AAEC 2305
Fundamentals of Ag Economics
Chapter 1
Introduction
INTRODUCTION
 Economics is the study of how to allocate
scarce resources to produce goods &
services that help satisfy unlimited human
wants.
• Economy as a whole is buyers & sellers
competing
• Everything is scarce at some point
• We have to allocate these scarce
resources
INTRODUCTION
 3 important aspects of definition:
• Allocation - making decisions about how
to use our resources or capabilities
• Limited Resources (Resource Scarcity)
• Unlimited Wants - most basic
assumption is that each individual has a
desire for more - more is preferred to
less (ex. money)
RESOURCE SCARCITY
 A resource is an input provided by nature
and modified by humans using technology
to produce goods that satisfy human wants.
• Resources are also called inputs or factors of
production (ex. land, labor, equipment, water,
etc.)
• Combining resources through human activity
& technology produces useful outputs.
3 IMPORTANT CHARACTERISTICS
OF RESOURCES
 Resources have economic value
• Producers generally must pay to use
resources
• Monetary & Societal (cars as status symbol)
 Their supply is limited (Scarce)
• Since there is a scarcity of resources, goods
produced from them are also scarce
• How should resources be distributed Economic issue of distribution of goods &
services
(CONTINUED)
 Resources have alternative uses
• Since resources have alternative uses, tradeoffs must be made
• The scarcity of goods requires choices (or
trade-offs) by individuals & society - you only
will buy a good if its value to you is greater
than or equal to the price of the good
• Opportunity costs are a measure of this tradeoff
OPPORTUNITY COSTS
 Resources are scarce - -
as decisions are
made in the face of scarcity, costs are
generated - - opportunity costs
• Economic decisions (choices) are based upon
scarcity
 Opportunity costs reflect the value of
alternative opportunities foregone or
sacrificed
 If you use a good for one purpose, you give
up the opportunity to use it elsewhere
ALLOCATION OVER TIME
& Distribution
 Time is another important element in
economic decisions.
• Someone has to make the decision whether to
use a resource today or in the future. (ex. Gas,
Education, etc.)
 Distribution of goods & services among
various persons & groups in society is also
a major concern of economists.
MICRO VS MACRO
 The study of economics consists of two
broad categories:
• 1) Macroeconomics - encompasses the
performance of a national economy and the
international economy (ex - inflation,
unemployment, dist. of income, etc.)
• 2) Microeconomics - the study of economic
decisions at the individual producer &
consumer level (ex - profit maximizing level
of output for a firm, how to spend your
weekly budget)
CLASSIFICATION OF ECO QUESTIONS
 1) Positive Economics
 2) Normative Economics
 3) Prescriptive Economics
POSITIVE ECONOMICS
 Deals with what is
 Does not involve value judgements or
opinions
• Ex - If the gov’t raises the price support
for a commodity, does this cause
farmers to produce more of that
commodity
NORMATIVE ECONOMICS
 Deals with what should be
 Inherently involves making value
judgements - To address these questions,
someone must decide what is good or bad,
fair or unfair, etc.
• Ex - Should gov’t policy guarantee that farmers
get a fair price for their grain?
PRESCRIPTIVE ECONOMICS
 Deals with ways to achieve a desired result
in the most efficient, profitable, or
acceptable manner
 Involves both positive and normative
economic issues
 Identifies alternative ways to reach a goal
and provides methods for choosing among
them
All economic systems need to answer:
 What to produce?
 How to produce?
 For whom it will be produced?
 When it will be consumed?
COMMON ASSUMPTIONS
 Economists use assumptions to answer
economic questions because the real
world is complex. The following are two
common assumptions that simplify
economic scenarios
• 1) Individuals want to maximize their well
being (utility)
• 2) Firms want to maximize profits
AGRICULTURE OVERVIEW
 Agriculture refers to the complex system
that begins with natural resources and
involves farms, agribusinesses, and
governmental organizations in providing
products of the land to the consumers.
 Three main sub-sectors:
• The Farm Sector
• Agribusiness
• The Public Sector
Farm Sector
 Includes all the farms and ranches
(including hobby farms & ranches) that
grow crops and raise livestock (usually for
sale)
 Changes in the farm sector have occurred
in the US due to technological
advancements, the development of
markets, and governmental policy.
AGRIBUSINESS
 Includes (1) firms & industries that produce
& sell goods for use in farm production
(input sub-sector) & (2) firms & industries
that buy, store, & process farm
commodities & distribute them to domestic
& export markets (Agricultural processing
& marketing sub-sector).
PUBLIC SECTOR
 The development & growth of agriculture is
marked by important advances in an array
of publicly supported services know as the
public sector.
 Ex. – higher education available to the farm
sector, extension services, information
services, roads, harbors, etc.
Examples of some Agricultural
Economic Issues
 Food Availability & Safety
 Environmental Consequences of Agricultural
Production
 Managing Technological Advances in
Agriculture
 Increasing Internalization of Agriculture
 Policy Responses to Uncertainty in Agriculture
 Decline in the Number of American Farmers
 These six issues are just an example of some
of the major challenges facing agriculture!