EPT 3102

Agricultural Economics
Introduction to Economics
The word economy comes from a Greek
word for “one who manages a
household”.
 Introduction to Economics

Economics examines how people use their

scarce resources to satisfy their unlimited
wants.
wants

A social science because it deals with people

in their daily activities where choices are
required.
 Scarcity, Choice and Opportunity
Cost
 Scarcity (scarce resources)

 Not freely available

- when its price exceeds zero
A good/service is scare when we must give up
(sacrifice) some amount of one thing to get some
of another good/service.
 As we make our choice in the face of scarcity,
costs are generated which is known as
opportunity costs (the value of alternative
opportunities forgone or scarified).
 Opportunity Cost
Opportunity cost of a chosen activity is the
value of the best alternative that is forgone.
Similar to opportunity lost.
Focuses on the alternatives associated with
making choices.
Opportunity cost is subjective.
Only the individual making the choice can select
the most attractive alternative.
 Resources

 Inputs - factors of production

 Used to produce goods and services
 Goods and services are scarce because resources
are scarce

 Four general categories:-

Labor
Capital
Land
Entrepreneurial ability
 Labor and Capital

 Labor: broad category of human effort

Physical and mental
Time
Scarcity of time  scarcity of labor

 Capital: Human creations used to produce goods

and services
Physical capital: factories, machines, tools, buildings,
airports, highways and other manufactured items
employed to produce goods and services.
Human capital: consists of the knowledge and skill
people acquire to enhance their labor productivity.
Land and Entrepreneurial Ability

 Land
Land and other natural resources
Gifts of nature including bodies of water,
trees, oil reserves, etc.
 Entrepreneurial ability
Special kind of human skill
Talent required to dream up a new product
or find a better way to produce an existing
one.
 Goods and Services

 Goods
 Tangible items
 Services
 Intangible items

 Good or service is scarce if the amount people

desire exceeds the amount that is available at a
zero price  we must continually choose among
them
 Choices in a world of scarcity implies we must pass up some
goods and services
 Free Goods

Goods that are available at a zero price

For example, while air and seawater may

appear to be free, clean air and seawater
have become scarce.
 Economic Decision Makers
Four types of decision-makers in the economy
1. Households
Demand the goods and services produced
Supply labor, capital, and entrepreneurial ability
1. Firms, governments, and the rest of the world
Demand the resources
Supply the goods and services
Rest of the world  foreign households, firms and
governments
 Economic Decision Makers
(Markets)
3. Product markets
Markets in which goods and services are bought
and sold
4. Resource markets
Markets in which the resources are exchanged
Labor, or job, market is the most important of
the resource markets

 Buyers and sellers carry out exchanges

Exhibit 1: Circular-Flow Model
Households supply resources
in the resource market and
demand goods and services in
the product market
Firms supply goods and
services in the product market
and demand resources in the
resource market
Money flows in resource
markets determine wages,
interest, rents and profits which
flow as income to households
Product markets determine
the prices for goods and
services which flow as revenue
to firms
Lecture week 1
 Agricultural Economics
 Definition:
“An applied social science dealing with how humans choose to use
technical knowledge and scare productive resources such as land,
labor, capital, and management to produce food and fiber and to
distribute it for consumption to various members of society over
time”. Cramer and Jensen (1994).
“An applied social science that deals with how producers,
consumers, and societies use scare resources in the production,
processing, marketing, and consumption of food and fiber
products”. Penson et al. (2002).
 Agribusiness
 Definition:
“The sum total of all operations involved in the manufacture and
distribution of farm supplies;
supplies production operations on the
farm; and the storage, processing, and distribution of farm
commodities and items made from them”. Davis and Goldberg
(1957).

 Farming engaged in as a large-scale business operation embracing

the production, processing, and distribution of agricultural products
and the manufacture of farm machinery, equipment, and supplies.
Microeconomics and Macroeconomics

Microeconomics
Examines the factors that influence individual
economic choices.
Studies the individual pieces of the economic
puzzle.

