AGRICULTURAL ECONOMICS

As a separate discipline, agricultural economics started only in the beginning of 20th

century when economic issues pertaining to agriculture aroused interest at several educational
centres. The depression of 1890s that caused havoc in agriculture at many places forced
organized farmers groups to take keen interest in farm management problems. The study and
teaching of agricultural economics was started at Harvard University (USA) in 1903 by
Professor Thomas Nixon Carver.
Agricultural economics may be defined as the application of principles and methods of
economics to study the problems of agriculture to get maximum output and profits from the use
of resources that are limited for the well-being of the society in general and farming industry in
particular. It focuses on land output, crop yields, labour force, financing, government
interventions and other relevant factors.
The discipline of agricultural economics grew out of farm management. Farm
management involves the application of scientific and technical principles to the solution of the
day to day problems facing the farmers on the farms. The early farm management experts were
mainly interested in the overall operation of the farm business and they did not specially relate
the discipline to economics until a few agriculturists with training in economics transferred
economic theory such as profitability, productivity and efficiency analyses into the discipline of
farm management.
In order to avoid economic losses of scare resources, the various disciplines in
Agriculture have to learn to bring in economic analysis of the real farm situation where plants
and animals have to be produced for a market with a number of socio-economic determinants
influencing the resulting prices, costs and income.
In agricultural economics, we study among other things, the following:
 Organization of farms.
 Availability of inputs and their prices.
 Marketing system for the various agricultural products.
 Organization of both production marketing cooperatives.
 Demands for and supply of agricultural products and those of allied industries.
 Finances of agriculture, role of banks, and other financial institutions in agricultural
development.
  Peasant farms to identify their problems as well as the problems of government
owned farms.

Nature and Scope of Agricultural Economics

Agriculture sector has undergone a radical change over time from being subsistence in
nature in early stages to the present day online high-tech agribusiness. It is no more confined to
production at the farm level. The storage, processing and distribution of agricultural products
involve an array of agribusiness industries. Initially, agricultural economics studied the cost and
returns from farm enterprises and emphasized the study of management problems on farms. But
now it encompasses a host of activities related to farm management, agricultural marketing,
agricultural finance and accounting, agricultural trade and laws, contract farming, etc.
Both microeconomics and macroeconomics have applications in agriculture. At micro
level, we need to understand the relevant production functions and relationship between labour
and capital. At the macro level, the subject studies the way governments decide how to support
the farmers. The production problems on individual farms are important. But agriculture is not
independent of other sectors of the economy. The logic of economics is at the core of agricultural
economics but it is not the whole of agricultural economics. To effectively apply economic
principles to agriculture, the economist must understand the biological nature of agricultural
production. Thus, agricultural economics involves the unique blend of abstract logic of
economics with the practical management problems of modern day agriculture.
The widely accepted goal of agricultural economics is to increase efficiency in
agriculture. This means to produce the needed food, fodder, fuel and fibre without wasting
resources. To meet this goal, the required output must be produced with the smallest amount of
scarce resources, or maximum possible output must be obtained from a given amount of
resources.
 INTRODUCTION TO ECONOMICS

People have limited number of needs which must be satisfied if they are to survive as
human beings. Some are material needs, some are psychological needs and some others are
emotional needs. People’s needs are limited; however, no one would choose to live at the level of
basic human needs if they want to enjoy a better standard of living. This is because human wants
(desire for the consumption of goods and services) are unlimited. It doesn’t matter whether a
person belongs to the middle class in India nor is the richest individual in the World, he or she
wants always something more. For example bigger a house, more friends, more salary etc.,
Therefore the basic economic problem is that the resources are limited but wants are unlimited
which forces us to make choices.
Economics is the study of this allocation of resources, the choices that are made by
economic agents. An economy is a system which attempts to solve this basic economic problem.
There are different types of economies; household economy, local economy, national economy
and international economy but all economies face the same problem.
The major economic problems are
(i) What to produce?
(ii) How to produce?
(iii) When to produce and
(iv) For whom to produce?
Economics is the study of how individuals and societies choose to use the scarce
resources that nature and the previous generation have provided. The world’s resources are
limited and scarce. The resources which are not scarce are called free goods. Resources which
are scarce are called economic goods.
Why Study Economics?
A good grasp of economics is vital for managerial decision making, for designing and
understanding public policy, and to appreciate how an economy functions. The students need to
know how economics can help us to understand what goes on in the world and how it can be
used as a practical tool for decision making. Managers and CEO’s of large corporate bodies,
managers of small companies, nonprofit organizations, service centers etc., cannot succeed in
business without a clear understanding of how market forces create both opportunities and
constraints for business enterprises.
Reasons for Studying Economics:
 It is a study of society and as such is extremely important.
 It trains the mind and enables one to think systematically about the problems of business
and wealth.
 From a study of the subject it is possible to predict economic trends with some
precision.
 It helps one to choose from various economic alternatives.
Economics is the science of making decisions in the presence of scarce resources. Resources are
simply anything used to produce a good or service to achieve a goal. Economic decisions involve
the allocation of scarce resources so as to best meet the managerial goal. The nature of
managerial decision varies depending on the goals of the manager.
A Manager is a person who directs resources to achieve a stated goal and he/she has the
responsibility for his/her own actions as well as for the actions of individuals, machines and
other inputs under the manager’s control.
Managerial economics is the study of how scarce resources are directed most efficiently to
achieve managerial goals. It is a valuable tool for analyzing business situations to take better
decisions.

