Transcript Document

Agricultural Economics
Lecture 2
• http://www.farmingfirst.org/green-economy/
Introduction to Agricultural Economics
• Agricultural economics surveys agriculture and the
food industry in its many facets and forms.
• The agricultural economist is concerned with the
entire food and fiber system.
– From inputs used, all the way through the production,
processing, distribution, and consumption chain.
• Study of agricultural economics covers much more
than just the activities of farmers or ranchers.
– Some economists deal with issues of resource
conservation, pollution control, and water management.
– Others study the agribusiness sector as purchasers,
processors, and distributors of food and fiber products.
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Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
AGRICULTURAL ECONOMICS
• The objective of any scientific inquiry is to…
– Observe & describe a particular range of phenomena.
– Organize those observations into recognizable patterns.
– Formulate “laws” where sufficient regularity warrants.
• The laws give scientist a basis on which to make predictions.
• Economics is a social science, and social scientists
must deal with the laws of human nature.
– As humans are not consistent in their behavior, the laws
of the social scientist are less reliable & more open to
exception than those of physical or biological scientists.
– Nevertheless, economic behavior of most persons is
generally consistent, and thus, predictable to a degree.
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Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
AGRICULTURAL ECONOMICS
• Economics is that particular social science that
deals with the allocation of scarce resources among
an unlimited number of competing alternative uses.
• The word “resources” describes anything tangible:
– Wheat, barbed wire, hamburgers, water, labor, clean air.
• Every resource is relatively scarce, meaning the
availability of every resource is insufficient to
satisfy all of its potential users.
• Scarcity creates the need for a system to allocate
the available resource among some of those
potential users.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
AGRICULTURAL ECONOMICS
• Agricultural economics is the social science that
deals with the allocation of scarce resources among
competing alternative uses found in the production,
processing, distribution, and consumption of food
and fiber.
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Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
BASIS FOR ECONOMICS
• The study of economics rests on three foundations:
– Self-interest, scarcity, and choice.
• Without scarcity, there would be no need for
an allocation system.
• Choice is important, because without choices
there is no decision to be made.
– Since economics is about decision making & allocation,
without choices there would be no need for economics.
• Self-interest is what drives the consumer to seek
more “stuff ” at a lower price.
– It also drives the producer to produce as efficiently as
possible—all economic activity is driven by self-interest.
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Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
BASIC ECONOMIC DECISIONS - Five Issues
• Every economic system must resolve five basic
issues:
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What to produce.
How to produce it.
How much to produce.
When to produce.
For whom to produce.
• These basic questions must be answered in each
society—they simply cannot be avoided.
– Institutional & political systems of each society determine
the manner in which these decisions will be made.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
ECONOMIC SYSTEMS
• At one extreme of possible allocation mechanisms
lies the free market or price system.
– Each individual producer and consumer, restricted only
by financial resources, is free to choose what, how,
how much, and when to produce or consume.
• Financial resources of each consumer resolves the
“for whom” question.
• At the other extreme is the command system.
– All decisions are made by a central planning agency
or other administrative individual such as an absolute
dictator or tribal chief.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
ECONOMIC SYSTEMS - Price System
• An advantage of the price system is consumer
sovereignty and freedom in economic decisions.
– The price system is a very efficient mechanism for the
“what,” “how,” “how much,”& “when” decisions.
• Its does have shortcomings, which even its most
ardent supporters recognize.
– In a price system, the old adage, that the “rich get richer
and the poor get poorer,” has some validity.
– There are a number of resources that a price system
cannot efficiently allocate.
• Frequently called public or nonmarket goods, these
include education, national defense, and fire protection.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
ECONOMIC SYSTEMS - Command System
• Advantages of a command system are that it is
very effective in allocating public goods.
– And can be quite egalitarian in “for whom” decisions.
• Disadvantages of such an allocation system are
loss of individual freedom in economic decisions.
– And inherent inefficiencies of central planning agencies.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
BASIC SKILLS OF AGRICULTURAL ECONOMISTS
• The study of agricultural economics provides the
student with an opportunity to explore phenomena
common to everyday life from the perspective of an
analytical scientist.
• The role of the economist is to devise rules for
making decisions in an ever-changing, uncertain
economic environment.
– These rules can be used to make production,
consumption, marketing, and financial decisions.
• Studying logic of these managerial rules, a student
can learn to adjust decisions to changing
environments in which economic activity occurs.
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Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Economic Models
• It is impossible for economists to explain, much less
predict all behavior—different people act differently.
