AAEC 2305-Intro. to Agricultural

EconomicsDr. Darren Hudson

Larry Combest Chair of Agricultural Competitivenessdarren.hudson@ttu.edu, 742.2821x272, 206 AGSCI

What do you see?

What do you see?

Economics

Supply and Demand Translate into Price

Study of allocation of scarce resources to highest and best use◦ Competing demands on and finite supplies of

resources determine how resources are allocated Study of human behavior

◦ Economics is a social science, which means we are studying human beings and their decisions

Economics requires a broad understanding of both physical and social sciences

What is Economics?

A resource is an input provided by nature and modified by humans using technology to produce goods that satisfy human desires.◦ Two key elements here: Resources have a finite supply (are limited); yes, yes,

the sun and wind are not “limited” in the sense that they will be used up; but they must be combined with other scarce resources to be useful

Human wants are not limited; we call this non-satiation. “More is preferred to less.”

Resource Scarcity

Resource are “scarce”◦ Because resources are scarce, the goods produced

from them are scarce as well◦ How do we distribute resources—determines how

we distribute goods and services Resources have alternative uses

◦ Because of scarcity and alternative uses, trade-offs must be made

Resources have economic value◦ Because of scarcity and alternative uses, resources

have economic value—that is, we must generally pay to use them

Important Characteristics of Resources

Actors should engage in an action if, and only if, the extra benefits from taking the action are at least as great as the added costs◦ Easy in concept, difficult to implement What are the added costs of increased asthma from

pollution? What is the value of a human life?

Cost-Benefit Principle

€

R =B

C

In economics, we are concerned with trade-offs—that is, how much of one good must we give up to get another. We call this opportunity cost◦ Opportunity cost reflects the value of alternatives

that are foregone or sacrificed to choose another alternative In our land example, the opportunity cost may be the

lost value of agricultural production to society for building another subdivision—by building the subdivision, you are giving up the opportunity to grow strawberries

You are giving up current income to get a college degree (hopefully more future income!!)

Opportunity Cost

Time is another important element of economic decisions◦ Do we use our petroleum/water reserves today or

save them for future generations?◦ Who makes that decision?

Distribution of income/goods is another important element◦ Who gets access to educational opportunities?

Who pays for it?

Other Dimensions of Economics

Marginal cost-the added cost arising from the production of one more unit of output

Marginal benefit-the added benefit arising from one more unit of consumption

Thinking at the margin…

Macroeconomics—examines the performance of national/international economies (e.g., inflation, unemployment, interest rates, etc.)◦ This is what you hear most about on the news

Microeconomics—study of economic decisions at the individual level◦ How does a firm maximize profits?◦ What goods are consumers most likely to

purchase?

Micro/Macro Economics

1. Positive Economics2. Normative Economics3. Prescriptive Economics

Analyzing Economic Problems

Deals with “what is” – purely concerned with measurement and reporting

Does not involve value judgments◦ Ex. – If the government raises the price support

for a commodity, does this cause farmers to produce more of that commodity…and by how much?

Positive Economics

Deals with “what should be” Inherently involves making value judgments

—to address these questions, someone must decide what is “good” and “bad”◦ Ex. – Should government policy guarantee that

farmers get a “fair” price for their grain?

Normative Economics

Deals with ways to achieve a desired result. Involves both positive and normative issues

◦ Ex. – If we want to increase household income of families in the bottom 20% of U.S. incomes, how can we do this in the manner least costly to U.S. taxpayers?

Prescriptive Economics

What do we produce? How do we produce it? For whom will it be produced? When/how will it be consumed?

Economic systems must, then, answer:

Because of the complexity of the real world, we use simplifying assumptions to aid our analysis of questions. For now, the two most common for which you need to be aware are:◦ Individuals want to maximize their own well-being

(or, as we call it, utility)◦ Firms want to maximize profits

Common assumptions

The principles we will discuss apply to all economic problems, but we will focus on agriculture as our centerpiece for analysis

Agriculture is a complex system beginning with natural resources, biological production of food and fiber products, agribusinesses that process and distribute those goods, the public sector that influences the process through policy, and consumers

Agriculture Overview

Includes all farms and ranches that grow crops and livestock (usually, but not always, for sale)

Changes in the agricultural production sector have occurred due to technological change, development of markets, and government policy and international trade

Agricultural Production

Input suppliers (produce goods and services used in agricultural production)

Processing and distribution

Agribusiness

Government policy and government supplied goods◦ Higher education◦ Roads, rail, shipping channels◦ Extension service◦ Information services

Public Sector

Food availability and safety, nutrition, etc. Environmental and resource management Technological advancement and adoption Globalization and global competition Risk and uncertainty Declining farm numbers, rural development Alternative energy production

Some example issues