Download Agriculture Economics and the American Economy

Agriculture Economics and
the American Economy
Chapter 2
Objectives:
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Define Economics.
Explain three major components of
economics.
Discuss three basic economic questions.
Explain six types of economic systems.
Discuss economics from a historical
perspective.
Discuss the role of government versus
individuals in the economic system.
Objectives cont.’d
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Describe the characteristics of the American
economy.
Differentiate between macroeconomics and
microeconomics.
Differentiate between positive and
normative economics.
Explain agricultural economics.
Introduction
Today’s world is complex and
continually changing. The successful
agribusiness manager must possess a
basic understanding of economic
principles to react to these changes.
To understand agricultural economics,
the agribusiness manager must first
understand basic economic principles.
Definitions of Economics
There are many definitions of economics.
Consider each of the following definitions,
look for key words and phrases, and then
form your own definition.
– Economics is the study of allocation of scarce
resources among competing alternatives.
– Economics is the study of how individuals and
countries decide how to use scarce resources to
fulfill their wants.
– Economics is the “study of how society allocates
scarce resources and goods.”
– Economics is “the science of allocating
scarce resources (land, labor, capital, and
managements) among different and
competing choices and utilizing them to
best satisfy human wants.
– Economics “is a study of how to get the
most satisfaction for a given amount of
money or to spend the least money for a
given need or want.”
– Economics is the study of how scarce
resources are transformed into goods and
services to satisfy our most pressing wants,
and how these goods and services are
distributed.
– Economics is “the study of the decisions
involved in producing, distributing, and
consuming goods and services.”
– Economics “is a social science that studies
how consumers, producers, and societies
choose among the alternative uses of
scarce resources in the process of
producing, exchanging, and consuming
goods and services.”
– Economics is “concerned with overcoming
the effects of scarcity by improving the
efficiency with which scarce resources are
allocated among their many competing
uses, so as to best satisfy human wants.”
Three major components
of Economics
Three key words or phrases can be
drawn from each of these definitions:
scarcity, types of resources, and wants
and needs.
Scarcity
Scarcity is the economic term for a situation in
which there are not enough resources available
to satisfy people’s needs or wants. Economics is
the study of society’s allocation of scarce
resources. These resources are considered
scarce because of a society’s tendency to
demand more resources than are available. A
resource that is not scarce is called a free
resource or good. However, economics is
mainly concerned with scarce resources and
goods. Scarcity is what motivates the study of
how society allocates resources.
Shortage versus Scarcity
Shortage and scarcity are not the same.
Scarcity always exists because it relates to
an unlimited or unsatisfied want, whereas
shortages are always temporary. Shortages
often exist after natural disasters destroy
goods and property. Temporary shortages
of products such as gasoline may be cause
when imports are dramatically decreased for
any reason.
Types of Resources
Resources are the inputs that society uses
to produce outputs. Traditionally,
economists have classified resources as
natural resources (land), human resources
(labor), manufactured resources (capital),
and entrepreneurship (management).
Natural Resources (Land)
Land and the mineral deposits in it
constitute a huge natural resource in
the agricultural industry.
Human Resources (Labor)
The services provided by laborers and
managers for the production of goods
and services are human resources and
are also considered scarce.
Manufactured Resources
(Capital)
All the property people use to make
other goods and services is capital.
These resources take the form of
machines, equipment, and structures.
Entrepreneurship
(Management)
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Entrepreneurship refers to the ability of
individuals to start new businesses and to
introduce new products and techniques.
Today the four resources just discussed are
called the factors of production. They are
used to produce goods and services. Goods
are the items people buy. Services are the
activities done for others for a fee.
Wants and Needs
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Needs include things that are really crucial
to daily living. Basic needs include enough
food, clothing, and shelter to survive. Most
of us would also consider a good education
and adequate health are to be needs. Of
course, there are other needs depending on
your situation.
Wants are things that are not crucial
to daily living. A basic tractor is a need
to a farmer, but a tractor with a cab,
air conditioner, and radio may be a
want. The difference between needs
and wants is not always clear. The
tractor with an air conditioned may be
a need if the operator has severe
allergies.
Economists use the term insatiable
(unlimited, unsatisfied) wants. This
means that human wants cannot be
satisfied no matter how much or how
many goods we have. This human
trait, in conjunction with scarcity of
resources, creates economic problems.
The efforts to solve these problems
are the basis of the discipline of
economics.
Three basic economic
questions
Because of the relationship between scarce
resources and unlimited/unsatisfied wants, all
societies have to answer some basic economic
questions. These questions entail trying to
decide what to sell, how to sell it, and who
should receive the benefits. Therefore, all
economic systems must solve the following
three questions:
– What goods should be produced, and how much
of each?
– How should these goods be produced?
