1. AAEC 2305 Fundamentals of Ag Economics Chapter 1 Introduction

2. INTRODUCTION b 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 competingEconomy as a whole is buyers & sellers competing Everything is scarce at some pointEverything is scarce at some point We have to allocate these scarce resourcesWe have to allocate these scarce resources

3. INTRODUCTION b 3 important aspects of definition: Allocation - making decisions about how to use our resources or capabilitiesAllocation - making decisions about how to use our resources or capabilities Limited Resources (Resource Scarcity)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)Unlimited Wants - most basic assumption is that each individual has a desire for more - more is preferred to less (ex. money)

4. RESOURCE SCARCITY b 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.)Resources are also called inputs or factors of production (ex. land, labor, equipment, water, etc.) Combining resources through human activity & technology produces useful outputs.Combining resources through human activity & technology produces useful outputs.

5. 3 IMPORTANT CHARACTERISTICS OF RESOURCES b Resources have economic value Producers generally must pay to use resourcesProducers generally must pay to use resources Monetary & Societal (cars as status symbol)Monetary & Societal (cars as status symbol) b Their supply is limited (Scarce) Since there is a scarcity of resources, goods produced from them are also scarceSince there is a scarcity of resources, goods produced from them are also scarce How should resources be distributed - Economic issue of distribution of goods & servicesHow should resources be distributed - Economic issue of distribution of goods & services

6. (CONTINUED) b Resources have alternative uses Since resources have alternative uses, trade- offs must be madeSince resources have alternative uses, trade- offs 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 goodThe 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 trade- offOpportunity costs are a measure of this trade- off

7. OPPORTUNITY COSTS b Resources are scarce - - as decisions are made in the face of scarcity, costs are generated - - opportunity costs Economic decisions (choices) are based upon scarcityEconomic decisions (choices) are based upon scarcity b Opportunity costs reflect the value of alternative opportunities foregone or sacrificed b If you use a good for one purpose, you give up the opportunity to use it elsewhere

8. ALLOCATION OVER TIME & Distribution b 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.)Someone has to make the decision whether to use a resource today or in the future. (ex. Gas, Education, etc.) b Distribution of goods & services among various persons & groups in society is also a major concern of economists.

9. MICRO VS MACRO b 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.)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)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)

10. CLASSIFICATION OF ECO QUESTIONS b 1) Positive Economics b 2) Normative Economics b 3) Prescriptive Economics

11. POSITIVE ECONOMICS b Deals with what is b 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 commodityEx - If the gov’t raises the price support for a commodity, does this cause farmers to produce more of that commodity

12. NORMATIVE ECONOMICS b Deals with what should be b 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?Ex - Should gov’t policy guarantee that farmers get a fair price for their grain?

13. PRESCRIPTIVE ECONOMICS b Deals with ways to achieve a desired result in the most efficient, profitable, or acceptable manner b Involves both positive and normative economic issues b Identifies alternative ways to reach a goal and provides methods for choosing among them

14. All economic systems need to answer: b What to produce? b How to produce? b For whom it will be produced? b When it will be consumed?

15. COMMON ASSUMPTIONS b 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)1) Individuals want to maximize their well being (utility) 2) Firms want to maximize profits2) Firms want to maximize profits

16. AGRICULTURE OVERVIEW b 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. b Three main sub-sectors: The Farm SectorThe Farm Sector AgribusinessAgribusiness The Public SectorThe Public Sector

17. Farm Sector b Includes all the farms and ranches (including hobby farms & ranches) that grow crops and raise livestock (usually for sale) b Changes in the farm sector have occurred in the US due to technological advancements, the development of markets, and governmental policy.

18. AGRIBUSINESS b 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).

19. PUBLIC SECTOR b The development & growth of agriculture is marked by important advances in an array of publicly supported services know as the public sector. b Ex. – higher education available to the farm sector, extension services, information services, roads, harbors, etc.

20. Examples of some Agricultural Economic Issues b Food Availability & Safety b Environmental Consequences of Agricultural Production b Managing Technological Advances in Agriculture b Increasing Internalization of Agriculture b Policy Responses to Uncertainty in Agriculture b Decline in the Number of American Farmers b These six issues are just an example of some of the major challenges facing agriculture!