AAEC 2305 Fundamentals of Ag Economics

1. AAEC 2305Fundamentals of Ag Economics Chapter 1 Introduction

2. 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

3. 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)

4. 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.

5. 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

6. (CONTINUED) • Resources have alternative uses • Since resources have alternative uses, trade-offs 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 trade-off

7. 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

8. 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.

9. 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)

10. CLASSIFICATION OF ECO QUESTIONS • 1) Positive Economics • 2) Normative Economics • 3) Prescriptive Economics

11. 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

12. 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?

13. 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

14. All economic systems need to answer: • What to produce? • How to produce? • For whom it will be produced? • When it will be consumed?

15. 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

16. 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

17. 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.

18. 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).

19. 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.

20. 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!