Introduction to Agricultural Introduction to Agricultural EconomicsEconomics

What do We Study in What do We Study in Economics?Economics?

The study of economics deals with ordinary, everyday things (e.g. Food, shelter, clothing, designer jeans, prostitution, bass boats, etc.)

Basic Definition of Basic Definition of EconomicsEconomics

The demand for goods and services is unlimited.

Yet the resources needed to make goods and services all resources are limited.

Economics is the field of study that deals with the allocation of these scarce resources among competing needs, over time.

The Study of EconomicsThe Study of EconomicsAlthough economics deals with

ordinary, everyday things, it does so scientifically.

So economists look at these things in a methodical and scientific way which allows economists to draw conclusions and make predictions;

Words Data Graphs Equations

Economic ConceptsEconomic ConceptsIn order for any profession to function

it must develop a working set of relevant concepts and an agreed upon definition for such concepts.

In Economics this means that certain attributes of goods and services and human behavior are important enough to receive special treatment and in some cases a unique name.

What Is It That Gives What Is It That Gives Something Value?Something Value?

For something to be of value it must be useful; provide UTILITY.Utility = usefulness = ability to

satisfy = value

What Is the Relationship What Is the Relationship Between Utility and Price?Between Utility and Price?

Water is a necessity of life yet it is free for the gulping at the nearest water fountain.

Diamonds are hardly a necessity yet, they are very expensive.

Utility, Scarcity, & PriceUtility, Scarcity, & PriceThe key to understanding price

is the relationship between the amount of a thing that is available and the amount which is desired.

Water is abundant and diamonds are scarce.

Utility, Scarcity, & PriceUtility, Scarcity, & Price Two-headed dogs are scarce,

yet they do not command a high price in the market place. This is because they have little utility.

For a good or service to command a high price, it must be both useful and relatively scarce.

Opportunity CostOpportunity Cost

Opportunity cost is what one is willing to give up to consume a particular good or service.

Opportunity cost is measured as being the cost or value of the "next best" thing you could have been doing, if you were doing something else; you could have eaten an apple but you chose a peach.

Marginal Analysis Marginal Analysis (Step by Step)(Step by Step)

Analyzing a process incrementally

Law of Diminishing Marginal Law of Diminishing Marginal UtilityUtility

When an individual consumes additional units of a commodity (X), consumption of other commodities unchanged, the amount of satisfaction derived from each additional unit of commodity (X) decreases.

“I bet you can’t eat just one”

Law of Diminishing Marginal Law of Diminishing Marginal UtilityUtility A very hungry lad

purchases a dozen donuts.

The consumption of the first donut will give him a great deal of satisfaction. Consumption of the second donut will also give him much satisfaction but not quite as much as the first. Consumption of the third donut will likewise be enjoyed by the lad but, again, not quite as much as the second donut and so on. This is the law of diminishing marginal utility.

MacroeconomicsMacroeconomicsDeals with the economic system as a

whole. Scope; national & world economy.– GDP– Money supply– Unemployment rate– Interest rates– International currency exchange rates– Income Tax– Government Programs

MicroeconomicsMicroeconomics

Scope; from a single individual to a specific industry. Market supply and demand Commodity prices Cost of production

Agricultural EconomicsAgricultural EconomicsThe agricultural industry is unique

because;– It produces products from living

entities,– Cyclical production which results in

volatile prices An applied science dealing with the

food & fiber system. Includes the economic issues

related to resources, production, processing, and distribution.

AgribusinessAgribusiness

The sum total of all businesses involved in the production, manufacture, and sale of agricultural products.

Deals with any agricultural product from the beginning of production to its final consumption.

Positive vs. Normative Positive vs. Normative EconomicsEconomics

Facts vs. opinions

GraphsGraphs

Economic data is often displayed in graphic form.

Graphs make it easier to see relationships.

Y

X

Quadrant Ivalues of X are positivevalues of Y are positive

Quadrant IIvalues of X are negativevalues of Y are positive

Quadrant IIIvalues of X are negativevalues of Y are negative

Quadrant IVvalues of X are positivevalues of Y are negative

0 1 2 3 4 5-4 -3 -2 -1

-1

3

-2

1

2

-3

Cartesian Coordinate System

GraphsGraphsDependent variable.– Variable whose value changes as

the result of a change in another (independent) variable.

Independent variable.– Variable whose changes cause the

value of another (dependent) variable to change.

GraphsGraphs The value of the dependent

variable is shown on one axis and the value of the independent variable on the other axis.

Four basic relationships may exist between two variables.

Y

X0

Positive relationship - anincrease in X causes anincrease in Y.

Y

X0

Negative relationship - anincrease in X causes a decreasein Y.

Y

X0

Constant relationship - anincrease in X does not changethe level of Y.

Y

X0

Changing relationships - anincrease in X has a variableaffect on Y.

Y

X0

Changing relationships - anincrease in X has a variableaffect on Y.

Implicit Assumptions About Implicit Assumptions About GraphsGraphs

Economists tend to make a lot of assumptions in order to simplify complex problems.

Ceteris paribus = all other things remaining constant. When making a graph, this means that all things not measured along the two axes, are held constant.

Implicit Assumptions About Implicit Assumptions About GraphsGraphs

Homogeneous units = the physical units measured along the axes are all alike.

Divisibility = in order to draw smooth continuous lines, we assume that the units can be divided into small fractions.