– As a general rule, people act in similar, predictable ways.
• An expected pattern of economic behavior is called
an economic model.
– The basic building block in the logic of the economist.
• A model usually will include…
– Some assumptions about human behavior.
– Other assumptions about the institutional environment
in which a particular form of human behavior takes place.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Economic Models
• The economist uses the model to attempt to
describe appropriate economic behavior.
– Leading to the eventual achievement of some goal.
• A frequently used economic model is the “perfectly
competitive firm,” with a number of assumptions
about the firm & the its operating environment.
– The assumption is made that the firm is so small relative
to the market that its actions will not affect the market.
– Also that the firm manager attempts to maximize profits
given a particular resource endowment.
• Are the assumptions valid?
• If not the results may not be appropriate.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Economic Models
• At best, economic models approximate reality in a
manner that enhances our ability to conceptualize
and simplify the real world we are examining.
– Models provide the economist with an internally
consistent mechanism for conceptualizing problems.
– They force the economist to reason in a systematic,
deductive manner.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Ceteris Paribus
• Ceteris paribus is a Latin phrase that roughly
translates to “everything else being equal.”
– Generally any economic principle is valid only
when all other external factors remain the same.
• Use of ceteris paribus gives economics much of
the logical rigor required in a scientific inquiry.
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Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Opportunity Cost
• A powerful economics concept is opportunity cost.
• All economic resources have value.
– Value is sometimes determined in a marketplace where
the user of a resource pays the prevailing price for the
use of the resource.
– Other times, resources have economic value, but
those resources are not purchased in the open market.
• In the latter case, economists use the principle of
opportunity cost to determine the economic value
of a resource.
– Though there is no manifest market price of that resource.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Opportunity Cost
• Opportunity costs cannot be measured directly.
– They can only be estimated indirectly.
• The study of economics is all about economic
values—costs and returns.
– When available, we use market prices to determine
economic value.
– When market prices are not available, we use the
concept of opportunity cost to estimate those values.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Diminishing Returns
• In the economics of production and consumption,
the concept of diminishing returns is central to
the process of economizing.
• The basic idea of diminishing returns is that as you
increase the amount of something, ceteris paribus
will eventually increase at a decreasing rate.
– Diminishing returns.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Diminishing Returns
• The idea of diminishing returns is expressed in
the “law of diminishing marginal utility.”
– Marginal utility refers to the additional utility or satisfaction
associated with one additional unit of a good being
consumed—ceteris paribus.
• What this law says is that the amount of total utility
gained from consuming a good eventually
increases at a decreasing rate.
– Assuming consumption of everything else stays constant.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Marginality
• One of the greatest contributions of economics is
the concept of marginality.
– In economics, the term marginal refers to an additional
or an incremental unit of something.
• Most economic analyses deal not with the marginal
value of production or consumption.
– It is on the margin where economic decisions are made.
• As the consumer consumes additional units of a
good, ceteris paribus, additional satisfaction or
utility obtained by each unit decreases.
– At any given consumption level, economists focus
on the economics of the marginal or additional unit.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Marginality
• The relevant economic question of the consumer
should be…
– Is the marginal utility associated with one additional unit
greater than the marginal cost of acquiring that unit?
• Regardless of current level of satisfaction or utility,
if the marginal utility is greater than the marginal
cost, the consumer can increase total utility by
consuming the marginal unit.
– The same basic principle applies to production as well
• As additional units of fertilizer are applied to a
given amount of land, ceteris paribus.
– Incremental or marginal returns to that fertilizer decline.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
Marginality
• Using marginal analyses, we are able to determine
economic optimizing behavior.
– Ignoring total costs or returns & concentrating on
marginal costs and returns, we are able to focus
on the economizing process.
• From the economist’s perspective, everything
happens on the margin.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
FACTS, BELIEFS, AND VALUES
• Since economics inevitably must deal with the
value system of individuals and society, it is
important to distinguish among facts, beliefs,
and values.
Facts are what we know to be the case.
Beliefs are what we think to be the case.
Values are what we think should be the case.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458
Introduction to Agricultural Economics
FACTS, BELIEFS, AND VALUES
• As a social scientist, the agricultural economist
studies man’s behavior as producer and consumer.
– With words to describe the behavior/environment taken
from everyday language.
tab
Agricultural Economics, 3th edition
By H. Evan Drummond and John W. Goodwin
© 2011, 2004 Pearson Higher Education, Inc.
Pearson Prentice Hall - Upper Saddle River, NJ 07458