Addis Ababa University
Department of Economics
Agricultural Economics
By: Gebeyaw K
Lecturer, Department of Economics
Email: gebeyawkassie32@gmail.com
Addis Ababa , Ethiopia
March, 2023
Chapter One: The Subject Matter of Agricultural Economics
The concept of Agricultural Economics
 Agriculture is the art and science of cultivating the soil, growing crops, and raising
livestock.
 Economy of most of the countries of the world till the middle of the last century
was founded almost exclusively on agriculture.
 Economics is defined as the study of how limited resources can best be used to fulfill
unlimited human wants.
 It 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.
 Agricultural economics is an applied social science that deals with how producers,
consumers, and societies use scarce and natural resources in the production, processing,
marketing, and consumption of food and fiber products.
 It deals with the principles which underlie the farmer's problems of what to produce,
how to produce it, what to sell and how to sell it, in order to secure the largest net
profit for himself consistent with the best interest of the society as a whole.
 It has the relation of the farmer with other elements of the industrial system, such as
land tenures, means of transportation, methods of marketing, system of taxation,
credit institutions and protective and simulative legislation.
 It may be defined as the science in which the principles and methods of economics
are applied to the special conditions of agricultural industry.
 The basic problem is of economizing or of efficiency, i, e,,
 choosing the most profitable enterprise and operating it at the optimum scale,
 combining the different factors of production in the most economical proportion,
buying and selling most advantageously,
 regulating all the activities involving value to the best interest,
 and in short, directing all the activities to the best advantage.
 The Specific Features of Agriculture
 There are some unique features of the agricultural sector which make the sector
distinct from other sectors of the economy.
 Land is the most important factor of production in agriculture.
 Nature plays an important role in agricultural production
 Use of machinery is limited in Agriculture
 the production operations for which machinery is used in agriculture are few in
number.
 Price elasticity of supply of agricultural products is less than that of the industrial
products.
 Other things remaining the same, supply of agricultural products responds slowly to
changes in their prices as compared with the supply of industrial products to similar
price changes.
 Agriculture as we know involves sowing, waiting, and then harvesting of the crop.
 And all this follows more or less a rigid time schedule set by climatic requirements of
the crops.
 Elasticity of demand for most of the agricultural products is low
 Most of the agricultural products are used only for meeting the basic necessities of life
i.e. food and clothing.
 Seasonal nature of turnover of agricultural production
 Agricultural production on any farm is a seasonal occupation.
 Many of the agricultural products are perishable in nature
 Some products of agriculture like vegetables, fruit and milk have a very short life, a
number of others deteriorate considerable in quality if stored for more than one crop
year.
 Area of operation for a worker is relatively large in agriculture as compared with that in
an industry
 An agricultural worker invariably moves over a large area in order to attend to the jobs
assigned to him, be it ploughing of the field or its watering or the harvesting of crops.
 A farm is a multi-product production unit
 Farm is engaged in the production of many independent products simultaneously.
 For example, each crop is independent of every other crop and the farmer has to decide
which crop to produce and which not to produce.
Historical Development of Agriculture
 The beginning of agriculture was in the gradual transition of nomadic people who hunted
animals and gathered plants into a more stationary people who planted, harvested, and
tended plants and animals in one place.
 Generalized Hunting and Gathering
 This is the basic hunter-gatherer food procurement strategy, characterized by the
generalized and opportunistic use of wild food resources.
 The San (or Kung) hunter-gatherers in southern Africa are a good example of people
practicing this strategy.
 Until 8,000 BC, nomadic hunter-gatherers.
 Specialized Hunting and Gathering
 With more regular targeting of specific resources, people develop systems of
specialized resource exploitation.
 Such practices can be characterized as tending or management of selected wild food
resources.
 Food resources used in this systematic, specialized manner respond biologically to such
intensive cropping in various ways, often by increasing their reproduction.
 For example, Australian Aboriginal communities manage their landscapes by
woodland clearance, weeding, soil alteration through digging, coppicing, pollarding,
and firing of wetlands, woodlands, and grasslands.
 Husbandry of Tamed Food Resources
 The next threshold is crossed when the symbiotic relationship, implicit in the tradition
of specialized hunting and gathering, reaches the point of taming, or behavioral
domestication.
 It may include sowing or planting.
 It is through these practices that animals become tamed and plants semi-domesticated in the
sense that they become accustomed to human presence, attached to human habitations, and
dependent on anthropogenic environments (those created by humans) within a web of
mutually beneficial, symbiotic relationships.
 Cultivation of Domesticated Plants and/or Animal Husbandry of Domesticated
Animals
 It can be accomplished through selective breeding of targeted resources.
 The shift in dependence from tamed to biologically domesticated plants and animals
marks the beginnings of farming.
 As local human cultures grew into large civilizations and people began traveling long
distances, seeds and roots of regional crops were traded.
