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AAEC 2305 Fundamentals of Ag Economics

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									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!


								
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