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EPT 3102

Agricultural Economics

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Introduction to Economics

The word economycomes from a Greek

word for one who manages a

household.

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Introduction to Economics

EconomicsEconomics examines how people use theirscarce resourcesscarce resources to satisfy their unlimitedunlimitedwantswants.

A social sciencesocial science because it deals with peoplein their daily activities where choices are

required.

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Scarcity, Choice and OpportunityScarcity, Choice and Opportunity

CostCost

Scarcity (scarce resources)Scarcity (scarce resources)

Not freely available- when its price exceeds zeroA good/service is scare when we must give up

(sacrifice) some amount of one thing to get some

of another good/service.As we make our choicechoice in the face of scarcity,costs are generated which is known asopportunity costs(the value of alternativeopportunities forgone or scarified).

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Resources

Inputs -factors of productionUsed to produce goods and servicesGoods and services are scarce because resources

are scarce

Four general categories:-LaborCapitalLandEntrepreneurial ability

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Labor and Capital

Labor: broad category of human effortPhysical and mental

Time

Scarcity of time scarcity of labor

Capital: Human creations used to produce goodsand services

Physical capital: factories, machines, tools, buildings,airports, highways and other manufactured itemsemployed to produce goods and services.

Human capital: consists of the knowledge and skill

people acquire to enhance their labor productivity.

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Land and Entrepreneurial Ability

Land

Land and other natural resources

Gifts of nature including bodies of water,trees, oil reserves, etc.

Entrepreneurial ability

Special kind of human skillTalent required to dream up a new product

or find a better way to produce an existing

one.

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Goods and Services

Goods Tangible items

Services Intangible items

Good or service is scarce if the amount peopledesire exceeds the amount that is available at azero price we must continually choose amongthemChoices in a world of scarcity implies we must pass up some

goods and services

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Free Goods

Goods that are available at azero price

For example, while air and seawater may

appear to be free, clean air and seawater

have become scarce.

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Economic Decision Makers

(Markets)

3. Product markets

Markets in which goods and services are boughtand sold

4. Resource markets

Markets in which the resources are exchanged

Labor, or job, market is the most important ofthe resource markets

Buyers and sellers carry out exchanges

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Lecture week 1

Exhibit 1: Circular-Flow Model

Households supply resourcesin the resource market and

demand goods and services in

the product marketFirms supply goods and

services in the product market

and demand resources in the

resource marketMoney flows in resource

markets determine wages,

interest, rents and profits which

flow as income to householdsProduct markets determine

the prices for goods and

services which flow as revenue

to firms

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Agricultural Economics

Definition:

An applied social scienceapplied social sciencedealing with how humans choose to use

technical knowledge and scare productive resourcestechnical knowledge and scare productive resourcessuch as land,

labor, capital, and management to produce food and fiberfood and fiberand to

distributedistribute it forconsumptionconsumption to various members of society overtime. Cramer and Jensen (1994).

An applied social science that deals with how producers,

consumers, and societies use scare resources in the production,

processing, marketing, and consumption offood and fiber

products. Penson et al. (2002).

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Agribusiness

Definition:

The sum total ofall operationsall operations involved in the manufacturemanufacture and

distributiondistribution offarm suppliesfarm supplies; production operationsproduction operations on the

farm; and the storage, processing, and distributionstorage, processing, and distribution offarmfarm

commoditiescommodities and items made from them. Davis and Goldberg(1957).

Farming engaged in as a large-scale business operation embracing

the production, processing, and distribution of agricultural productsand the manufacture of farm machinery, equipment, and supplies.

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Microeconomics and Macroeconomics

MicroeconomicsMicroeconomicsExamines the factors that influence individual

economic choices.

Studies the individual pieces of the economicpuzzle.

MacroeconomicsMacroeconomics

Studies the performance of the economy as awhole.Focuses on the big picture.

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Scientific Method

Identify the question and define the relevantvariablesVariable is a measure that can take on different

values

Specify AssumptionsCeteris paribusCeteris paribus --Other-things-constant assumption

(Holding some variables constant, while letting specific variableschange)

Behavioral assumption refer to how people behave rational self-interest consumer maximizessatisfaction and firm maximizes profits

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Normative versus Positive

Positive EconomicPositive EconomicAssertion about economic realitySupported or rejected by reference to the facts

Value judgmentsDeals with what is, what can be

Normative EconomicNormative EconomicOpinions should try,should doCannot be shown to be true or false by reference to the

factsSubjective

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Topic Highlights

It is because ofscarcity that we must economize in choosingbetween desire alternatives.

Sacrificing one thing for another gives rise to the true costs ofmaking choices.