Circular Flow of Economic Activity

The individuals own or control resources which are necessary inputs for the firms in the
production process. These resources (factors of production) are classified into four types.
 Land: It includes all natural resources on the earth and below the earth. Non-renewable
resources such as oil, coal etc once used will never be replaced. It will not be available
for our children. Renewable resources can be used and replaced and is not depleted with
use.
 Labour: is the work force of an economy. The value of the worker is called as human
capital.
 Capital: It is classified as working capital and fixed capital (not transformed into final
products)
 Entrepreneurship: It refers to the individuals who organize production and take risks.
All these resources are allocated in an effective manner to achieve the objectives of
consumers (to maximize satisfaction), workers (to maximize wages), firms (to maximize the
output and profit) and government (to maximize the welfare of the society).
 The fundamental economic activities between households and firms are shown in the
diagram. The circular flows of economic activities are explained in a clockwise and
counterclockwise flow of goods and services. The four sectors namely households, business,
government and the rest of the world can also be considered to see the flow of economic
activities. The circular flow of activity is a chain in which production creates income, income
generates spending and spending in turn induces production.
The major four sectors of the economy are engaged in three economic activities of
production, consumption and exchange of goods and services. These sectors are as follows:
 Households: Households fulfill their needs and wants through purchase of goods and
services from the firms. They are owners and suppliers of factors of production and in
turn they receive income in the form of rent, wages and interest.
 Firms: Firms employ the input factors to produce various goods and services and make
payments to the households.
 Government: The government purchases goods and services from firms and also factors
of production from households by making payments.
 Foreign sector: Households, firms and government of India purchase goods and services
(import) from abroad and make payments. On the other hand all these sectors sell goods
and services to various countries (export) and in turn receive payments from abroad

The above said four agents take economic decisions to produce goods and services and to
exchange them and to consume them for satisfying the wants of the economy as a whole.
Understanding the opportunities and constraints in the exchange is essential to take better
decision in business.
 The economy comprises of the interaction of households, firms, government and other
nations. Households own resources and supply factor services like land, raw material, labour and
capital to the firms which helps them to produce goods and services. In turn, firms pay rent for
land, wages for their labour and interest against the capital invested by the households. The
earnings of the household are used to purchase goods and services from the firms to fulfill their
needs and wants, the remaining is saved and it goes to the capital market and is converted as
investments in various businesses. The household and business firms have to pay taxes to the
government for enjoying the services provided. On the other hand firms and households purchase
goods and services (import) from various countries of the world. Firms tend to sell their products
to the foreign customers (export) who earn income for the firm and foreign exchange for the
country. Therefore, it is clear that households supply input factors, which flow to firms. Goods
and services produced by firms flow to households. Payment flows in the opposite direction.
 DEVELOPED VERSUS UNDERDEVELOPED ECONOMIES

Countries are divided into two major categories by the United Nations, which are
developed countries and developing countries. The classification of countries as a Developed and
Developing country is based on the economic status like GDP, GNP, per capita income,
industrialization, standard of living, etc. Developed Countries is a country which provides free,
healthy and secured atmosphere to live but the countries which lack the same is known as
Developing Countries.

Features of underdeveloped economies:

1) Low Level of Income: Underdeveloped countries are maintaining a very low level of
income in comparison to that of developed countries. The per capita incomes of these
groups of countries are extremely low if we compare it with that of developed countries.
2) Mass Poverty: Existence of chronic mass poverty is another characteristic of
underdeveloped economies. The degree of poverty in these economies gradually
increases due to increase in its size of population, growing inequality in income and
increasing price level.
3) Lack of Capital Formation: As the level of per capita income in these countries is very
low thus their volume and rate of savings are also very poor. This has resulted lack of
capital formation and which is again responsible for low rate of investment in these
countries.

