Chapter Two

Define economics Explain three major components of

economics Discuss three basic economic questions Explain six types of economic systems Discuss economics from a historical

perspective

Discuss the role of government versus individuals in the economic system

Describe the characteristics of the American economy

Differentiate between macroeconomics and microeconomics

Differentiate between positive and normative economics

Explain agricultural economics

Several definitions~ the study of allocation of scarce resources

among competing alternatives the study of how individuals and countries

decide how to use scarce resources to fulfill their wants

the study of how society allocates scarce resources and goods

the science of allocating scarce resources (land, labor, capital, and managements) among different and competing choices and utilizing them to best satisfy human wants

study of how to get the most satisfaction for a given amount of money or to spend the least money for a given need or want

study of how scarce resources are transformed into goods and services to satisfy our most pressing wants, and how these goods and services are distributed

study of the decisions involved in producing, distributing, and consuming goods and services

social science that studies how consumers, producers, and societies choose among the alternative uses of scarce resources in the process of producing, exchanging, and consuming goods and services

concerned with overcoming the effects of scarcity by improving the efficiency with which scarce resources are allocated among their many competing uses, so as to best satisfy human wants

What is YOUR definition?

Scarci

ty

Types of Resour

ces

Wants and Needs

Not enough resources available to satisfy people’s needs or wants

Resources are scarce because of a society’s tendency to demand more than are available

Non-scarce is called a free resource or good

Scarcity is what motivates the study of how society allocates resources

Shortage and scarcity are not the same Scarcity always exists because it

relates to an unlimited or unsatisfied want

Shortages are always temporary often exist after natural disasters occur when imports are dramatically decreased for any reason

Resources are the inputs that society uses to produce outputs

Natural Resources Land

Human Resources Labor

Manufactured Resources Capital

Entrepreneurship Management

Natural resources: Land and the mineral deposits in it constitute a huge section in the ag industry

Human resources: services provided by laborers and managers

for the production of goods and services human resources considered scarce

Manufactured Resources: all the property people use to make other

goods and services is capital machines, equipment, and structures

Entrepreneurship ability of individuals to start new

businesses and to introduce new products and techniques

Four resources (Natural, Human, Manufactured, Entrepreneurship)

Used to produce goods and services Goods are the items people buy Services are the activities done for others

for a fee

Needs are crucial to daily living Food Clothing Shelter Tractor is a need for a farmer

Wants are not crucial to daily living Tractor with a cab, air conditioner, and

radio is a want

Insatiable wants Unlimited or unsatisfied means that human wants cannot be

satisfied no matter how much or how many goods we have

Insatiable wants and scarcity of resources creates economic problems

Efforts to solve these problems are the basis of the discipline of economics

What goods should be produced, and how much of each? answered every time people buy goods

How should these goods be produced? answered by agribusiness producers or

manufacturers according to what yields greatest profits

Who should get what and how much? answered by determining who has the greatest

needs, wants, and ability to pay

Six Types: Traditional Capitalism Fascism Socialism Command (Communism) Mixed

Used to designate political systems as well as economic systems

Major distinction between these classifications? degree of control by private individuals

versus the group represented by government

Things are done “the way they have always been done”

Economic decisions based on customs, religious beliefs, and processes that have been passed from generation to generation

Traditional systems in limited parts of: Asia Africa Middle East Latin America

Free reign over their time and resources Few legal controls by the government Self-regulating system that excludes the

government from economic decisions Depends on will and desires of those

involved in the system Market forces determine prices, assign

resources, and distribute income

Basis is an economic system of public ownership of all productive resources

Government or “state” directs all decisions regarding the utilization of resources by the various sectors of the community

Decisions are therefore made on a centralized basis by government planners

System in which productive property, though owned by individuals, is used to produce goods that reflect government or state preferences

Suppresses opposition, censors criticism, and denies some freedoms to individuals

Property is privately owned and businesses control production

Government controls labor, employers, and consumers

Totalitarian system of government Single, authoritarian political party or

body controls government-owned means of production

Government has total control of economic matters and private individuals have none

Adam Smith, father of economics Looking for new directions in economic

policy to deal with the severe economic conditions

Proposed a system completely opposite to the system operating in England

Capitalism, free enterprise, and laissez-faire Individuals can control the economy

without any government interference

Free enterprise system Freedom of private businesses to

organize and operate for profit in a competitive environment

Government interference is necessary only for regulation to protect the public interest and to keep the national economy in balance

Little or no government control Freedom of enterprise Freedom of choice The right to own private property Profit incentive Competition

Freedom of Enterprise individuals are free to own and make

decisions about the factors of production Freedom of Choice

freedom to fail buyers make the decisions about what

should be produced success or failure of a good depends on

individuals freely choosing what they want

Private Property owned by individuals rather than by

government Free to buy whatever you can afford

Profit Incentive desire to make a profit

Study of the economy on a large scale or nationally

Looks at the aggregate (total) performances of all the markets in the national economy

Concerned with the choices made by large subsectors of the economy

Gross domestic product all final goods and services produced within a

country in a given period of time Aggregate supply

total supply of goods and services produced by a national economy during a specific time period

Aggregate demand total demand for goods and services in a

national economy during a specific time period

Competition and market structure competition is determined by the number

of buyers and sellers in a particular market Income distribution

functional distribution division of an economy’s total income goes into

wages and salaries, rent, interest and profit personal distribution of income

groups different populations by the number of people receiving various amounts of income

Deals with matters of fact and questions about how things actually are

Do not contain obvious value judgments or emotional content

“What is, what was, and what probably will be”

Emotional or social philosophy Express a hypothesis that can be

analyzed and evaluated

Higher interest rates will cause a rise in the exchange rate and an increase in the demand for imports.

Lower taxes may stimulate and increase in the active labor supply.

A nationwide minimum wage will probably cause a contraction in the demand for low-skilled labor.

“That person is hungry.” What is the cost of feeding that person? What benefit accrues to you or society if

that person is not fed? What is the cost of not feeding that person? What is the benefit of not feeding that

person? Positive economics tries to answer such

questions objectively, by doing what is called cost-benefit analysis.

Subjective statements based on opinion only

Without a basis in fact or theory “What ought to be”

A national minimum wage is undesirable because it does not help the poor and causes higher unemployment and inflation.

The national minimum wage should be increased as a method of reducing poverty.

Protectionism is the only good way to improve the living standards of workers whose jobs are threatened by outsourcing and imports.

application of economic concepts to agricultural problems

To be a productive agricultural economist, one must first understand basic economic principles

Agricultural economics is an applied science “an applied social science dealing with how

humans choose to use technical knowledge and scarce productive resources such as land, labor, capital, and management to produce food and fiber and to distribute if for consumption to various members of society over time”