Agricultural economics is a social science applied toagricultural problems.

Positive economics results from a scientific analysis of factsrelevant to a situation; normative economics involves our

personal values.

Agribusiness includes the functioning of the entirefood andfiber system from the input industry to the farm and theultimate consumer.

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Production Possibilities FrontierProduction Possibilities Frontier

(PPF)(PPF)

Focus is on how much an economy can produce with

the resources available What are the economysproduction capabilities?

Simplifying assumptions:-Two broad classes of products consumer goods and

capital goods

Production during agiven time period one year

Resources available arefixedin both quantity and quality

during the time period

The available technology does not change

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Production Possibilities Frontier (PPF)Production Possibilities Frontier (PPF)

Identifies the various possible combinations of the

two types of goods that can be produced when all

available resources are employed fully and

efficiently.

No change increases the production of one good

without decreasing the production of the other

good.Involves getting the maximum possible output

from available resources.

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Lecture week 1

Figure 1: PPFFigure 1: PPF

Combination Consumergoods

CapitalGoods

ABCDE

F

5048433420

0

010203040

50

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Production Possibilities Frontier (PPF)Production Possibilities Frontier (PPF)

Points

Aand

F= amount of

consumer goods and capital goods that

can be produced per year if all

resources are used efficientlyPoints betweenA and F= other

possible combinations of the two goods

produced when all resources are

efficiently employedPoints inside the curve,I, =

combinations that do not employ

resources efficiently or fully Point Cyields more consumer goods

and no fewer capital goods thanI,

while point Eyields more capital goods

and no fewer consumer goods thanI,

and all points between Cand Eyield

more of both goodsPoints outside the PPF, such asU, =

unattainable combinations PPF

serves as the frontier between

unattainable and attainablecombinations.

0

10

20

34

43

50

0 10 20 30 40 50

Capital Goods

(millions of units per year)

ConsumerGoods

(millions

ofunitsp

eryear)

48

A

C

D

E

F

B

U

I

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Movements along the PPFMovements along the PPF

Law of Increasing CostsDictates the bowed-out shape of the PPFWhen the economy uses all resources efficiently, each

additional increment of one good requires the economy tosacrifice successively larger and larger increments of theother goodOccurs because resources drawn away from consumer goods

are those that are increasingly better suited to producingconsumer goodsFirst 10 million units of capital goods have an opportunity cost of

only 2 million units of consumer goods whileFinal 10 million (points E to F) have an opportunity cost of 20

million units of consumer goods

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Factors that can shift the PPFFactors that can shift the PPF

1. Changes in Resource Availability Increases / Improvements in Quality rightward shift Decreases / Reductions in Quality leftward shift

2. Increases in the Capital Stock Increases rightward shift Decreases leftward shift

3. Technological Change Employs available resources more efficiently

rightward shift

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Lecture week 1

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All of the following exampleswould lead to a rightward shift

in the PPF from A to A:1. Increase in the size or

health of the labor force

2. Improvement in the skills

of the labor force3. Increases in the amount

of capital

Decreases in any of the

above factors would shift the

PPF from A' to A shift to

the leftThe parallel shift implies the

change that occurred affected

the production of both goods

equally

Exhibit 2a: Shifts in the PPFExhibit 2a: Shifts in the PPF

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Lecture week 1

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A leftward shift from A to

A"could be caused by any

of the following examples:1. Decrease in the size

or health of the labor

force

2. Decline in the skills ofthe labor force

3. Decreases in the

amount of capital

The parallel shift implies

the change that occurred

affected the production ofboth goods equally

Exhibit 2b: Shifts in the PPFExhibit 2b: Shifts in the PPF

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Lecture week 1

Exhibit 2c: Shifts in the PPF

28

Increase in resources or

technological change that

benefits consumer goods

would rotate the PPF

outward from the horizontal

axis, fromA

toA'

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Lecture week 1

Exhibit 2d: Shifts in the PPF

29

Increase in resources or

technological advance that

benefits capital goods would

rotate the PPF outward from

the vertical axis, F to F'

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Lessons of PPF

Efficiency PPF represents thecombinations of output that are possible,given the economys resources andtechnology

Scarcity Given the stock of resources andtechnology, the economy can produce only somuch

Economic Growth

rightward shift orrotation of PPFChoice

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Three QuestionsThree Questions

How an economy selects the most preferred combination

will depend on the decision-making rules employed.

Regardless of how decisions are made, each economy must

answer three fundamental questions

WhatWhatgoods and services will be produced?

HowHowwill they will be produced?Forwhomwhom will they be produced?