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Forest
Resources
Economics
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 Economics is the study of how individuals choose,

with or without money, to employ scarce
productive resources that have alternative uses, to
produce various commodities and services and
distribute them for current or future consumption
among various persons in society.
 There are four key concepts in the definition of
economics:
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 Pearce (1994) defines scarcity as “usually reserved for

situations in which the resources available for producing
outputs are insufficient to satisfy wants.”
 There are two types of scarcity:
 Absolute scarcity - implies that there is a finite quantity
of a resource. For example, oil and coal are often
referred to as absolutely scarce.
 Relative scarcity - implies that sacrifices must be
made to keep the resource in its current use or to
obtain it, or they have alternative uses.
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 The reason individuals must choose is because of

scarcity; more specifically, relative scarcity.
Relative Scarcity ↔ Choice
 relative scarcity implies choice and choice implies
an opportunity cost
Relative Scarcity ↔ Choice ↔ Opportunity Cost
Opportunity cost is defined as the value of the next
best alternative forgone.
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 There are basically three functions of money:

 medium of exchange,

 unit of account, and

 store of value.
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 Consumption of the resource now as opposed to in

the future.
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 Forest economics deals with those economic

problems involved in owning, buying, selling,
taxing, and managing forest land, whether it is used
for producing water, wildlife, wood, or some other
products. It is also concerned with the economic
problem of growing, protecting, harvesting, and
marketing the products of that land, and with
examining the interplay of forces that determine
the product or group of products a particular forest
should produce.
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 Timber remains as the major product from forests. The

peculiarities of timber production justify the need for
Forest Economics:
 Long period of production, e.g., growing pulpwood timber
takes about 10 years
 Dual nature of standing timber. Standing timber is both the
final product and the factory. If you cut the timber, you also
"cut" portion of the timber producing factory
 One-way flexibility of production and marketing. Because of
the time factor it is difficult to change output (growth)
significantly without investing long periods.
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 Immobility of forest resources. Stumpage must be sold where

it stands.
 Biological nature of production/Aggregative nature of forests.
Susceptible to pests and diseases, prone to damage by
typhoons and droughts; timber is associated with other life
forms in the forest
 High ratio of inventory to annual growth. There is always a
temptation to cut more than the periodic growth/yield
particularly in uneven-aged stands.
 Presence of externalities/amenities. Forests are public utility
thus subject to public regulation. Forests produce products
and services other than those that can be marketed.
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 The economy is a collection of technological, legal,

and social arrangements through which individuals
in society seek to increase their material and
spiritual well-being. (Field and Field, 2002)
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 “technical, legal, and social arrangements” or

institutions necessary to allow individuals to realize
gains from trading refers to institutions such as:
 Property rights

 Legal System

 Money

 Governments (local, state, and national)

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 Individuals seek to “increase their material and spiritual

well-being”; or simply “increase their wealth”.
 The economic concept of wealth is simply whatever
people value.
 People value material goods, and they also value mental
and spiritual wellbeing. Thus, the goal of the economy is
to increase individual wealth.
 Wealth can be increased through:
 production of physical commodities
 Trade - a voluntary exchange of goods or services
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 Economic reasoning is about systematically examining

the choices or tradeoffs individuals make in a given
context.

 This requires developing a consistent set of terminology,

models, and methods
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 individuals are asserted to be maximizers; in terms

of voluntary exchanges, individuals will seek to
maximize their satisfaction, net benefit, utility,
profit, or smiles-per-minute, etc.
 Second, individuals have preferences for goods and
services.
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 An assigned value is the expressed relative

importance or worth of an object to an individual in
a given context.
 Assigned values are relative; it is not the intrinsic
nature of the object but the object relative to all
other objects that gives rise to an assigned value
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 Price is defined as a per-unit measure of assigned value

and thus a measure of relative scarcity.
 If the price of a resource is zero, what is its opportunity
cost?
 Market price is economic information that consumers
use in examining their opportunity cost of purchasing a
good or service. That same market price is economic
information that suppliers use in examining their
opportunity cost of producing or providing a good or
service.
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 The market provides a place where information

concerning the relative scarcity of a good or service
is revealed and the choices individuals make are
observed. Given the information generated by the
market, an individual can choose to provide or
produce a particular good or service and another
individual can choose to purchase that particular
good or service.
 Price is a key piece of information generated by the
markets and used by buyers and sellers.
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 Characteristic of workable competition:

 Generally speaking, the more sellers of a good or

service in a market, the greater the inability of a
single seller to have control over the price.
 Similarly, the more buyers of a good or service in the
market, the greater the inability of a single buyer to
have control over price.
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 Efficiency is the technical relationship between

inputs and outputs: the greater the output relative
to input, the greater the efficiency.
 Equity denotes the concept of a just or fair (not
necessarily equal) distribution of goods, services,
output, income, etc., among all consumers.
 It is important to note that the objectives of
efficiency and equity often conflict and it may
become necessary to compromise one for another.
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 Max NB denotes maximization of net benefit

 Profit model (NB),

 B denotes benefits,
 Max NB = B – C
 C denotes costs;

 or  Max P denotes maximization of profit (P);

 TR denotes total revenue, TR = P ∙ Q,

 Max P = TR - TC  P denotes market price,

 Q denotes market quantity;

 = P ∙ Q - TVC - TFC
 TC denotes total cost, TC = TVC + TFC

 TVC denotes total variable costs,

 TFC denotes total fixed costs.

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 Increase in benefit through trade

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 Least cost  Min Cost denotes the

objective of minimizing costs;
 Min Cost = TVC  TVC denotes total variable
costs (e.g. transportation and
 s.t.
processing costs);
 Q(x) = Q 0  s.t. denotes “subject to” and
what follows is a constraint
placed on the objective;
 Q(x) = Q 0 denotes producing
or providing a good or service,
Q(x), using inputs, x, at a
given quantity or quality, Q 0
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 cost effective model  Max Q(x) denotes the

objective of providing or
 Max Q(x) producing the maximizing
quantity or quality of a good
 s.t.
or service using inputs, x;
 TVC = C 0
 TVC = C 0 denotes that the
total variable costs (TVC)
of using inputs x to
produce or provide the
good or service cannot
exceed a given budget, C 0.
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 Marginal analysis is a systematic examination of

observable choices by individuals resulting from
observable market conditions.
 Marginal analysis will not prove if in fact you are
maximizing profits nor prove if the output level
you are producing is “optimal.” Marginal analysis
allows for statements concerning a direction of
change; for example, increasing or decreasing the
amount of output you provide.
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 Maital (1994) defines the three Pillars of Profit as

Price, Value, and Cost.
 Production System.
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Amacher, G., Ollikainen, M., & Koskela, E. (2009). Economics of

Forest Resources. Cambridge, Mass.: MIT Press.

Menger, C. (1981). Principles of Economics. New York: New York

University Press.

Wagner, J. (2012). Forestry Economics. London: Routledge.