crop tree selection –Financial maturity of crop trees

19. Perspective Matters Decisions based on a stand –Even-aged Optimal rotation length –Uneven-aged Single tree selection Two-age shelterwood

20. Perspective Matters Decisions based on multiple stands –Unregulated Irregular harvest –Regulated Regular harvest Even-aged Hardwood Stands on Daniel Boone National Forest

21. Perspective Matters Decisions based on ecosystems –Multiple objectives –Must manage across pro- perty lines Forested ridges in Central PA are important watersheds

22. Economic Characteristics of Forests and Timber –Immobility of trees Location utility –Inventory vs. economic supply –Long production period –Dual nature of trees Capital (factory & machinery) Product

23. Immobility of Trees Location Utility –Forests have value in part based on their location –Trees have in-place value as part of a forest –Conversion value requires harvesting and transportation of cut products

24. Inventory vs. Economic Supply Inventory is total physical volume present –US Forest Service Forest Survey Estimate of total volume

25. Inventory vs. Economic Supply Economic supply is amount of timber owners are willing to sell at some price over a specified time period –Can’t measure directly Deduced from observed market equilibrium points

26. Long Production Period High ratio of inventory to output –Inventory of 3 to 6 MBF per acre for 100 - 500 bd.ft. per acre per year –3% ratio

27. Economic Characteristics of Forests and Timber –Production function is a biological growth process Highest cost input is time, an opportunity cost –Opportunity to sell now instead of later

28. Production Function Relationship between inputs (age) and outputs (volume) Input (age) Output (volume) Inflection point Biological maturity

29. Production Function

30. Dual nature of trees Level of capital investment - –size of factory, and –number and capacity of machines Acres of forest –stand density

31. Dual nature of trees Rate at which machines are operated –Speed and hours per week Rotation length –Increasing length increases capital investment in “machinery”