The Economics of
Agribusiness
IAFNR Agribusiness
Module
U.S. Food and Fiber System
• Term used to represent all businesses involved in the production,
processing, and distribution of food and fiber products to U.S.
consumers.
• Have you ever heard the phrase “from the farm to the table,” this describes that
process
Sound familiar to what
• This system includes four sectors
we know of as “The Big
• The farm input supply sector
Picture of
• The farm business sector
Agribusiness”?!
• The processing and manufacturing sector
• The wholesale and retail sector
• The Food and Fiber system employs more than one-fifth of the nation’s
workforce!
Product Circular Flow Table
Money Flow
(Wages, profits)
Money Flow
(Consumer Expenses)
Households
Resource Markets
(Land, Labor,
Capital, &
Management)
Sell
Resources
Buy
Products
Buy
Resources
Sell
Products
Product Markets
(Finished Goods &
Services)
Business Firms
(Business Expenses)
(Business Earnings)
Product and Resource Markets
Product Market Sector
Resource Market Sector
• Market for finished goods from
producers (businesses) to consumers
(households)
• Movement of economic resources
owned by consumers to business
firms
• Consumers pay producers for goods
and services
• Includes Land, Labor, Capital, and
Management
• Market sets prices based upon
quantity and quality of the goods and
services
• Producer pays consumer for their
resources
Households are buyers and
Businesses are sellers in the
Product Market
Households are sellers and
Businesses are buyers in the
Resource Market
Scarcity of Resources
• Resources are inputs that are found in nature and used to
produce goods and services
• Land, Labor, Capital, and Management
• If resources are scarce then goods
and services are scarce as well
• Alternatives must be made
What kind of alternatives is
the U.S. considering because
of scarce resources?
Image Retrieved From: http://scarcity-samuraireview.com/why-scarcity-improves-marketing/
Supply and Demand in
Agribusiness
Supply and Demand
• Represent relationship of quantity and price
• Work together to regulate price within
markets
• Demand- quantity of a good or service that
buyers are willing to purchase at difference
prices
• Supply- quantity of a good or service that
sellers are willing to offer at different prices
• Both supply and demand occur in the
economic market and are the true
interaction between buyers and sellers or
households and businesses
How and why do supply
and demand affect each
other?
Law of Supply
• A statement about link between
price and quantity supplied of a
good or service
• Law states that price and quantity
supplied are directly related
• If price increases, quantity supplied increases
• If price decreases, quantity supplied decrease
Image Retrieved from:
http://economictimes.indiatimes.com/definition/Law-of-Supply
Law of Demand
• A statement about link between
price and quantity demanded of a
good or service
• Law states that price and quantity
supplied are inversely related
• If price increases, quantity demanded decreases
• If price decreases, quantity demanded increases
Image retrieved from
http://economictimes.indiatimes.com/definition/la
w-of-demand
Reaching Equilibrium of
Supply and Demand
• How are Quantity and Price
determined in Supply and
Demand?
• In an ideal market the price will
adjust to the point of
equilibrium- or where quantity
demanded equals quantity
supplied
Image Retrieved from:
http://www.investopedia.com/university/economics/economi
cs3.asp
• In reference to demand anything
below the point of equilibrium is
considered shortage, and
anything above is surplus
Economic Concepts to Know
Opportunity Cost
• Decisions are made in regards of use
of scarce resources
• When a resource is used for one
activity or product it cannot be used
for another
• Value of what is given up is
considered opportunity cost.
• Is not always translated to a dollar
amount (ex. time)
Externalities
• Very important economic concept, but
cannot be captured or realized
• Involves environment surrounding
the economic area
• Not all costs or returns of a
transaction are made by company
• Costs and returns not made by company
are considered externalities
• Example: Farmers can purchase some
things tax-free, yet when farmers sell
goods taxes are added to price. Some of
his returns go to government.
References
• Ricketts, C., & Ricketts, K. (2009). Agribusiness Fundamentals &
Applications. New York: Delmar Cengage Learning.
• (2014) The Law of Supply. Retrieved from:
http://economictimes.indiatimes.com/definition/Law-of-Supply
• (2014) The Law of Demand. Retrieved from:
http://economictimes.indiatimes.com/definition/law-of-demand