INTRODUCTION TO AGRICULTURAL ECONOMICS

(AEB 212)

GROUP :

Student Numbers:

VENUE: Lecture Theatre 311/003

 This course is composed of eleven units:
Unit 1: Introduction
Unit 2: Factors of production
UNIT 3: Theory of consumer
behavior
UNIT 4: Theory of demand
UNIT 5: Theory of firm
UNIT 6: Price
determination UNIT 7: Cost
of production
UNIT 8: National income
accounting UNIT 9: Money
UNIT 10: Production economics
 UNIT 1: Introduction
• The unit 1 contains the following topics:
Definition of economics
Definition of agricultural economics
Branches of economics
Economic problems
Scarcity and choice
Opportunity cost
Value judgment in economics
Economic systems
 WHAT IS ECONOMICS?
• Economics involves analysis of production, distribution, and consumption
of goods and services in an economy.
• It is concerned with producers, distributors and consumers of goods and
services.

• Economics – the study of how individuals and societies make decisions about
ways to use scarce resources to fulfil their unlimited needs and wants.

What does this mean?

• Economics can be considered as a social science that deals with how consumers,
producers and society in general choose among alternative uses of scarce
resources with the aim of improving efficiency in production and consumption
and, in satisfying human wants.
 Economics explains how people interact within markets to get what
they want or accomplish certain goals.

A study of economics can describe all aspects of a country’s economy,

such as how a country uses its resources, how much time laborers devote
to work and leisure, the outcome of investing in industries or financial
products, the effect of taxes on a population, and why businesses succeed
or fail.
 Economists seek to answer important questions about how people,
industries, and countries can maximize their productivity, create wealth,
and maintain financial stability.
 Agricultural Economics: is an applied social science that deals with how human
beings choose to use technical knowledge and scarce production resources such
as land, labour, capital and management to produce food, fibre and distribute it
for consumption to various members of the society.

• Importance of economics/agric. Economics

• Individual contributions: as everyone contributes to economy and economics
gives idea and enable how an individual can contribute to the economy.
•Government policies: economics helps a govt. in formulation and
implementation of effective policies for development of the economy.
•Decision/choice making: helps in determining what is better for an
individual.
•Market mechanism: gives idea how market functions e. how price and demand
of a good changes.

• Boosts cooperation: among individuals as well as businesses.

• Determining the risk: helps in assessing risk and the way it can be minimized.
•Boost development: this is the ultimate and the most important function or
importance of economics which is accomplished by all the importance listed
above.
• Branches of Economics:
• Microeconomics: How do individuals make economic decisions?
It focuses on economic actions at an individual level; this can be people,
households, firms or markets.
• Microeconomics: Study of behavior of individual economic units such as firms
and households. For example; transport.
• This branch focuses on the price, demand and supply of goods and services.
• Thus, microeconomics concerned with study of individual firms.
Example: A farm and its relationship:

• to another farm,
•• to the entire economic sector such as agriculture and,
•• to the whole economy
•
 Macroeconomics
• Macroeconomics deals with the study and analysis of the whole economy.
• It concerns factors determining aggregate variables such as aggregate
demand, aggregate supply, national output, employment, inflation, the
balance of payments, etc.
• Thus, macroeconomics looks at the big picture of the economy.
• Choices made by large groups (like countries);deals with aggregate economic
actions.
• Macroeconomics deals with two types of policies that affect and control the
whole economy:
• Monetary policy: deals with aspects of money supply, interest rates, credit
instruments and facilities.
• Fiscal policy: deals with the taxation policies of the government, government
spending and public debt.
Questions that Economics tries to answer: Economic Problems

The major economic problems includes the following:

WHAT to produce (make)
HOW MUCH to produce(quantity)
HOW to Produce it(manufacture)
FOR WHOM to Produce(who gets what)
WHERE TO SELL (Market)
WHO gets to make these decisions?
All these problems are outcome of unlimited wants and scarce
resources
What now do we need to address these
economic questions?

RESOURCES
What are resources?
• The things used to make other goods
• Resources can be:
i. Natural and biological (fresh water, land and minerals)
ii. Human (labour and management or entrepreneurship)
iii. Manufactured or capital (machinery, buildings)
 Why then cant we produce as much as we wish to?

