Advertisement

Do Chinese Grain Farmers Maximise their Profits?

  • Kali P. Kalirajan
  • Yiping Huang
Part of the Studies on the Chinese Economy book series (STCE)

Abstract

Profit maximisation is generally seen as the behavioural norm among firms (farms) operating in the market economic system. Thus one way of verifying how effectively economic reform has facilitated the transformation of Chinese farmers into market-oriented producers is to examine whether they are maximising their profits. Such an examination can be conducted with the use of production, cost or profit functions, but both primal and dual approaches require reliable data on price, inputs and outputs. In production function analysis, profit maximisation occurs at the point where the production function is tangential to the price line (Heady, 1952), so how can profit maximisation be verified when there are no price data? Profits are maximised, exhibiting optimal output, when the returns to scale are constant (Carlson, 1956). The argument in this chapter is that the above concept can be used to test the profit maximisation hypothesis when there are no price data. Therefore one approach to testing the hypothesis is to model the production process and identify the point of constant returns to scale in production. We specify the production process in a homothetic form, which is more general than the homogeneous form.

Keywords

Production Function Profit Maximisation Constant Return Random Coefficient Price Data 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Breusch, T. S. and A. R. Pagan (1979) ‘A simple test for heteroscedasticity and random coefficient variation’, Econometrica, vol. 47, pp. 1287–94.CrossRefGoogle Scholar
  2. Byrd, W. A. and Q. Lin (1990) China’s Rural Industry: Structure, Development, and Reform (New York: Oxford University Press for the World Bank).Google Scholar
  3. Carlson, S. (1956) A Study in the Pure Theory of Production (New York: Kelley and Millman).Google Scholar
  4. Eichhorn, W. (ed.) (1965) Measurement in Economics: Theory and Applications of Economic Indices (Heidelberg: Physica-Verlag).Google Scholar
  5. Fare, R. (1973) ‘On scaling laws for production functions’, Zeitschrift für Operations Research, vol. 17, pp. 417–24.Google Scholar
  6. Fare, R., S. Grosskopf and C. A. K. Lovell (1985) The Measurement of Efficiency of Production (Boston: Kluwer-Nijhoff).CrossRefGoogle Scholar
  7. Fare, R. and B. J. Yoon (1984) ‘An empirical investigation of returns to scale: Welsh coal industry’, Resources Policy, vol. 11, pp. 134–7.CrossRefGoogle Scholar
  8. Farrell, M. J. (1957) ‘The measurement of productive efficiency’, Journal of the Royal Statistical Society, Series A (General), vol. 120, pp. 253–81.CrossRefGoogle Scholar
  9. Garnaut, R. G. and G. Ma (1992) Grain in China (Canberra: East Asian Analytical Unit, Department of Foreign Affairs and Trade).Google Scholar
  10. Gong, B. H. and R. C. Sickles (1992) ‘Finite sample evidence on the performance of stochastic frontiers and data envelopment analysis using panel data’, Journal of Econometrics, vol. 31, pp. 244–58.Google Scholar
  11. Griffiths, W. E. (1972) ‘Estimating actual response coefficients in the Hildreth-Houck random coefficient model’, Journal of the American Statistical Association, vol. 67, pp. 633–5.CrossRefGoogle Scholar
  12. Heady, E. O. (1952) Economics of Agricultural Production and Resource Use (Ames, Iowa: Iowa State University Press).Google Scholar
  13. Hildreth, C. and J. P. Houck (1968) ‘Some estimators for a linear model with random coefficients’, Journal of the American Statistical Association, vol. 63, pp. 584–95.Google Scholar
  14. Huang, Y. and K. P. Kalirajan (1995) ‘Technical choice in rice production in China’, paper prepared for the Conference on Grain in China, East-West Center, University of Hawaii, 16–19 September.Google Scholar
  15. Johnson, G. L. (1967) ‘A note on non-conventional inputs and conventional productivity functions’, in E. O. Heady et al. (eds), Resource Productivity, Returns to Scale and Farm Size (Ames, Iowa: Iowa State University Press).Google Scholar
  16. Kalirajan, K. P. and R. T. Shand (1994) Economics in Disequilibrium: An Approach from the Frontier (New Delhi: Macmillan).Google Scholar
  17. Renjian, T. (1996) ‘The status quo, objectives and philosophy of the reform on grain circulation system in China’, paper presented at the International Symposium on Food and Agriculture in China: Perspectives and Policy in Beijing, 7–9 October.Google Scholar
  18. Schwallie, D. P. (1982) ‘Unconstrained maximum likelihood estimation of contemporaneous covariances’, Economics Letters, vol. 9, pp. 359–64.CrossRefGoogle Scholar
  19. Shand, R. T. (1987) ‘Income distribution in a dynamic rural sector’, Economic Development and Cultural Change, vol. 36, no. 1, pp. 35–50.CrossRefGoogle Scholar
  20. Shephard, R. W. (1953) Cost and Production Functions (Princeton, NJ: Princeton University Press).Google Scholar
  21. Swamy, P. A. V. B. (1971) Statistical Inference in Random Coefficient Regression Models (New York: Springer-Verlag).CrossRefGoogle Scholar
  22. Varian, H. R. (1985) ‘Non-parametric analysis of optimising behaviour with measurement error’, Journal of Econometrics, vol. 30, pp. 445–58.CrossRefGoogle Scholar
  23. Varian, H. R. (1993) Intermediate Microeconomics, 3rd edn (New York: W.W. Norton).Google Scholar
  24. Wakashiro, N. (1990) ‘Rural reform and agricultural production in China’, The Developing Economies, vol. XXVIII, no. 4, pp. 482–502.Google Scholar
  25. Watson, A. and C. Findlay (1995) ‘Food and profit: the political economy of grain market reform in China’, paper presented at the conference arranged by the Chinese Studies Association of Australia, Macquarie University, Sydney, 5–7 July.Google Scholar

Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Limited 1999

Authors and Affiliations

  • Kali P. Kalirajan
  • Yiping Huang

There are no affiliations available

Personalised recommendations