– Who should get what and how much?
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What goods, and how much to produce.
– This question is answered every time people buy
goods.
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How to produce goods.
– This question is answered by agribusiness
producers or manufacturers according to what
will yield the greatest profits.
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Who should get what?
– This question refers to who will receive the
benefits of the goods. The question is answered
by determining who has the greatest needs,
wants, and ability to pay
To simplify the economic questions,
assume that all the goods and services in
our society or represented by a pie.
1.
2.
3.
What type of pie to produce?
What combination of ingredients to use?
How to divide the pie?
Each society answers the three basic
questions (what, how, and for whom)
according to its view of how best to
satisfy the needs and wants of its
people. The values and goals that a
society sets for itself determine the
kind of economic system it will have.
Economists have identified six types of
economic systems: traditional, capitalism,
fascism, socialism, command
(communism), and mixed. These terms
are often used to designate political
systems as well as economic systems.
The major distinction between these
classifications is the degree of control by
private individuals versus the group
represented by government.
Traditional System
A pure traditional economic system answers
the three basic questions according to
tradition. In a traditional system, things are
done “the way they have always been
done.” Economic decisions are based on
customs, religious beliefs, and ways of
doing things that have been passed from
generation to generation. Today, traditional
economic systems exist in very limited parts
of Asia, Africa, the Middle East, and Latin
America.
Capitalism
In capitalism, individuals have free reign
over their time and resources, and can
determine exactly how to use those assets,
with few legal controls by the government.
It is a self-regulating system that excludes
the government from economic decisions.
What capitalism depends on is the will and
desires of those involved in the system.
Market forces determine prices, assign
resources, and distribute income. Market
prices indicate the value of resources and
economic goods.
Socialism
In sharp contrast to capitalism, the basis of
socialism as an economic system is public
ownership of all productive resources.
Instead of little to no involvement in the
system (as with capitalism), the government
or “state” directs all decisions regarding the
utilization of resources (both human and
nonhuman) by the various sectors of the
community. Decisions are therefore made
on a centralized basis by government
planners.
Fascism
Fascism is an economic system in which
productive property, though owned by
individuals, is used to produce goods that
reflect government or state preferences.
Fascism suppresses opposition, censors
criticism, and denies some freedoms to
individuals. Although property is privately
owned and businesses control production,
the government controls labor, employers,
and consumers.
Communism
Communism is a totalitarian system of
government in which a single, authoritarian
political party or body controls governmentowned means of production. In other
words, the government has total control of
economic matters and private individuals
have none.
Economics – A historical
perspective
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The Father of Economics
– England was the major center of intellectual
activity during the 18th century and much
current economic policy based on economic
ideas presented during that period. Economic
historians contend that all the ideas presented
by Adam Smith had been introduced by other
economists.
Adam Smith, like most economists of that
time, was looking for new directions in
economic policy to deal with the severe
economic conditions he saw around him. He
proposed a system completely opposite to
the system operating in England and many
other countries at that time. Several names
have been coined for the system he
proposed. The major ones include pure
capitalism, free enterprise, and laissez-faire.
All of these terms are used interchangeably,
and they mean basically the same thing.
The basic meaning is that individuals can
control the economy without any
government interference.
“What is the role of government versus the
role of individuals?” Adam Smith said, “The
government should provide a police force
for internal and external protection and
nothing else. Economic matters should be
the sole responsibility of private individuals.”
He said, “Let each individual seek his or her
own personal gain,” and that society would
be guided by an “invisible hand” in such a
way that as a whole it would be better off
than it would with government intervention.
In other words, let each individual operate
independently rather than having some
government agency decide what should and
should not be done.
Characteristics of the
American Economy
A common term for the U.S. economic
system is the free enterprise system. It is
the freedom of private businesses to
organize and operate for profit in a
competitive environment. Government
interference is necessary only for regulation
to protect the public interest and to keep
the national economy in balance.
The American economy has six
major characteristics:
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Little or no government control
Freedom of enterprise
Freedom of choice
The right to own private property
Profit incentive
Competition
The six characteristics could be
referred to as free enterprise with
some regulations. Notice the influence
of Adam Smith in these six
characteristics, which are discussed in
the following subsections.
Freedom of Enterprise
Our economic system is also called the
free enterprise system. This term
emphasizes that individuals are free to
own and make decisions about the
factors of production.
Freedom of Choice
Part of freedom of choice is the
freedom to fail. Freedom of choice
means that buyers make the decisions
about what should be produced. The
success or failure of a good or service
in the marketplace depends on
individuals freely choosing what they
want.
Private property
Private property is simply what is
owned by individuals or groups rather
than by the federal, state, or local
government. You are free to buy
whatever you can afford, whether it is
land, an agribusiness, a home, or a
car.
