Lecture on Agricultural Economics

Synopsis: For Midterm Coverage

Principles of Economics
History of Economics
● Economics
- Factors of Production
- Economic Problem
● Positive Economics
● Normative Economics
● Microeconomics
● Agricultural Economics

Nature and Scope

● Relationship of Economics to other social Sciences
● Basic Economic Problem
● Basic goals

Foundation of Economics:
● Economic System
● Economic Ideologies of Nation
- Capitalism
- Communism
- Socialism
- Fascism
- Nazism

Economic Theories
● Development of Econ Theory
● Application of Economic Theory
History of Economics

● Economics has developed into a body of knowledge compiled and improved by various
thinkers.
● Mercantilists, who favored protected tariffs.
● Copernicus, the philosopher, enunciated the Quantity theory of money and prices.
● John Locke, the philosopher, formulated the labor theory of value.
● David Hume earned his living as a philosopher and historian
- Contributed to the understanding of the automatic regulation of the gold
standard with resulting effects on price levels to correct balance of trade.

Classical Economics –

● Believes that a market economy tends toward an equilibrium with full employment.
● Classical period ranges from Adam Smith's Wealth of the Nations, published in 1776,
to John Stuart Mill's Principles of Political Economy in 1848.
● Adam Smith is considered as the founder of modern economics.
● A half century after the Wealth of Nations, the law of diminishing returns was
discovered.
● According to this law, if technology is unchanged, the use of more and more unit of a
variable input, together with the use of more fixed inputs, must eventually lead to a
declining marginal product for the variable input.
● David Ricardo wrote "Principles of Political Economy and Taxation
● Thomas Malthus introduced the concept on the constraint of the resources on the
level of economic activity and population.
● Thomas Malthus wrote Essay on the Principles of Population as it Affects the Future
Improvement of Society in 1798.
● Laissez Faire or the "left-alone" policy with respect to business.

What is economics?

✓the study of how societies use scarce resources to produce valuable commodities to obtain the
maximum satisfaction for the unlimited material wants of society.

Oikonomia - a Greek word meaning “household management”

Oikonomos – one who manages the household (oikonomis, plural)

(fajardo) Economics is the proper allocation and utilization of resources - especially available
scarce resources to maximize - their benefits for the satisfaction of people.

Such fundamental definition clearly relates economics to all fields of human endeavors.

This definition indicates 3 things:

1. Scarcity
 2. Economic Good
3. Unlimited Human Wants

1. Scarcity - refers to the condition wherein most things that people want are available only in
limited supply, hence, must be rationed, either by price or some other means.

✓the imbalance between our desires and the means of satisfying those desires.

2. Economic good - anything, either a good or service, that yields utility and could command a
price if sold in the market (e.g. books, cell phones, ukay-ukay, etc.)

Those which are produced and needed by man and are considered scarce and have to be paid
for.

FREE GOODS - Those which are produced by nature and could be obtained in unlimited
quantities without cost, e.g. sunshine, air, water.

3. Unlimited human wants - "wants" refers to a person's desires or preferences to satisfy a

basic need.

It is natural that man wants to maximum benefits or satisfaction out of his resources or activities.

It is important to consider the following types of resources or also known as the factors of
production:

Factors of Production (types of resources)

1. Land.

Land and its resources represent the gift from nature. It includes areas or places used for
agricultural or industrial purposes and those mineral deposited below and found above the soil
such as fossil fuels, geothermal emissions, non-energy resources like granite, lime stones,
diamond, gold.

Today, it include our environmental resources such as clean air and drinkable water.

2. Labor

Is the use of physical effort, skills, and intellectual powers which consist human time spent in the
production.

This may be the chef's cooking skills, driver's driving skills, actor's acting skills and others.

3. Capital – do not include money

Building, roads, machineries, and computers are examples of capital as they are referred to as
durable goods produced in order to produce other goods and services.

4. Entrepreneurial ability may be possessed by few qualified individuals who serve as

supervisor, manager, owner of the business.

