AGRICULTURAL ECONOMICS

Microeconomics – deals with the economic behavior of the individual units of the economy

Positive Economics – studies how the problems of the economy are actually solved

Normative Economics - studies how the problems of the economy should be solved

Market – placed where the exchange of goods & services takes place

Function – shows the relationship between 2 or more variables

Equilibrium – balancing of market forces

I. Demand & Supply

Demand – quantity of goods & services that a consumer is willing to buy at a given price &
time

Law of Demand
Downward sloping due to the indirect relationship between price & quantity demanded

Change in Qd – movement along the same demand curve

- caused by the change in price

Change in Demand – shifting of the demand curve either to the right or to the left
- caused by the level of income & other factors aside from price

Supply – quantity of goods & services that a producer is willing to sell at a given price & time

Law of Supply
Upward sloping due to the direct relationship between price & quantity supplied

Change in Qs – movement along the same supply curve

- caused by the change in price

Change in Demand – shifting of the supply curve either to the right or to the left
- caused by the level of income & other factors aside from price

Causes of in Supply

1. technology
2. inputs
3. climate
4. weather condition
5. calamities
6. production costs

Law of Supply & Demand

D>S
D<S

Equilibrium D=S
 II. Measurement of Elasticities

Elasticity of Demand – responsiveness of demand to price change

Kinds of Price Elasticities of Demand

1. Elastic
2. Inelastic
3. Unitary
4. Perfectly Elastic
5. Perfectly Inelastic

Elasticity of Supply – responsiveness of supply to price change

Kinds of Price Elasticities of Supply

1. Elastic
2. Inelastic
3. Unitary
4. Perfectly Elastic
5. Perfectly Inelastic

III. Consumer Demand Theories

A. Utility Approach
Utility – level of satisfaction in consuming goods & services
Utils – unit of satisfaction
Total utility – total satisfaction in the consumption goods & services
Marginal utility – additional satisfaction derived in consuming one more unit of goods
& services
Saturation Point – point wherein individual reach maximum satisfaction & marginal utility

Consumer Equilibrium

B. Indifference Curve Approach

Indifference Curve – shows the various combination of commodity x & y which will give
equal utility or satisfaction to the consumer

Characteristics of Indifference Curve:

1. negatively-sloped
2. Convex to the origin
3. They cannot intersect

Marginal Rate of Substitution (MRS)

the amount of Y that a consumer is willing to give up to have one more unit of X & still stays at
the same indifference curve

Budget Line Constraints

shows the different combinations of X & Y that a consumer can purchase given his money
income and the prices of the 2 goods

Consumer Equilibrium
Indifference curve is tangent to the budget

Income Consumption Curve

Locus of points of consumer equilibrium for varied levels of income
Engel Curve – shows the amount of commodity that a consumer would purchase per unit of time at
various levels of income

1. Engel Curve Positively-Sloped

2. Engel Curve Negatively-Sloped
3. Engel Curve Positively-Sloped & cuts the Income Axis
4. Engel Curve Negatively-Sloped & cuts the Quantity Axis

IV. Theory of Production

Production - process of transformation of inputs into output.

Production Function – relationship between input & output

Law of Diminishing Returns

- as additional units of variable inputs are used in combination with one or more fixed inputs,
the MPP will eventually decline

Production with 2 Variable Inputs

Isoquant – shows the different combination of Labor & Capital with which a firm can
produce a specific quantity of output

Marginal Rate of Technical Substitution (MRTS)

the amount of K that a firm is willing to give by increasing the amount of L & still stay at the
same isoquant

Characteristics of Isoquants
1. Negatively-sloped – due to indirect relationship between L & K
2. Convex to the Origin – diminishing MRTS
3. Never Intersect – due to the isocost

Isocosts – shows all the combination of L & K that a firm can purchase with its total outlay & factor
Price

Producer Equilibrium – Isoquant tangent to isocost

Expansion Path – locus of points of producer’s equilibrium

Returns to Scale

1. Constant Returns to Scale

2. Decreasing Returns to Scale
3. Increasing Returns to Scale

V. Costs of Production

Types of Costs:
1. explicit costs – what the firm actually pays-out to purchase factor inputs
- cash costs
2. implicit costs – value of factor inputs owned & used in the production process
- non-cash costs

3. Fixed Costs – costs of fixed inputs can’t be altered during the production period

4. Variable Costs – costs of variable inputs

- can be altered during the production period
 Economic Costs
1. Total Cost - - summation of all costs incurred in the production (FC & VC)
2. Total Fixed Cost (TFC) - value of fixed inputs
3. Total Variable Cost (TVC) – value of variable inputs
4. Average Cost – value per unit of output
5. Marginal Cost (MC) – additional costs incurred by using 1 more unit of input
6. Opportunity Cost – foregone opportunity / alternative benefit

Short-run – period which is long enough to change the variable input but short enough to change the
fixed input

Long-run - period which is long enough to change both the variable & fixed input

Economies of Scale – efficiency of management in relation to size

1. external economies of scale – factors outside the firm which contribute to its efficiency
a. good government policies
b. good communication facilities
c. good transportation facilities
d. good roads & bridges
2. internal economies of scale – factors inside the firm which contribute to its efficiency
a. technical economies of scale – use of good technology, specialization (educ.), labor, & use
of machines
b. financial economies of scale – large firm have easier access to capital which lower interest
c. marketing economies of scale – large firms purchase & sell in volume (lower cost/unit)
d. Administrative & management economies of scale – specialization in management
(education), increase productivity & lower production costs

Diseconomies of Scale – inefficiency in production in relation to size

External Diseconomies of Scale - factors outside the firm which contribute to its inefficiency
1. poor government policies
2. poor communication facilities
3. poor transportation facilities
4. poor roads & bridges
5. air & water pollution

Internal diseconomies of Scale

1. red tape
2. overspecialization
3. difficulty of management
4. slow to adopt changes