AAEC 3315 Agricultural Price Theory Introduction

INTRODUCTION What is Economics? Economics is the study of how to allocate scarce resources to produce goods & services that help satisfy unlimited human wants.

INTRODUCTION Three important aspects of definition: “Economics is the study of how to allocate scarce resources (inputs or factors of production) to produce goods & services that help satisfy unlimited human wants.” Unlimited Wants - most basic assumption is that each individual has a desire for more - more is preferred to less (ex. money) Limited Resources (Resource Scarcity) Allocation - making decisions about how to use our resources or capabilities among unlimited wants.

IMPORTANT CHARACTERISTICS OF RESOURCES Resources have economic value Producers generally must pay to use resources Resources have alternative uses Since resources have alternative uses, trade-offs must be made Opportunity costs are the measure of this trade-off

OPPORTUNITY COSTS If you use a good for one purpose, you give up the opportunity to use it elsewhere; opportunity costs reflect the value of alternative opportunities foregone or sacrificed

ALLOCATION OVER TIME 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. Oil, Gas, Water, etc.)

All economic systems need to answer four basic questions: What to produce? How to produce? For whom it will be produced? How to achieve economic growth?

Alternative approaches to address the four basic questions: Tradition (custom and traditions) Central direction The Market System or the Price System

The Market System or the Price System The U.S. and many other market-driven economies performs the four principal functions based on, at least in part, the price system. What should be produced is decided by the amount of each good that the consumers want and the price they are willing to pay for it. How should resources be used is decided by the relative value of various types of materials and equipment. How should output be distributed (For whom it will be produced) is decided by, in general, the purchasing power of individuals. The purchasing power of individuals depends largely on the prices of resources they own. Decisions regarding economic growth is also motivated, at least in part, through the price system.

The Price System and Microeconomics Microeconomics – or at least a major part of it – is often called price theory because so much of it is concerned so directly with the workings of the price system. 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)

MACROECONOMICS Macroeconomics – is primarily concerned with the study of fluctuations in the levels of employment, aggregate income, and the general price level, and of the ways to prevent such fluctuations. It deals with behavior of economic aggregates. Is not the focus of this course.

Examples of problems that Microeconomics can help to solve Optimal Production Decisions Pricing Policy Efficient Allocation of Scarce Resources Environmental Consequences of Agricultural Production Food Availability & Safety Managing Technological Advances in Agriculture Increasing Internalization of Agriculture Policy Responses to Uncertainty in Agriculture

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 Individuals want to maximize their well being (utility) Firms want to maximize profits