AAEC 2305AAEC 2305Fundamentals of Ag Fundamentals of Ag

EconomicsEconomics

Chapter 1Chapter 1

IntroductionIntroduction

INTRODUCTIONINTRODUCTION

Economics is the study of how to Economics is the study of how to allocate scarce resources to produce allocate scarce resources to produce goods & services that help satisfy goods & services that help satisfy unlimited human wants.unlimited human wants.• Economy as a whole is buyers & Economy as a whole is buyers &

sellers competingsellers competing• Everything is scarce at some pointEverything is scarce at some point• We have to allocate these scarce We have to allocate these scarce

resourcesresources

INTRODUCTIONINTRODUCTION

3 important aspects of definition:3 important aspects of definition:• Allocation - making decisions about how Allocation - making decisions about how

to use our resources or capabilitiesto use our resources or capabilities• Limited Resources (Resource Scarcity)Limited Resources (Resource Scarcity)• Unlimited Wants - most basic Unlimited Wants - most basic

assumption is that each individual has a assumption is that each individual has a desire for more - more is preferred to desire for more - more is preferred to less (ex. money)less (ex. money)

RESOURCE SCARCITYRESOURCE SCARCITY

A A resourceresource is an input provided by is an input provided by nature and modified by humans using nature and modified by humans using technology to produce goods that technology to produce goods that satisfy human wants.satisfy human wants.• Resources are also called inputs or factors Resources are also called inputs or factors

of production (ex. land, labor, equipment, of production (ex. land, labor, equipment, water, etc.)water, etc.)

• Combining resources through human Combining resources through human activity & technology produces useful activity & technology produces useful outputs.outputs.

3 IMPORTANT 3 IMPORTANT CHARACTERISTICS OF CHARACTERISTICS OF

RESOURCESRESOURCES Resources have economic valueResources have economic value

• Producers generally must pay to use Producers generally must pay to use resourcesresources

• Monetary & Societal (cars as status symbol)Monetary & Societal (cars as status symbol) Their supply is limited (Scarce)Their supply is limited (Scarce)

• Since there is a scarcity of resources, goods Since there is a scarcity of resources, goods produced from them are also scarceproduced from them are also scarce

• How should resources be distributed - How should resources be distributed - Economic issue of distribution of goods & Economic issue of distribution of goods & servicesservices

(CONTINUED)(CONTINUED)

Resources have alternative usesResources have alternative uses• Since resources have alternative uses, Since resources have alternative uses,

trade-offs must be madetrade-offs must be made• The scarcity of goods requires choices (or The scarcity of goods requires choices (or

trade-offs) by individuals & society - you trade-offs) by individuals & society - you only will buy a good if its value to you is only will buy a good if its value to you is greater than or equal to the price of the greater than or equal to the price of the goodgood

• Opportunity costs are a measure of this Opportunity costs are a measure of this trade-offtrade-off

OPPORTUNITY COSTSOPPORTUNITY COSTS Resources are scarce - - as decisions are Resources are scarce - - as decisions are

made in the face of scarcity, costs are made in the face of scarcity, costs are generated - - opportunity costs generated - - opportunity costs • Economic decisions (choices) are based upon Economic decisions (choices) are based upon

scarcityscarcity Opportunity costs reflect the value of Opportunity costs reflect the value of

alternative opportunities foregone or alternative opportunities foregone or sacrificedsacrificed

If you use a good for one purpose, you give If you use a good for one purpose, you give up the opportunity to use it elsewhereup the opportunity to use it elsewhere

ALLOCATION OVER TIMEALLOCATION OVER TIME& Distribution& Distribution

Time is another important element in Time is another important element in economic decisions.economic decisions.• Someone has to make the decision Someone has to make the decision

whether to use a resource today or in whether to use a resource today or in the future. (ex. Gas, Education, etc.)the future. (ex. Gas, Education, etc.)

Distribution of goods & services Distribution of goods & services among various persons & groups in among various persons & groups in society is also a major concern of society is also a major concern of economists.economists.

MICRO VS MACROMICRO VS MACRO

The study of economics consists of two The study of economics consists of two broad categories:broad categories:• 1) Macroeconomics - encompasses the 1) Macroeconomics - encompasses the

performance of a national economy and performance of a national economy and the international economy (ex - inflation, the international economy (ex - inflation, unemployment, dist. of income, etc.)unemployment, dist. of income, etc.)