The Fundamental Problem

SCARCITY: unlimited needs and wants but limited resources
Because ALL resources, goods, and services are limited – WE MUST MAKE
now CHOICES!!!!
We make choices about how we spend our money, time, and energy so we can
fulfil our NEEDS and WANTS.

What are NEEDS and WANTS?

• NEEDS;Things we must have to survive, generally: food, shelter, clothing?
• Economic WANTS are desires that can be satisfied
through consumption of a good, service, or leisure activity?
You can’t have it all (SCARCITY – remember?)

◦ Scarcity requires choice. People must choose which of their desires

they will satisfy and which they will leave unsatisfied.
◦ When we choose more of something, scarcity forces us to take less of
something else.
◦ Economics is sometimes called the study of scarcity because
economic activity would not exist if scarcity did not force people to
make choices.
◦ . Scarcity is the fundamental economic problem, and all economic
activities revolve around trying to solve this problem.
 OPPORTUNITY COST
• A special kind of Trade-Off is an OPPORTUNITY COST
• The Value of the Next Best Choice (e.g.: Sleeping is
the
opportunity cost of studying for a test)
 The opportunity cost of a choice is the value of the best
alternative forgone, in a situation in which a choice needs to be
made between several mutually exclusive alternatives given limited
resources.
 Assuming the best choice is made, it is the "cost" incurred by not
enjoying the benefit of the second best choice available.

 An opportunity cost is a benefit, profit, or value of something that

must be given up to acquire or achieve something else.
OPPORTUNITY COST cont.’

• Since every resource (land, money, time, etc.) can be put to

alternative uses, every action, choice, or decision has an
associated opportunity cost.

• e.g. If John buys a pizza for lunch at P90… Then he

can’t afford the T-shirt he saw at Options that he plans on
saving for…

• Q: What is the opportunity cost of buying pizza?

Production
So, how do we get all these that we wish to have?
• Production: making of products (goods or services using the scarce
resources).
And what do we need in order to produce?
 Factors of Production
• To produce goods and services requires resources or factor inputs.
• A resource can be defined as a factor that can be used in the production process
to produce a product that can satisfy a human need, want or desire.
• There are four basic categories of resources (factors of production) – land,
labour, capital and entrepreneurship.
 Factors of Production

1. LAND – Natural Resources available for production.

• It includes all the land forms in view as well as the physical characteristics and
the natural influence of the land that may influence its productivity.
• Examples are minerals, forests, and groundwater.
• Only one major resource is considered free – the air we breathe.
• The rest of the resources are scarce as there are not enough natural
resources in the world to satisfy the demands of consumers and producers
• Air is classified as a free good since consumption by one person does not
reduce the air available for the others
• A free good does not have an opportunity cost. The reward for land is rent.
 Factors of Production cont.’
2. LABOR – Physical and Intellectual
Labour refers to the physical act of performing a task
i.e.
•manpower.
E.g. the labour in production: seed
required crop bed
preparation, planting, irrigation, weeding, chemical
application, harvesting and etc. payment for labour is
wages and salaries.
• Human capital is the quality of labour resources that can
be improved through investments in education, training
and health.
 Factors of Production cont.’

3. CAPITAL - Tools, Machinery, Factories, road networks,

telecommunications network, ICT infrastructure etc..
• refers to investment in goods that can produce other goods in the future.
• Capital therefore refers to manufactured goods which have been produced
in order to produce other goods and services. The reward for capital is
interest.
4. ENTREPRENEURSHIP – Investment
• Investing time, natural resources, and capital are all risks
associated with production
labour
Of goods and services.
ENTREPRENEURSHIP
• The term 'Entrepreneur' has been derived from a French word
'Entreprendre'
meaning to undertake certain activities.

• It refers to the ability and the willingness to take risk in the

production
process.

• Reward for Entrepreneurship is Profit/ Loss

• Normally, entrepreneur has to perform two types of functions:

i. Organization Function and,
ii. Risk Bearing
ENTREPRENEURSHIP
• The term 'Entrepreneur' has been derived from a French word
'Entreprendre'
meaning to undertake certain activities.

• It refers to the ability and the willingness to take risk in the

production
process.

• Reward for Entrepreneurship is Profit/ Loss

• Normally, entrepreneur has to perform two types of functions:

i. Organization Function and,
ii. Risk Bearing
Example of organisation function
Value judgment in economics

• Each and every activity has its value in economics.