Macroeconomics
Studies the performance of the economy as a
whole.
Focuses on the big picture.
 Scientific Method
Identify the question and define the relevant
variables
Variable is a measure that can take on different
values

Specify Assumptions
Ceteris paribus - Other-things-constant assumption
(Holding some variables constant, while letting specific variables
change)
Behavioral assumption refer to how people behave 
rational self-interest consumer maximizes
satisfaction and firm maximizes profits
 Normative versus Positive

Positive Economic
Assertion about economic reality
Supported or rejected by reference to the facts
Value judgments
Deals with what is, what can be

Normative Economic
Opinions – should try, should do
Cannot be shown to be true or false by reference to the
facts
Subjective
 Topic Highlights
 It is because of scarcity that we must economize in choosing
between desire alternatives.
 Sacrificing one thing for another gives rise to the true costs of
making choices.
 Agricultural economics is a social science applied to
agricultural problems.
 Positive economics results from a scientific analysis of facts
relevant to a situation; normative economics involves our
personal values.
 Agribusiness includes the functioning of the entire food and
fiber system from the input industry to the farm and the
ultimate consumer.
 Production Possibilities Frontier
(PPF)
 Focus is on how much an economy can produce with
the resources available  What are the economy’s
production capabilities?
 Simplifying assumptions:-
Two broad classes of products – consumer goods and
capital goods
Production during a given time period – one year
Resources available are fixed in both quantity and quality
during the time period
The available technology does not change
Production Possibilities Frontier (PPF)

 Identifies the various possible combinations of the

two types of goods that can be produced when all
available resources are employed fully and
efficiently.
No change increases the production of one good
without decreasing the production of the other
good.
Involves getting the maximum possible output
from available resources.
 Figure 1: PPF
Combination Consumer Capital
goods Goods

A 50 0
B 48 10
C 43 20
D 34 30
E 20 40
F 0 50

Lecture week 1
 Production Possibilities Frontier (PPF)
Points A and F = amount of
consumer goods and capital goods that
can be produced per year if all
resources are used efficiently A B
50
Points between A and F = other 48
possible combinations of the two goods 43 C
produced when all resources are U

(millions of units per year)

efficiently employed D
34

Consumer Goods
Points inside the curve, I, =
combinations that do not employ
resources efficiently or fully I
 Point C yields more consumer goods 20 E
and no fewer capital goods than I,
while point E yields more capital goods 10
and no fewer consumer goods than I,
and all points between C and E yield F
0
more of both goods
0 10 20 30 40 50
Points outside the PPF, such as U, =
unattainable combinations  PPF
Capital Goods
serves as the frontier between (millions of units per year)
unattainable and attainable
combinations.
 Movements along the PPF

 Law of Increasing Costs

Dictates the bowed-out shape of the PPF
When the economy uses all resources efficiently, each
additional increment of one good requires the economy to
sacrifice successively larger and larger increments of the
other good
Occurs because resources drawn away from consumer goods
are those that are increasingly better suited to producing
consumer goods
First 10 million units of capital goods have an opportunity cost of
only 2 million units of consumer goods while
Final 10 million (points E to F) have an opportunity cost of 20
million units of consumer goods
Factors that can shift the PPF
1. Changes in Resource Availability
 Increases / Improvements in Quality  rightward shift
 Decreases / Reductions in Quality  leftward shift

2. Increases in the Capital Stock

 Increases  rightward shift
 Decreases  leftward shift

3. Technological Change
 Employs available resources more efficiently 
rightward shift
 Exhibit 2a: Shifts in the PPF

All of the following examples

would lead to a rightward shift
in the PPF from A to A‘:
1. Increase in the size or
health of the labor force
2. Improvement in the skills
of the labor force
3. Increases in the amount
of capital
Decreases in any of the
above factors would shift the
PPF from A' to A  shift to
the left
The parallel shift implies the
change that occurred affected
the production of both goods
equally

Lecture week 1
26
 Exhibit 2b: Shifts in the PPF

A leftward shift from A to

A" could be caused by any
of the following examples:
1. Decrease in the size
or health of the labor
force
2. Decline in the skills of
the labor force
3. Decreases in the
amount of capital
The parallel shift implies
the change that occurred
affected the production of
both goods equally

Lecture week 1
27
 Exhibit 2c: Shifts in the PPF

Increase in resources or
technological change that
benefits consumer goods
would rotate the PPF
outward from the horizontal
axis, from A to A'

Lecture week 1
28
 Exhibit 2d: Shifts in the PPF
Increase in resources or
technological advance that
benefits capital goods would
rotate the PPF outward from
the vertical axis, F to F'

Lecture week 1
29
 Lessons of PPF
Efficiency  PPF represents the
combinations of output that are possible,
given the economy’s resources and
technology
Scarcity  Given the stock of resources and
technology, the economy can produce only so
much
Economic Growth  rightward shift or
rotation of PPF
Choice
 Three Questions

 How an economy selects the most preferred combination

will depend on the decision-making rules employed.

 Regardless of how decisions are made, each economy must

answer three fundamental questions
What goods and services will be produced?
How will they will be produced?
For whom will they be produced?