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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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