• 2) Microeconomics - the study of economic 2) Microeconomics - the study of economic decisions at the individual producer & decisions at the individual producer & consumer level (ex - profit maximizing consumer level (ex - profit maximizing level of output for a firm, how to spend level of output for a firm, how to spend your weekly budget)your weekly budget)

CLASSIFICATION OF ECO CLASSIFICATION OF ECO QUESTIONSQUESTIONS

1) Positive Economics1) Positive Economics 2) Normative Economics2) Normative Economics 3) Prescriptive Economics3) Prescriptive Economics

POSITIVE ECONOMICSPOSITIVE ECONOMICS

Deals with what isDeals with what is Does not involve value judgements Does not involve value judgements

or opinionsor opinions• Ex - If the gov’t raises the price Ex - If the gov’t raises the price

support for a commodity, does support for a commodity, does this cause farmers to produce this cause farmers to produce more of that commoditymore of that commodity

NORMATIVE ECONOMICSNORMATIVE ECONOMICS

Deals with what should beDeals with what should be Inherently involves making value Inherently involves making value

judgements - To address these judgements - To address these questions, someone must decide questions, someone must decide what is good or bad, fair or unfair, what is good or bad, fair or unfair, etc.etc.• Ex - Should gov’t policy guarantee that Ex - Should gov’t policy guarantee that

farmers get a fair price for their grain?farmers get a fair price for their grain?

PRESCRIPTIVE ECONOMICSPRESCRIPTIVE ECONOMICS

Deals with ways to achieve a Deals with ways to achieve a desired result in the most efficient, desired result in the most efficient, profitable, or acceptable mannerprofitable, or acceptable manner

Involves both positive and Involves both positive and normative economic issuesnormative economic issues

Identifies alternative ways to reach Identifies alternative ways to reach a goal and provides methods for a goal and provides methods for choosing among themchoosing among them

All economic systems need to All economic systems need to answer:answer:

What to produce?What to produce? How to produce?How to produce? For whom it will be produced?For whom it will be produced? When it will be consumed?When it will be consumed?

COMMON ASSUMPTIONSCOMMON ASSUMPTIONS

Economists use assumptions to Economists use assumptions to answer economic questions answer economic questions because the real world is complex. because the real world is complex. The following are two common The following are two common assumptions that simplify economic assumptions that simplify economic scenariosscenarios• 1) Individuals want to maximize 1) Individuals want to maximize

their well being (utility)their well being (utility)• 2) Firms want to maximize profits2) Firms want to maximize profits

AGRICULTURE OVERVIEWAGRICULTURE OVERVIEW

Agriculture refers to the complex Agriculture refers to the complex system that begins with natural system that begins with natural resources and involves farms, resources and involves farms, agribusinesses, and governmental agribusinesses, and governmental organizations in providing products of organizations in providing products of the land to the consumers.the land to the consumers.

Three main sub-sectors:Three main sub-sectors:• The Farm SectorThe Farm Sector• AgribusinessAgribusiness• The Public SectorThe Public Sector

Farm SectorFarm Sector

Includes all the farms and ranches Includes all the farms and ranches (including hobby farms & ranches) (including hobby farms & ranches) that grow crops and raise livestock that grow crops and raise livestock (usually for sale)(usually for sale)

Changes in the farm sector have Changes in the farm sector have occurred in the US due to occurred in the US due to technological advancements, the technological advancements, the development of markets, and development of markets, and governmental policy.governmental policy.

AGRIBUSINESSAGRIBUSINESS

Includes (1) firms & industries that Includes (1) firms & industries that produce & sell goods for use in farm produce & sell goods for use in farm production (input sub-sector) & (2) production (input sub-sector) & (2) firms & industries that buy, store, & firms & industries that buy, store, & process farm commodities & process farm commodities & distribute them to domestic & export distribute them to domestic & export markets (Agricultural processing & markets (Agricultural processing & marketing sub-sector).marketing sub-sector).

PUBLIC SECTORPUBLIC SECTOR

The development & growth of The development & growth of agriculture is marked by important agriculture is marked by important advances in an array of publicly advances in an array of publicly supported services know as the public supported services know as the public sector.sector.

Ex. – higher education available to the Ex. – higher education available to the farm sector, extension services, farm sector, extension services, information services, roads, harbors, information services, roads, harbors, etc.etc.

Examples of some Examples of some Agricultural Economic Agricultural Economic

IssuesIssues

Food Availability & SafetyFood Availability & Safety Environmental Consequences of Agricultural Environmental Consequences of Agricultural

ProductionProduction Managing Technological Advances in Managing Technological Advances in

AgricultureAgriculture Increasing Internalization of AgricultureIncreasing Internalization of Agriculture Policy Responses to Uncertainty in AgriculturePolicy Responses to Uncertainty in Agriculture Decline in the Number of American FarmersDecline in the Number of American Farmers These six issues are just an example of some These six issues are just an example of some

of the major challenges facing agriculture!of the major challenges facing agriculture!