Profit Incentive
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The desire to make a profit is called
the profit incentive.
Macroeconomics versus
Microeconomics
The total body of economic knowledge
today is too extensive for a person to
be a general economist. The most
common division of economics is into
macroeconomics and microeconomics.
Macroeconomics
The prefix macro means “large,” indicating
that macroeconomics is the study of the
economy on a large scale or nationally.
Macroeconomics looks at the aggregate
(total) performances of all the markets in
the national economy and is concerned with
the choices made by large subsectors of the
economy.
Cont.’d
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Gross domestic product – the GDP of a
country is defined as the market value of all
final goods and services produced within
that country in a given period of time.
Aggregate supply – aggregate supply is the
total supply of goods and services produced
by a national economy during a specific time
period.
Aggregate demand – aggregate demand is
the total demand for goods and services in
a national economy during a specific time
period.
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Unemployment rate – the unemployment
rate is the number of unemployed workers
divided by the total civilian labor force,
which includes all those willing and able to
work for pay – both unemployed and
employed.
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Inflation and deflation – inflation is a rise in
the general level of prices, as measured
against some baseline of purchasing power.
Deflation is a decrease in the general price
level, over a period of time.
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Monetary policy – monetary policy is the
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Fiscal policy – fiscal policy determines
government process of managing the
money supply to achieve specific goals, such
as constraining inflation, maintaining an
exchange rate, and achieving full
employment or economic growth.
changes in taxes, government spending on
goods and services, and transfer payments
that are intended to affect overall
(aggregate) demand in the economy.
Microeconomics
The prefix micro means “small,” indicating
that microeconomics studies the economy
on a small scale. Microeconomics considers
the individual markets that make up the
economy and is concerned with the
decisions made by small economic units
such as individuals, single firms, and
individual government agencies such as the
USDA and state governments.
Cont.’d
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Market and prices – markets are institutions that
enable buyers and sellers to exchange goods and
services. The amount of money people pay in
exchange for a good or service is the price of that
good or service.
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Supply and demand – supply is the different
quantities of a resource, good, or service that will
be offered to consumers at various prices during a
certain amount of time. Demand is economic want
backed up by purchasing power, expressing
different amounts of product buyers are willing and
able to buy at possible prices.
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Competition and market structure –
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Income distribution – there are two
competition is determined by the number of
buyers and sellers in a particular market.
classifications of income distribution. The
first is functional distribution, where the
division of an economy’s total income goes
into wages and salaries, rent, interest and
profit. Income distribution also can be
classified by personal distribution of income,
which groups different populations by the
number of people receiving various amounts
of income.
Positive versus Normative
Economics
The media often contain statements
about economic issues. These
statements can be classified into “what
is” and “what should be.” These two
main categories are called positive and
normative economics, respectively.
Positive Economics
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Positive economics consists of objective statements
dealing with matters of fact and questions about
how things actually are. Positive statements do not
contain obvious value judgments or emotional
content.
Positive economics can be described as “what is,
what was, and what probably will be” economics:
emotion or social philosophy. Often these
statements express a hypothesis that can be
analyzed and evaluated. (continue to next slide)
…such as the following
examples:
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Higher interest rates will cause a rise in the
exchange rate and an increase in the
demand for imports.
Lower taxes may stimulate and increase in
the active labor supply.
A nationwide minimum wage will probably
cause a contraction in the demand for lowskilled labor.
Cost-benefit analysis
“That person is hungry.” What is the cost of
feeding that person? What benefit accrues
to you or society if that person is not fed?
What is the cost of not feeding that person?
What is the benefit of not feeding that
person? Positive economics tries to answer
such questions objectively, by doing what is
called cost-benefit analysis.
Normative Economic
Normative economics consists of subjective
statements based on opinion only, often
without a basis in fact or theory. They are
value-based, emotional statements that focus
on “what ought to be.” Consider the following
examples:
– A national minimum wage is undesirable
because it does not help the poor and causes
higher unemployment and inflation.
– The national minimum wage should be increased
as a method of reducing poverty.
– Protectionism is the only good way to improve
the living standards of workers whose jobs are
threatened by outsourcing and imports.
Agriculture Economics
Agriculture economics may be defined in
several ways, but basically it refers to the
application of economic concepts to agricultural
problems. Therefore, as stated earlier, to be a
productive agricultural economist, one must first
understand basic economic principles.
Economics is sometimes called a basic science,
whereas agricultural economics is an applied
science.
Cont.’d
The following definition is a good example
of merging general economics with
agriculture. Agricultural economics is “an
applied social science dealing with how
humans choose to use technical knowledge
and scarce productive resources such as
land, labor, capital, and management to
produce food and fiber and to distribute if
for consumption to various members of
society over time.”