They hope for profit but may take the consequence or risk of factors of production to create an
output.

The Basic Economic Problems (viray)

1. What goods or services to produce and how much?

Since resources are limited, it is not possible to produce all the needs of the people at the same
time. The most essential and important goods are produced first, like food, medicine, school,
roads, irrigation systems and houses, etc.

2. How to produce the goods?.

The production of a good is possible by various methods. For example, you can produce cotton
cloth using handlooms, power looms or automatic looms. While handlooms require more labor,
automatic looms need higher power and capital investment.

Hence, society must choose between the techniques to produce the commodity. Similarly, for all
goods and/or services, similar decisions are necessary. Further, the choice depends on the
availability of different factors of production and their prices. Usually, a society opts for a
technique that optimally utilizes its available resources.

3.For whom are the goods/services produced?

In a capitalistic society, good are distributed according to the ability and willingness of the
people to buy them. Those who have more money get more goods and services.

And so rich have more properties than poor. It other economic systems, the goods af society
are allocated on the basis of needs of the families. It is not the ability to pay like in the
capitalism.

Positive Economics versus Normative Economics

Recognizing the roles of the government in the economy, two classification of economics are
introduced by the economist :
 ● the positive economics, which deals with "what is"

● and the normative economics which is" what ought to be".

- Often, economists are asked to explain the causes of economic events.

- Or make policy recommendations

Positive statements - are descriptive in nature. They make a claim of how the world is.

Normative statements- are prescriptive; Makes claims of how the world should be.

Normative vs. Positive Economic

● Positive statements can be refuted or confirmed by examining evidence.

● Normative statements involves values and facts and cannot be judged by data alone.

What is good and bad cannot be judged by science alone, but also involves value judgments.

NATURE AND SCOPE OF ECONOMICS

Economics can also be defined as the social science that deals with the production, distribution,
and consumption of goods and services.

The nature of economics deals with the question that whether economics falls into the category
of science or arts. Various economists have given their arguments in favor of science while
others have their reservations for arts.

Economics as a Science

To consider anything as a science, first, we should know what science is all about? Science
deals with systematic studies that signify the cause and effect relationship. In science, facts and
figures are collected and are analyzed systematically to arrive at any certain conclusion. For
these attributes, economics can be considered as a science. However, economics is treated as
a social science because of the following features:

✓ It involves a systematic collection of facts and figures.

✓ Like in science, it is based on the formulation of theories and laws.
✓ It deals with the cause and effect relationship.

These points validate that the nature of economics is correlated with science. Just as in science,
various economic theories are also based on logical reasoning.
Economics as an Art

It is said that "knowledge is science, action is art." Economic theories are used to solve
various economic problems in society. Thus, it can be inferred that besides being a social
science, economics is also an art.

The scope is very wide and includes the subject matter of economics whether economics is a
science or an art or whether it is positive or normative science.

Neo-Classical View and Contemporaries -

Scarcity Definition of Robbins

According to Robbins, "Economics is the science which studies human behavior as a

relationship between ends and scarce means which have alternative uses." It was Lord
Robbins, who exposed the rational discrepancy and insufficiencies of other economists'
definitions.

Growth Oriented Definition

Modern Age is the age of economic development. Its key purpose is to enhance social
wellbeing and progress the standard of living of the people by getting rid of poverty,
redundancy, disparity of income and wealth, malnutrition etc. of the realm. Hence the financial
development is the essential point of all economic policies.

Branches of Economics

1. Macroeconomics

Macroeconomics is the study of the entire economy -- its behavior, main elements and
overarching systems.

The scale of these macroeconomic discussions are typically on a country level and utilizes facts
from that country's economic performance -- gross domestic product, inflation, government
interest rates and unemployment.

This also touches upon international trade and the overall impact of imports and exports has on
a country's economic growth.

