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AGRICULTURAL ECONOMICS
NOTES
Agricultural Economics on the other hand is an applied social science that deals with
the production, distribution and consumption of Agricultural or farm goods and services. It is a
social science because it deals with people in their dairy activities where choices are required. In
the overall economist is concerned with overcoming the effect of scarcity by improving the
efficiency with which scarce resources are allocated among with other competing uses so as to
best satisfy human wants.
Application of Economic theory to agricultural problems went through a process of slow
acceptance in the world. To date the field is fully developed.
Micro economics and macroeconomics
Adam Smith is usually considered the founder of the files of microeconomics, the branch of
economics which today is concerned with the behaviour of individual entities such as markets,
firms and households. In the Wealth of Nations (1776), Smith considered how individual prices
of land, labour and capital, and inquired into the strength and weaknesses of the market
mechanism. Most important, he identified the remarkable efficiency properties of markets and
saw that economic benefit comes from the self-interested actions of individuals. These remain
important issues today, and while the study of micro economics has surely advanced greatly
since Smith’s day, he is still cited by politicians and economists alike.
The other major branch of our subject is macroeconomic, which is concerned with the
overall performance of the economy. Macroeconomics did not even exist in its modern form
until 1936, when John Maynard Keynes published his revolutionary General Theory of
Employment, interest and money. A that time, England and the United States were still stuck in
the Great Depression of the 1930’s with over one- quarter of the American labor force
unemployed. In his new theory Keynes developed an analysis of what causes business cycles
with alternating spells of high unemployment and high inflation. Today, macroeconomics
examines a wide variety of areas, such as how total investment and consumption are determined,
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how central banks manage money and interest rates, what cause international financial crises,
and why some nations grow rapidly while others stagnate. Although macroeconomics has
progressed far since his first insights, the issues addressed by Keynes still define the study of
macroeconomics today.
The two branches- microeconomics and macro economics- converge to form the core of
modern economics.
The three problems of economic organization
Every human society- whether it is an advanced industrial nation a centrally planned economy,
or an isolated tribal nation – must confront and resolve three fundamental economic problems.
Every society must have a way of determining what commodities are produced, how these goods
are made, and for whom they are produced.
Indeed, these three fundamental questions of economic organization – what, how, and for whom
are as crucial today as they were at the dawn of human civilization. Let’s look more closely at
them:

What commodities are produced and in what quantities? A society must determine how
much of each of the many possible goods and services it will make and when they will be
produced. Will we produce pizzas or shirts today? A few high quality shirts or many
cheap shirts? Will we use scarce resources to produce many consumption goods (like
pizzas)? Or will we produce fewer consumption goods and more investment goods (like
Pizza – making machines), which will boost production and consumption tomorrow?

How are goods produced? A society must determine who will do the production, with
what resources, and what production techniques they will use. Who farms and who
teaches? Is electricity generated from oil, from coal, or from the sun? will factories be run
by people or robots?

For whom are goods produced? Who gets to eat the fruit of economic activity? Is the
distribution of income and wealth fair and equitable? How is the national product divided
among different households? Are many people poor and a few rich? Do high incomes go
to teachers or athletes or autoworkers or venture capitalists? Will society provide minimal
consumption to the poor, or must people work if they are to eat?
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Positive economics versus normative economics
In thinking about economic questions, we must distinguish questions of fact from questions of
fairness. Positive economic describes the facts of an economy, while normative economic
involves value judgments.
Positive economics deals with questions such as : why do doctors earn more than janitors? Does
free trade raise or lower the wages of most American? What is the impact of computers on
productivity? Although these are difficult question to answer, they call all be resolved by
reference to analysis and empirical evidence. That puts them in the realm of positive economics.
Normative economics involves ethical precepts and norms of fairness. Should poor people be
required to work if they are to get government assistance? Should unemployment be raised to
ensure that price inflation does not become too rapid? Should be United States break up
Microsoft because it has violated the antirust laws? There are no rights or wrong answers to
these questions because they involved ethics and values rather than facts. They can be resolved
only by political debate and decision. Not by economic analysis alone.
Major types of economic systems
Free market system
A free market system refers to an economic system whereby there is an absence of government
intervention and where the forces of demand and supply are allowed to operate freely. The free
play of market forces where the state plays little or no role in economic activity is the
fundamental characteristic of a free market system.
Characteristics of a free market system
The following are the key characteristics of a free market system.
i)
The ownership of private property. The institution of private property implies that
individuals and organizations have the right to own, control and dispose of factors of
production.
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ii)
Free market economies are characterized by freedom of choice and enterprise.
Freedom of enterprise implies that individuals are free to buy and hire economic
resources to organize these resources for production to sell their products in markets
of their choice. Freedom of choice. Freedom of choice signifies that the owners of
factors of production may use these resources as they prefer.
iii)
Self – interests. This entails that each economic agent attempts to do what is best for
itself. Firms will usually aim to maximize profits. Owners of factors of production
will aim at obtaining the highest possible rewards and workers will tend to move to
occupations that offer the highest remuneration. Consumes will attempt to maximize
their utilities.
iv)
Competition. The theoretical model of a free market economy is based on a situation
whereby there are large number of buyers and sellers, implying that the market
determines prices. Theoretically competition constitutes the regulatory mechanism of
capitalism.
v)
The price mechanism. Is the fundamental feature of a free market system and will
therefore be explored in a little more depth.
The price mechanism
The allocation of resources via the price mechanism in a free market system can be analyzed in
terms of the three fundamental choices facing any society.
i)
What to produce? With respect to the problem of what to produce in free market
system, the price mechanism only facilitates the production of those commodities for
which consumers are wiling to pay a unit price sufficiently high to cover at least the
full cost of producing them in the long run. It implies that by paying a higher price,
consumers can usually induce producers to increase the quantity supplied of a given
commodity. On the other hand, a reduction in price normally gives rise to a decrease
in the quantity supplied.
ii)
How to produce? In a free market economy, the price of a factor of production
represents its relative scarcity, which suggests that the best technique of producing a
good or service is the one that minimizes costs of production. It therefore follows that
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if the price of a factor of production rises in relation to price of other factors used in
the production process, producers will switch to a production technique that uses less
of the expensive factor in order to minimize their costs of production.
iii)
For whom to produce? Regarding the question of whom to produce under the price
mechanism, the economy will produce those commodities that satisfy the wants of
those people who have money to pay for them. This suggests that the higher the
income of the individual, the more the economy will be geared to producing the
commodities of such a consumer.
Advantages of a free market system
i)
A free market system is in line with concept of consumer sovereignty. According to
the notion of consumer sovereignty, the consumer is considered the best judge of his
or her own welfare. Producers undertake production in line with consumer
preferences since it is in their own interests to do so. Consumers can, therefore,
influence what goods and services are produced directly by their purchases.
ii)
A free market system is characterized by a greater responsiveness to changes in the
international economic environment. This is because profit – maximizing firms are
exposed to much greater competition in international markets and hence they have an
incentive to respond faster to changes in the relative prices of goods and services and
factors inputs. For example, firms operating in market – directed economies were able
to adjust faster and more effectively to the adverse impact of Organization of
Petroleum Exporting Countries (OPEC) price hikes in the 1970s
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