CHAPTER 1
Introducing the Economic Way
Of Thinking
© 2009 South-Western, a part of Cengage Learning.
2
Economics Puzzles
 Would you purchase more ice lemon tea when the
price increases?
 What you do if the price of cooking oil increases?
 If the cost of labor decreases, would you produce
more?
 Limited land available, is that matter for the
producers?
© 2009 South-Western, a part of Cengage Learning.
Introduction
 Agricultural economics a part of economics which studies agriculture
and food sector.
 concerned with the entire agriculture and food value chain - from
inputs procurement and utilization to farm production, processing,
logistics and marketing until consumers end.
 involved with natural resources and environment - thus some
agricultural economists study natural resource, environment
conservation and climate change issues.
 Others study on agribusiness sector as buyers, processors and
distributors of food and fiber products.
© 2009 South-Western, a part of Cengage Learning.
Three foundations of economic
studies
•
Scarcity:
• every resource is scare.
• It means that resource available is insufficient to satisfy every
user.
• need for system to allocate the resources amongst users
•
Choice:
about making decision and allocation of resource.
• Thus economics is about decision making and allocation on
consumption and resources.
•
•
Self-interest:
• what motivates the consumer to seek more goods at a lower
price.
• drives the producer to produce as efficiently as possible, such as
lowering production cost and increase profit margin.
© 2009 South-Western, a part of Cengage Learning.
5
Four Categories of Resources
Land
Labor
Capital
Entrepreneurship
Goods and
services
Resources are the basic categories of inputs used to produce goods and services
© 2009 South-Western, a part of Cengage Learning.
6
Scarce Resources and Production
• Land
▫ A shorthand expression for any natural resource provided by
nature.
• Labor
▫ The mental and physical capacity of workers to produce
goods and services.
• Capital
▫ The physical plants, machinery, and equipment used to
produce other goods. Capital goods are human-made goods
that do not directly satisfy human wants.
• Entrepreneurship
▫ The creative ability of individuals to seek profits by taking risks
and combining resources to produce innovative products.
© 2009 South-Western, a part of Cengage Learning.
7
The Problem of Scarcity
 Our world faces with the problem of scarcity.
 Why???
 So what???
 What should we do as a human being, as a consumer,
as a producer, as a leader, as a government……..
 The problem of scarcity is often threatening…. South
America, Africa and Asia…..
© 2009 South-Western, a part of Cengage Learning.
Scarcity forces society to make
choices
3 basic questions need to be answered:
1.
What goods and services should be produced?
Society needs to determine what goods and services should be produced with the limited
resources to maximize their satisfaction. Once goods and services to be produced are
identified, the society needs to decide how much to produce each good and service.
2.
How should the goods and services be produced?
In a free market economy, resources are distributed by demand and supply - resources are
allocated to industries which offer higher wage.
3.
For whom the goods and services are produced?
Goods and services produced need to be distributed. Capital goods are distributed to firms
while consumer goods are distributed to consumers. In a free market economy, price
mechanism plays important role in distribution of goods and services.
© 2009 South-Western, a part of Cengage Learning.
9
Economics: The Study of Scarcity
and Choice
• Economics - the study of how society chooses to allocate its scarce
resources for the production of goods and services in order to satisfy
unlimited wants.
© 2009 South-Western, a part of Cengage Learning.
Definition of economics
 A social science that deals with how consumers, producers
and societies choose among the alternative uses of scarce
resources in the process of producing, exchanging, and
consuming goods and services.
 A social science concerned with the way an individual or
society CHOOSES to employ limited resources having
alternative uses to produce economic goods and services for
present and future consumption.
© 2009 South-Western, a part of Cengage Learning.
Definition of Agricultural
Economics
 “…an applied social science that deals with how producers,
consumers and societies use scarce resources in the
production, processing, marketing and consumption of food
and fiber products”.
 The social science that deals with the allocation of scarce
resources among those competing alternative uses found in
the production, processing, distribution, and consumption of
food and fiber (Drummond & Goodwin)
© 2009 South-Western, a part of Cengage Learning.
Agribusiness
 Definition:
“The sum total of all operations involved in the manufacture and
distribution of farm supplies; production operations on the
farm; and the storage, processing, and distribution of farm
commodities 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 products and the manufacture of farm machinery,
equipment, and supplies.
© 2009 South-Western, a part of Cengage Learning.
Ceteris Paribus Assumption
 A Latin phrase that means while certain variables
changes, “all other things remain unchanged”.
 Relevant variables held constant.
© 2009 South-Western, a part of Cengage Learning.
Branches of Economics
1. Microeconomics:
Studies economic behavior of individual or group of individuals decision
making units
i.
Consumers: The microeconomics of consumption. The consumer
faces the problem of what to buy with limited resources, eg
budget
ii.
Business Firms (producers): The microeconomics of production. Firm
acquires resources and used them in production process so that it
maximizes profit.
© 2009 South-Western, a part of Cengage Learning.
Branches of Economics
2. Market economics
study how value is created as a commodity moves from producer to
consumer.
In the marketing of a good, four changes happen: time, place, form
and possession.
Eg: The form of wheat must change to bread or buns.
The place
the bread moves from Kuala Lumpur to Malacca. The time of bread
shifts from Monday (factory) to Wednesday (retail store). The possession
of the bread transferred from retailer to consumer.
© 2009 South-Western, a part of Cengage Learning.
Branches of Economics
3. Macroeconomics
- Studies the aggregate level of economic activity - national or
international level.
- The main focus is how the total economic system operates and how
various policies and institutions affect the vitality of the economic
system.
- It concerns issues which include;
•
Level of National Income
•
Total Level of Unemployment
•
General Price Level of the Economy: Inflation
•
Balance of payment
•
Federal budget
•
International issues
© 2009 South-Western, a part of Cengage Learning.
17
What Does an
Agricultural Economist Do?
 Role at Microeconomic Level
 concerned with issues related to resource use in the
production, processing, distribution, and consumption of
products in the food and fiber system.
 Role at Macroeconomic Level
 Interested in how agriculture and agribusiness affect
domestic and world economies and how the events
taking place in other sectors affect these firm and vice
versa.
© 2009 South-Western, a part of Cengage Learning.
18
Basic Skills of the Agricultural
Economist
 Economic model: a conceptualization, based on
assumptions, of how economic activity occurs.
 Ceteris paribus: a shorthand way of saying “let one
economic variable (the cause) change and see how
another economic variable (the effect) changes,
assuming that everything else remains unchanged.”
 Marginal Analysis: an additional or an incremental unit
of something.
© 2009 South-Western, a part of Cengage Learning.
19
Positive Vs Normative Analysis
 Positive Statements claims that attempt to describe
the world as it is
 E.g Increase tax rate will cause Inflation.
 Normative Statements claims that
prescribe how the world should be
attempt
 E.g The government should reduce the tax rate.
© 2009 South-Western, a part of Cengage Learning.
to
20
Positive Vs Normative Analysis
Minimum-wage
laws cause
unemployment
© 2009 South-Western, a part of Cengage Learning.
The government
should raise the
minimum wage
21
Exercise
 Classify each of the following statements as positive or
normative. Explain
1.
An increase in the interest rate will cause a decline in
investment.
2.
The government should provide health
everyone irrespective of their income levels.
© 2009 South-Western, a part of Cengage Learning.
care
to
22
© 2009 South-Western, a part of Cengage Learning.