Chapter 2
Agricultural Economics and
the American Economy
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Essential Questions
1. What is economics?
2. Evaluate the major economic systems.
3. How does economics function as both a
large-scale and small-scale system?
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What is Economics?
• Economics is a social science that studies
how consumers, producers, and societies
choose among the alternative uses of scarce
resources in the process of producing,
exchanging, and consuming goods and
services.
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Three Components of Economics
• Scarcity:
– An economic term for a situation in which there are not enough
resources available to satisfy people’s needs and wants.
• Resources:
– Inputs that society uses to produce outputs – natural, human,
manufactured, and entrepreneurial.
• Wants & Needs:
– Wants are things above and beyond what is required for daily
living.
– Needs are essential to daily living (water, food, shelter).
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Types of Resources
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Natural Resources (Land)
Human Resources (Labor)
Manufactured Resources (Capital)
Entrepreneurship (Management)
– Goods and Services
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Three Economic Questions
• These are questions asked by all societies:
– What goods should be produced, and how much of
each?
– How should these goods be produced?
– Who should get what and how much?
• The answers to these questions will
determine the type of economic system each
society will use.
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Combining the Economic
Ingredients
To simplify the economic questions, assume
all the goods and services in our society are
represented by a pie.
1. What type of pie to produce?
2. What combination of ingredients to use?
3. How to divide the pie?
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Six “Major” Economic Systems
• Economists have identified six major economic
systems:
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Traditional
Capitalism
Fascism
Socialism
Communism (Command)
Mixed
• The major distinction between each classification
is the degree of control by private individuals
versus the group (or government).
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The Traditional System
• The traditional system answers the three
basic economic questions according to
tradition, or what has always been done.
• Economic decisions are based on customs,
religious beliefs, and ancestry.
• These systems exist in limited parts of Asia,
Africa, the Middle East, and Latin America.
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Capitalism
• In this economic society, individuals have free
reign over their time and resources and can
determine exactly how to use these assets, with
few legal controls by the government.
• Ownership is private and the factors of production
are controlled by the individual.
• Competition in the driving force in every
economic activity and decision – the market forces
determine prices and value.
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Socialism
• The founding idea of socialism (as an economic
system) is public ownership of all productive
resources.
• The government directs all decisions as to the
utilization of resources.
• It is intended for the mutual benefit of all people
and individual economic incentives are limited.
• Lack of free prices and free markets eliminates
competition.
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Fascism
• In this system, productive property is owned by
individuals.
• Use of this property reflects the preference of the
government.
• Individuals have a high degree of economic
power, IF they support the government in power.
• This system suppresses opposition, censors
criticism, and denies freedom.
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Communism
• Totalitarian style of government in which a
single authoritarian political park controls
government-owned means of production.
• Private individuals have no control.
• Everyone contributes according to ability.
• Distribution is made according to need.
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Mixed Economic Systems
• Most societies reflect multiple aspects of
different economic structures, thus being a
“mixed” economy.
• Economic policy may change in a society
due to war, times of hardship, or changes in
leadership.
• America, though often said to be
capitalistic, is actually a mixed economy.
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The American Economy
• Individuals have a great deal of economic
control.
• However, the government guides
production in many industries and regulates
nearly all sectors.
• Government subsidies and grants act as
incentives to increase or reduce production
of goods and services.
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Father of Economy
• England was the major center of intellectual
activity during the 18th century.
• Adam Smith – known as the Father or
Founder of Economics.
• “The Wealth of Nations” responded to the
economic environment in this period. A
small percentage of people were wealthy,
while the masses were extremely poor.
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The American System of Free
Enterprise
• The American Economy has six major
characteristics:
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Little or no government control
Freedom of enterprise
Freedom of choice
The right to own private property
Profit incentive
Competition
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The Role of Government
• The Founders of the US originally limited
the role of the government to national
defense and keeping the peace.
• Recently, government’s role has increased
to regulation of business and provision of
public services.
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Free Enterprise
• Free enterprise – economic system that
allows individuals to organize and conduct
business with a minimum of government
control; individuals privately own what they
produce.
• Common term for US economic system.
• Limits – Minimum age to work (ex. 16
years old) in most states and then limit of
how many hours, Minimum wage, etc.
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Freedom of Choice
• Part of freedom of choice is freedom to fail.
• Buyers make the decisions about what to
produce.
• Success or failure of a good or service
depends on the individuals freely choosing
what they want.
• Government sets law to protect buyers –
safety standards such as labels and tags.
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Private Property
• Private property – what is owned by an
individual or group rather than by the
federal, state, or local government.
• Individuals have the freedom to buy
whatever they can afford.
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Profit Incentive
• Profit incentive – the desire to make a
profit.
• The goal of a profit is what prompts people
to produce things that others want to buy.
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Competition
• Producers or sellers of goods hope to win
more business by offering lower prices or
better quality.
• Success depends upon the ability to produce
products at a price the average consumer
can afford.
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Macroeconomics vs. Microeconomics
• Economics is most often looked at in two ways: Macro
(large scale) and Micro (small scale)
• Macroeconomics studies factors on a national scale and is
most concerned with the following:
– Gross domestic product, aggregate supply, aggregate demand,
unemployment, inflation and deflation, monetary policy, and fiscal policy
• Microeconomics considers individual markets and is most
concerned with the following:
– Markets and prices, supply and demand, competition and market structure,
income distribution, business failures, and the role of government
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