As for example, the rate of investment in countries like India and Pakistan is
lower than even 10 per cent but, on the other hand, the same rate is ranging between 15 to
30 per cent in developed countries like U.S.A., Canada etc.

4) Heavy Population Pressure: The natural growth rate of population in these countries is
very high due to its prevailing high birth rate and falling death rate.
5) Agricultural Backwardness: Although being the most important sector, agricultural
sector in these countries remains totally underdeveloped. But what is more peculiar is that
these countries are depending too much on this agricultural sector.
6) Unemployment Problem: Excessive population pressure and lack of alternative
occupations have resulted in huge unemployment and underemployment problem in these
underdeveloped countries.
7) Unexploited Natural Resources: For maintaining a rapid pace of economic growth in
these underdeveloped countries, possession of different types of natural resources in
sufficient quantity and its utilisation are very important. But under-developed countries
are either suffering from scarcity of raw materials or from un-exploited natural resources
of its own.
8) Shortage of Technology and Skills: Underdeveloped countries are facing low level of
technology and acute shortage of skilled manpower’s. Poor technology and lower skills
are responsible for inefficient and insufficient production which leads to poverty of
masses. The pace of economic growth in these countries is very slow due to application
of poor technologies.
9) Lack of Infrastructural Development: In respect of transportation, communication,
generation and distribution of electricity, credit facilities, social overheads etc. these
countries are very much backward than most of the developed countries.
10) Lack of Industrialization: The pace of industrialization in these countries is very slow
due to lack of capital formation, paucity in the supply of machinery and tools and also
due to lack of initiative and enterprise on the part of people of these countries.
11) Lack of Proper Markets: Markets in underdeveloped countries are suffering from
number of limitations viz. lack of market information, lack of diversification, lack of
proper relation or connection between markets, lack of adequate demand etc.
12) Mass Illiteracy: Educational institutions are few and far between. Due to illiteracy the
people in these countries are very much superstitious and conservative which is again
responsible for lack of initiative and enterprise on the part of people of these countries.
13) Inefficient Administrative Set Up: Due the absence of efficient and sound
administrative set up, these countries are suffering from lack of proper economic
organisation, lack of investments and lack of appropriate decisions leading to total
mismanagement of these economies.

The following are the names of some developing countries: China, Colombia, India,
Kenya, Pakistan, Sri Lanka, Thailand, Turkey, U.A.E.
Features of developed economies:

1) Dominance of industrial sector: Industrial and service sectors dominated the economy.
Agriculture remains a subsidiary occupation. The major part of national income is
obtained through industrial production.
2) Large scale production: Commodities are produced and manufactured on very large
scale, mechanisation is adopted in the industrial production.
3) Better infrastructure facilities: They have advanced and developed social infrastructure
like roads, bridges, and dams etc. which not only ease the production of goods and
services, but also help in the rapid growth of markets.
4) Division of work: The work to be performed is divided and subdivided into small pieces
and individuals or group is required to perform only a part of the work. The worker
becomes specialised in his job by doing the same work again and again. Division of
labour and specialisation increase the quantity of work and improves the quality of
production.
5) High level of literacy: majority of the population have higher degrees of education.
Educational institutions are everywhere.
6) Supremacy of capital: Capital plays a dominant role in the economy. Capital intensive
industries are installed. Village, cottage and small scale industries are neglected.
7) Profit motive: Human efforts are directed towards earning more and more income.
8) The political, social, cultural and economic environment is stable and certain. This is a
major catalyst to growth and development.

Economies of America, U.K., Russia, France, Germany and Japan etc. are the examples of
developed economy.

Key Differences Between Developed and Developing Countries

Basis for Comparison Developed Countries Developing Countries
Meaning A country having an effective rate Developing Country is a
of industrialization and individual country which has a slow rate
income is known as Developed of industrialization and low
Country. per capita income.
Unemployment and Low High
Poverty
Rates Infant mortality rate, death rate High infant mortality rate,
and birth rate is low while the life death rate and birth rate, along
expectancy rate is high. with low life expectancy rate.
Living conditions Good Moderate
Generates more revenue Industrial sector Service sector
from
Growth High industrial growth They rely on the developed
countries for their growth.
Standard of living High Low
Distribution of Income Equal Unequal
Factors of Production Effectively utilized Ineffectively utilized