INTRODUCTION TO

AGRICULTURAL ECONOMICS
John B. Penson, Jr.
Oral Capps, Jr.
C. Parr Rosson III
Richard T. Woodward

Chapter 1: What is Agricultural Economics?

LEARNING OBJECTIVES
Define economics and agricultural economics.
Distinguish between the fields of macroeconomics and
microeconomics.
Discuss the difference between positive and normative
economic policy analysis.
Identify the three measures of economic performance in
the economy.
Discuss the economist's role at the microeconomic and
macroeconomic level.
Understand the concept of marginal analysis.

DEFINITION OF ECONOMICS

The word economics derived from the Greek

word OIKONOMICAS- OIKOS meaning a
household and NOMOS meaning Management
In the beginning economics was made by
the Greek Philosopher, Aristotle in his book
Economica which focussed in the field of
economics that deals with household
management
Economics is the science which studies
human behaviour as a relationship between
ends and scarce means which have alternative
uses.

SCOPE OF ECONOMICS
The premise of economics is that there are scarce resources
A scarce resource is one that has a finite/limited quantity
that cannot fulfill the needs of all people and/or entities
that perceive that they need/want it at any point in time.
Resources can be broadly classified into three major
categories:
Natural and Biological Resources
E.g., land, water, animals, plants, etc.
Human Resources
E.g., labor, management, time, education, etc.
Manufactured Resources
E.g., tractors, buildings, storage capacity, etc.

IMPLICATION OF SCARCE RESOURCES

Since society cannot fulfill all of its wants when scarce
resources exist, then people are required to make choices.
This implies that a person should look at his opportunity cost
of every decision she makes regarding the
allocation/consumption of scarce resources.
Opportunity cost can be defined as the cost associated with
foregoing the next best alternative to the choice that is made.
In essence, examining opportunity costs ensures that you
have accounted for any costs associated with your current
decision.
E.g., If you plant Banana, the opportunity cost to planting
those Banana could be the amount you forgo to renting
the land out.
Can you think of other opportunity costs?

MAIN PARTS OF ECONOMICS

The discipline of economics is divided into two main parts
microeconomics and macroeconomics.
Microeconomic Analysis
Microeconomics examines the choices made by individuals or
specific groups of individuals.
Macroeconomic Analysis
Macroeconomics examines the aggregation of choices made by
individuals or specific groups of individuals.
It tends to look at the whole picture, e.g., the Somali Economy,
rather than the individual choices.
Economic thinking is often divided into two categoriespositive and
normative.
Positive Economics examines questions like what would happen if and
what is happening objectively.
Normative economics examines questions like what should happen.
Prescriptive Economics
It is a combination of positive and normative economics.
It looks at how to achieve set goals given a prescribed acceptable
manner.

DEFINITION OF AGRICULTURAL ECONOMICS

The word Agriculture comes from Latin Word, ager, meaning soil
and cultura, meaning cultivation.
Agriculture in its widest sense can be defined as the cultivation
and/or production of crops plants or livestock products.
Agricultural economics is an applied field of economics in which
the principles of choice are applied in the use of scarce resources
such as land, labour, capital and management in farming and allied
activities.
Agricultural economics is an applied social science that deals with
how producers, consumers, and societies use scarce resources in
the production, processing, marketing, and consumption of food
and fibre products. ( Cramer and Jensen)
Prof. Gray has defined as the science in which the principles and
methods of economics are applied to the special conditions of
agricultural industry

CONTINUE
Prof. Hibbard defined as the study of relationships arising from the
wealth-getting and wealth-using activity of man in agriculture.
According to Goodwin Agricultural Economics as a social science
is concerned with human behaviour during the process of
producing, processing, distributing and consuming the products on
farm.
Casavant, Infanger, and Bridges define agricultural economics as
economics applied to agriculture and rural areas.
All the above definitions show that the field of agricultural
economics deals with the problems of the farm as the units of
industry, the income earning and spending activities and also the
management of farm business and bringing the necessary changes
according to the situation so as to bring stability to farm income.

MARGINAL ANALYSIS
Marginal analysis is a form of analysis that emphasizes
examining what will happen if something changes in
small amounts.
What happens to the farmers profit if he applies one
more bag of seeds to each acre of his land?
What happens to the supply of cotton if the government
increases subsidies to cotton by a dollar a bale?
What happens to my yield if I decrease my pesticide
usage on my vineyards?
All of these examples have to do with examining what
happens if something changes.

MAJOR TOOLS OF THE ECONOMIST

Intuition
Research
Graphical Analysis
Mathematical Modeling
Intuition is having the innate ability to understand an issue.
Research helps you build your intuition of a topic by looking
at the work someone else has done.
It allows you to better understand the topic that you are
thinking about because you have bounded rationality.
Bounded rationality is the idea that you are not able to
understand the complexity of the whole issue that you are
studying.
Graphical analysis is the ability of taking a problem and
visualizing using pencil and paper or a computer.

If a picture is worth a thousand words, a graph is worth a million.

Continue...
Mathematical Modeling is the art of taking a complex issue
and confining it into a set of equations that can be
manipulated.
Every graphical analysis is built upon some form of
mathematical modeling.
The key to understanding graphical analysis is to understand
the underlying model that it is built upon.
The cornerstone of modeling are assumptions.
An assumption is taking a complex issue and defining its
behavior.
Assumptions help you constrain a complex problem into a
tractable form to think about.
Every economic graph is based on a set of assumptions.
The key to understanding any graphical analysis or any
economic intuition is to understand the assumptions.

Continue...
Stages of Mathematical Modeling
Understand the problem or issue you are investigating.
Map that issue into a set of assumptions.
Map your assumptions into a set of mathematical equations that
you can work through.
Take your results from your analysis and put them into
lay/common language.
N:B, All graphical analysis is built-up from a mathematical model,
you need to understand the assumptions to understand the
behavior of the graph.
A graph shows the relationship between two or more variables.
A variable is something that can take different values.
E.g., y = x + 2; in this equation x and y are variables
Variables can be related to each other.
In the example above if you increase x, you will increase y

Continue...
In economics, the two primary types of variables we work with are
prices and quantities.
Prices are usually denoted by P, p, or pi.
Quantities are usually denoted by Q, X, q, x, qi, or xi.
The quantity of outputs are usually denoted by the different
forms of q, and the quantity of inputs are usually denoted by
the different forms of x.
When talking about prices and quantities together, prices are
graphically depicted on the y-axis, while quantities are
graphically depicted on the x-axis.
There are two major types of ways we map data to a graph.
Discrete mapping:
This is where you take discrete relationships and plot them on
a graph.
Equational mapping:
Taking a mathematical equation relationship between two or
more variables and plotting them on a graph.

REVIEW OF GRAPHING TECHNIQUES CONT.: DISCRETE MAPPING

REVIEW OF GRAPHING TECHNIQUES CONT.: EQUATIONAL MAPPING

DRAWING A LINE ON A GRAPH

If the line is linear, to graph the line it is best to find the x and y
intercepts.
To find the x intercept, set y equal to zero in the equation and
solve for x.
To find the y intercept, set x equal to zero in the equation and
solve for y.
It is important to remember that the slope (m) of the line will be
equal to the rise over the run or more commonly seen as:
m = ((y2-y1))/(x2-x1))
Example: P = 20 - 2*Q