• The values of goods or services can be valued or
judged in two ways:

1. Positive economics
2. Normative economics

• Economists often distinguish between positive

economics
and normative economics.
Value judgment in economics
• Positive economics is concerned with facts. It tells us what was, what
is or what will be. Disagreement over positive economics can be
settled by an appeal to facts. In other words, positive economics is
verifiable.
• For, example, consider the statement. “A decrease in personal income
tax will lead to a rise in unemployment.”
• In the above statement, both personal income tax and unemployment
are measurable and hence the statement is verifiable. Therefore, the
statement is a positive statement.
• It is important to take note that a positive statement can be true or
false. What makes the statement a positive statement is not that it is
true but that it is verifiable. In fact, the above statement is false.
Value judgment in economics
• Normative economics is concerned with value judgments. It tells us
what should be. Disagreement over normative economics cannot be
settled by an appeal to facts. normative economic statement is not
verifiable.
• For example, consider the statement. “A redistribution of income from
the rich to the poor will increase social welfare.”
• In the above statement, although redistribution of income is measurable,
social welfare is not and hence the statement is not verifiable. Therefore,
the statement is a normative statement.
• It is important to take note that a normative statement can be true or
false. Although the statement is true, what makes it a normative
statement is not that it is true but the what ought to be.
Economic Systems
• As discussed previously, all economies face the problem of scarcity
and hence are required to make the three fundamental economic
decisions of what and how much to produce, how to produce and for
whom to produce.
• An economic system is a way of making the fundamental economic
decisions of what and how much to produce, how to produce and for
whom to produce etc. etc.
• Economic System refers to the ways or mechanism of running or
managing the economy of a country.
• Economic systems and economy are often used interchangeably. It
helps in providing solution to the basic economic problems.
Economic Systems
• An economic system has three functions: Production,
distribution, and consumption of goods and services desired
by society.
• It must provide solutions to basic economic
problems/questions
of:
What to produce (Choose product or service)
How much to produce (Quantity)
How to produce (Technology / method of production)
When to produce (Timeline )
For whom to produce (Consumer)
Economic Systems
• An economic system of each country is complex and encompasses
many institutional arrangements including statutory instruments such
as: its constitution, laws, policies, rules and regulations.
• Types of economic systems:

1. Free market/ Capitalistic/ Market economic system

2. Planned/Socialistic/Command economic system
3. Mixed economic system
Market Economic System
 A market economy is very similar to a free market.
 The government does not control vital resources, valuable goods or
any other major segment of the economy.
 The means of production are owned primarily by private enterprises
and decisions regarding production and investment determined by
private owners in capital markets.
 Market economic system
• Also described as a Free enterprise or capitalist system.
• The society attempts to deal with the basic economic problems by allowing free
play to what are known as market forces i.e. prices are determined by the forces of
demand and supply.
• The framework of this system is characterized by the following
Features
 Capitalism is the dominant ideology.
o Private property – resources are owned by individuals
 Freedom of choice and enterprise, and the profit motive.
o Self-interest as the determining motive
o Competition
 A reliance on the price system; Price is the key variable in resource allocation.
o A very limited role of government,
 Gov’t intervention is mainly through creation of rules.
 Land is a marketable commodity which can be bought and sold.

 The unfettered interaction of individuals and companies in the marketplace

determines how resources are allocated and goods are distributed.
 Individuals choose how to invest their personal resources, what training to
pursue, what jobs to take, what goods or services to produce.
 And individuals decide what to consume.
 Within a pure market economy the government is entirely absent from economic
affairs.
 The United States in the late nineteenth century, at the height of the lassez-faire
era, was close to a pure market economy in modern practice.
 Advantages of the market system

 Allocative efficiency may be achieved as private individuals themselves are

in the best position to know what they want.
 There will be incentive for workers to work hard and for firms to be efficient
as they will be rewarded with high income and profit.
 There will fast decision-making as each private individual only needs to make
economic decisions pertaining to their interest.
 There will be liberty as private individuals are allowed to choose their ways of
life.
Advantage: market economy (at least, outside of economic benefits) is the
separation of the market and the government.
 This prevents the government from becoming too powerful, too controlling
and too similar to the governments of the world that oppress their people while
living lavishly on controlled resources.
 It is self regulating; goods and services are produced and distributed to where
they are in high demand.
 Freedom of choice, that is, consumers' sovereignty.
 Comers purchase what they want and decide what to be produced.
 Conditions for initiative and enterprise.
 Personal and self interest are the root of economic activity.
 Producers are alert to new opportunities.
Disadvantage: progress and innovation have occurred at such incredible
rates as to affect the way the world economy functions.
 Since it is based on self- interest and profit motive only those items
backed by money and purchasing power are produced.
 Result in the rich enjoying luxuries whereas the poor lack necessities.
 Public goods like judiciary, education and health and other social
amenities are rarely considered.
 Competition is an essential ingredient for the efficient working of the
system.
Command Economic System (collectivism)

 Production is carried out to fulfil planned-economy objectives.