Agricultural Timeline
 The 11th Century
 Draft horse and plow came into use, greatly increasing farmers’ ability to cultivate larger
fields.
 Farmers learned how to maintain soil fertility, but cereal yields reached a plateau.
 Increased concentration and larger amounts of land under cultivation.
 Food surpluses enabled peasants to more easily move to cities.
 The 1700s
 An important period.
 1750s—agriculture in England became highly organized
 Late 1700s—European societies saw stagnant/falling yields; high prices and widespread
concern about food availability
 1798—Thomas Malthus published his series of essays (still controversial) ! Population
increases exponentially, food supplies increase arithmetically = famine
The 1800s
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Period of profound change.
1825—world population reaches one billion people
Crop yields sufficient to provide exports.
Mechanized farm equipment, expansion of farm size, and the decline in the number
of farms.
 Agricultural science gained prominence; enough food to ―feed the world‖ (Evans,
1998).
 1850–1900—population of industrialized nations grows from 500 to 800 million.
 Per capita calorie consumption increased, consumption of animal proteins increased,
and cereal consumption decreased.
The 1900s
 1927—world population reached 2 billion.
 Land available for cropping became a limiting factor.
 Increased crop yields prioritized.
 Nitrogen fertilizers.
 First use of pesticides in the early 1900s.
Industrial Agriculture
- Started in early 19th century.
- Industrial methods in agriculture well established in U.S. and other Western nations
- Chemical inputs for agriculture greatly increased.
- Mechanized methods of farming and food production became the norm.
- Animal agriculture industry begins raising large numbers of animals confined in
crowded indoor facilities.
- Dramatic increases in yields—with significant hidden costs.
The Green Revolution
- Occurred in mid-twentieth century.
- Planned international effort to eliminate hunger by improving crop performance.
- This revolution refers to the period from the 1940s to the late 1960s when the world
saw a large increase in crop production.
- These increases were achieved using new high-yield crop varieties, new highly
mechanized tools and machines, new irrigation techniques, and new technological
advances in chemical pesticides, insecticides, and herbicides.
Role of Agriculture in Economic development
 The importance of agriculture in the economic development of any country, rich or poor, is
borne out by the fact that it is the primary sector of the economy.
 The contribution of agriculture to economic development is crucial.
 It has already made a significant contribution to the economic prosperity of
advanced countries and
 its role in the economic development of less developed countries is of vital
importance.
 The contributions lie in:
 Providing food to the rapidly expanding population.
 Increasing the demand for industrial products and thus necessitating the expansion
of the secondary and tertiary sectors, i.e. Market Contribution.
 Providing additional foreign exchange earnings for the import of capital goods for
development through increased agriculture exports, i.e. Product Contribution
 Increasing rural incomes to be mobilized by the state
 Providing productive employment, i.e. Factor Contribution
 Improving the welfare of the rural people.
Economic Theories on the Role of Agriculture in Economic Development
The Physiocrats
 Wealth of nations derived solely from the value of "land agriculture" or "land
development" and that agricultural products should be highly priced.
 Agriculture is the only productive industry and consequently the source of all wealth
for the economy.
 It was their view that only agriculture, turned out a "net product" over and above its
cost of production.
 They believe that the amount of food consumed by the workers plus what is used as
seed is on the average less than the amount of produce raised from the ground.
Adam Smith
 According to A. Smith, food is the conditional factor in the growth of an economy. In his
system, technical improvement in agriculture is the pivotal point for sparking of
development in other sectors of the economy.
 The creation of an agricultural surplus is sine qua non (an essential condition; a thing that is
absolutely necessary) for generating demand for other goods and services which could be
purchased with the excess supply of agricultural products.
 Therefore, every increase in the surplus brings about more specialization in industry
through the division of labor.
David Ricardo
 Ricardo considers agriculture as the most important sector of the economy.
 The difficulty of providing food for an expanding population serves as the focal point for
his entire analysis.
 In the progress of society by means of an expansion in population and an accumulation of
capital, there arises, according to Ricardo, an increasing scarcity of the most fertile types
of land.
 In order to meet the rising demand for food, the successive employment of equal units of
labor and capital on poorer grades of land (together with the more intensive use of labor
and capital on better grades of land) brings diminishing returns in terms of agricultural
output.
 As poorer lands are brought under cultivation and diminishing returns occur, competition
among the capitalists for the better grades of land causes a portion of produce of the land
to be transferred to the landlords in terms of rent.
Lewis Theory of Unlimited Supplies at Labour
 Lewis analyses the process of economic expansion in a dual economy composed of a
"Capitalist (Industrial)" sector and a “Subsistance (Agricultural)" sector.
 The basic assumption of Lewis', model is that there exists surplus labour in the
subsistence sector.
 Such labour is there either with zero marginal productivity or having marginal
productivity much less than the institutional wage.
 According to Lewis, the surplus labour in the subsistance sector acts as a source from
which an unlimited supply of labour can be drawn for the development of the capitalist
sector.