 Decisions regarding the use of the means of production are adjusted to
satisfy state-conceived economic demand, investment is carried out
through state-guided mechanisms.
 The means of production resources are either publicly owned, or are
owned by the workers cooperatively.
 Command economic system

• Based on the ideology of socialism

• Solutions to the economic problems are worked out by some all
powerful authority which imposes its solution on the people e.g.
government.
• Resources are owned by government
• Decisions are made by government
• Prices are determined by government
• No role of individuals in decision making
Centralized Control: The most notable feature of a command economy is that
a large part of the economic system is controlled by a centralized power; often,
a federal government.
 This kind of economy tends to develop when a country finds itself in
possession of a very large amount of valuable resource(s).
 The government then steps in and regulates the resource(s).
 Often the government will own everything involved in the industrial
process, from the equipment to the facilities.
 Prices are set by price commissioners.
Decisions on what to produce? How to produce? How much to produce and
who gets it are made by the central government.
 It decides on how human and non human resources are utilised. The state
decides how to use and distribute resources.
 The government regulates prices and wages; it may even determine what
sorts of work individuals do.
Advantages of the command system

Allocative efficiency may be achieved as externalitieswill be takeninto

consideration by the government.
There will be no unemployment as the government will provide a job
for every private individual.
The distribution of income will be equitable as no private individuals
will
earn very high or very low income.
Public goods are produced by the government through taxation.
There will be no private firms with substantial market power
which can
charge high prices. i.e. Consumers do not suffer from harmful effects of
monopolies
Advantages continue:

 It is capable of creating a healthy supply of its own resources and it

generally rewards its own people with affordable prices (but because
it is ultimately regulated by the government, it is ultimately priced by
the government).
 Through state control a minimum standard of living can be provided
for everyone in the society.
 Since profit is not the motive, certain services can be provided even
though they are loss making.
Disadvantages: the government in a command economy only
desires to control its most valuable resources.
 Other things, like agriculture, are left to be regulated and run by
the people.
 Planning is difficult. It is impossible to accurately assess the
demand for each product consumers want.
 Consumers lose their sovereignty (freedom of choice).
 High administrative costs; large number are needed to run this
kind of economy.
 Lack of innovation; mainly because profit is not the motive.
 Lack of quality control; quantity is preferred at the expense of
quality.
 Lack of incentives; central planners have limited power to use
wage incentives to stimulate hard work.
 Workers usually have complete job security, hence do not have to
work hard.
Mixed Economic System
 A mixed economic system (also known as a Dual Economy) is just
like it sounds (a combination of economic systems), but it primarily
refers to a mixture of a market and command economy.
 Many economic decisions are made in the market by individuals. But
the government also plays a role in the allocation and distribution of
resources.
 Many variations exist, with some mixed economies being primarily
free markets and others being strongly controlled by the government.
Mixed economic system
 Based on the mixed ideology of socialism and capitalism therefore
operates under the control of government and private sector as well
 Some of the factors of production in the economy are owned by private
individuals and some are owned by the government.
 Economic decisions are partly made by private individuals and partly
made by the government.
 Private individuals can engage in productive activities, choose what to
buy and where to work, but they are restricted by the government
 Private individuals can pursue self-interest, but they are restricted by
the government.
 Although there is economic freedom, it is restricted by the government.
Advantages: In the most common types of mixed economies, the market is more or
less free of government ownership except for a few key areas.
 These areas usually are the government programs such as education,
transportation etc.
 Disadvantages: While a mixed economy can lead to incredible results it can also
suffer from similar downfalls found in other economies.
 The eternal question for mixed economies is just what the right mix between the
public and private sectors of the economy should be.
• Mixed economic system is composed of two economic sectors:
i. Private sector: It symbolizes with the free market economic system
ii. Public sector: It symbolizes with the planned economic system