 In this situation, new industries can be created or old industries can be expanded without
limit at the existing wage, or to put it more exactly, shortage of labour is no limit to the
creation of new sources of employment".
 In tracing the process of economic expansion, Lewis emphasizes that the key to the
process is the reinvestment of the capitalist system.
 As the capitalist sector expands, labour is withdrawn from the subsistence sector into wage
employment, the surplus then becomes even larger.
 There is still more reinvestment of profits, and the process continues on, progressively
absorbing the surplus labour from the subsistence sector.
Fei and Ranis Model
 Developed by John C. H. Fei and Gustav Ranis and can be understood as an
extension of the Lewis model.
 The strategic nature of agricultural sector in the dualistic economy is due not only to its
preponderant size but also .... to the peculiar production and consumption conditions
attached to the agricultural goods."
 Agricultural innovations and austerity are the forefront of the development effort.
 Growth in the agricultural sector must not be negligible and its output should be sufficient
to support the whole economy with food and raw materials.
 The model also focuses attention on the transfer of labour from the agricultural to the nonagricultural sector as central to economic development.
Interdependence of agriculture and industry
 Industry and agriculture are the lifeline of an economy.
o Agriculture meets demand for food.
o Industry meets demand for other goods such as clothes, houses, electricity, books,
shoes, bicycles, etc.
 Both food and non-food items are essential for living of human being.
 Industry and agriculture are complementary as far as satisfactions of wants of people
are concerned.
 Both must grow simultaneously.
 Industry alone cannot progress without progress of agriculture.
 Similarly, agriculture cannot progress without progress of industry.
 They are dependent on each other in respect of demand and supply.
 The population engaged in agriculture needs industrial products.
 The population engaged in industry needs agricultural products.
 Agriculture production needs producer’s goods from industry.
 Industry production needs raw materials produced by the agricultural sector.
 There is therefore, a clear-cut interdependence between agriculture and industry.
How industries depend on agriculture?
 Agriculture helps industry in the following ways:
 Agriculture provides raw materials for the agro-based industries such as cotton
textile- raw cotton, oil-oil seeds, tea-tea leaves, coffee-coffee beans, tyres and
tubes-natural rubber, etc.
• Populations engaged in agriculture are source of industrial goods and services

As rural income rise due to increasing agricultural yield, the increase in the
domestic demand for industrial goods brings rapid gains in industrialization.
 Agriculture sector is the source of labor for industry sector.
 Agriculture provides food to the population engaged in industry sector.
 Source for fund for the industry sector:
 Agriculture earns more foreign exchange to finance imports of capital, intermediate
goods, and raw materials for industrialization.
How agriculture depend on industries?
 Industrial sector provides seeds for agriculture
 Good quality seeds are an essential input in agriculture.
 It is the industrial sector which develops new technology and designs and produces
the equipment and instruments that are necessary to carry out the research.
 It provides fertilizers: The use of fertilizer in agriculture has significantly raised
agricultural productivity.
 Industries produce equipment and instruments needed for irrigation
 To provide irrigation facilities, there is a need to build or construct tanks, wells,
canals, dams, storage reservoirs, tube wells, hand pumps, and pumpsets, etc.
 The basic materials required for constriction are bricks, cements, iron.
 Where do these come from? These are manufactured by industrial sector
 It provides pesticides: to save crops from pests and diseases we need various pesticides.
 It provides modern equipment: new development in industrial sector have provided
modern types of machines to agriculture such as tractors, etc.
 It supplies manufacture goods to the population engaged in the agricultural sector
 apart from food, people need many other goods such as clothes, hoses, transport
vehicles, electricity, T.v., fridge, washing machine, etc.
 All these goods are produced by industrial sector.
 Source to funds to the agricultural sector
 the agricultural sector generally lacks funds due to low rate of saving.
 The fund collected in the industrial areas can conveniently be used for giving loans in
the rural areas.
 Industrialization favorably affects agricultural development in a number of ways:
First, with industrialization income rise rapidly which increase the demand for such
agricultural commodities as milk, vegetables, eggs, poultry, etc.
 Second, industrialization increases the availability of capital for the agricultural sector
which helps in modernizing agriculture and raising farm output.
Third, industrialization followed by urbanization opens vast job opportunities to the
rural people who remit money back to their home.
Fourth, when urbanization follows industrialization, it provides larger facilities for
education, travel, and contact with new things and ideas which widen the horizon of the
rural people, change their attitudes towards life and lead to modernization.
 Finally, industrialization provides a wide and expanding range of consumer goods which
encourages the agriculturists to increase farm produce.
 This, in turn, tends to raise their income to enable them to buy the consumer goods.
 Thus both agricultural and industrial developments are interrelated and each affects the
growth of the other.
 The LDCs should, therefore, achieve the harmonious development of agriculture and
industry for a steady growth of the economy.
“ End of Chapter One”