1. Macroeconomics
Some important sub-topics in macroeconomic discussions are the factors affecting a country's
stabilization policies and supply-side economics:

Stabilization policies include the ability of a government to control its economic growth through
employing fiscal and monetary policies during boom and recession periods.

Supply side economics deals with the country's production rate of its goods and how it can
leverage absolute and competitive production advantages against competing countries: creating
a product mix for optimum export levels and growth.

2. Microeconomics:

Microeconomics is the study of transactions between people and businesses and how the
flow of money operates between these basic entities.

This includes business investment and personal savings.

Microeconomics also focuses on the supply and demand relationship between buyer and seller
and how this ultimately determines equilibrium prices of goods and services.

ECONOMIC GOALS: generally desired by society and pursued by governments through

economic policies.

✓ Full employment

✓ Stability

✓ Economic growth

✓ Efficiency

✓Equity

A direct reflection of the scarcity problem is that human beings have always sought ways to
improve their lives and living standards.

Microeconomic Goals

1. Efficiency:

Efficiency is achieved when society is able to get the greatest amount of satisfaction from
available resources.
With efficiency, society cannot change the way resources are used in any way that would
increase the total amount of satisfaction obtained by society.

The pervasive scarcity problem is best addressed when limited resources are used to satisfy as
many wants and needs as possible.

While efficiency is indicated by equality between demand price and supply price for a given
market, there are no clear-cut comprehensive indicators for attaining this efficiency goal.

While it is possible, in theory, to pinpoint what is needed for efficiency, the complexity of the
economy makes the task difficult to accomplish in practice.

2. Equity:

Equity is achieved when income and wealth are fairly distributed within a society. Almost
everyone wants a fair distribution. However, what constitutes a fair and equitable distribution is
debatable.

Some might contend that equity is achieved when everyone has the same income and wealth.

Others contend that equity results when people receive income and wealth based on the value
of their production.

Still others argue that equity is achieved when each has only the income and wealth that they
need.

Equity means income and wealth are distributed according to a standard of fairness.

3. Full Employment (macro)

Full employment is achieved when all available resources (labor, capital, land, and
entrepreneurship) are used to produce goods and services.

This goal is commonly indicated by the employment of labor resources (measured by the
unemployment rate).

However, all resources in the economy--labor, capital, land, and entrepreneurship--are

important to this goal.

4. Stability

Stability is achieved by avoiding or limiting fluctuations in production, employment, and prices.

Stability seeks to avoid the recessionary declines and inflationary expansions of business
cycles.

This goal is indicated by month-to-month and year-to-year changes in various economic

measures, such as the inflation rate, the unemployment rate, and the growth rate of production.

If these remain uncharged, then stability is at hand.

Maintaining stability is beneficial because it means uncertainty and disruptions in the economy
are avoided.

It means consumers and businesses can safely pursue long term consumption and production
plans.

Policy makers are usually most concerned with price stability and the inflation rate.

5. Economic Growth

Economic growth is achieved by increasing the economy's ability to produce goods and
services.

This goal is best indicated by measuring the growth rate of production. If the economy produces
more goods this year than last, then it is growing.

Differences between Macroeconomics and Microeconomics

Economics, as a whole, is the study that focuses on production, distribution and consumption of
all goods and services within an economy.

Microeconomics and macroeconomics are two categories within this subject that each focus on
different aspects of the economy.

Approach

These two categories of economics each take a different approach whe studying the effects and
patterns of the economy.

Microeconomics takes a bottoms-up approach. With this approach, aspects of the economy
from the bottom up, the consumer, are studied first. This information is analysed by working up
towards the whole economy.
Macroeconomics takes a top-down approach, starting with the top of the economy: the
government. It works its way down to the consumer, trying to relate effects and patterns of the
economy, in order to develop theories.

Decisions

Microeconomics is a type of study that focuses on individuals and business decisions; whereas
macroeconomics studies the economy as a whole by focusing on country and government
decisions.

Macroeconomics views the big picture of the economy; while microeconomics looks at smaller
segments and tries to determine theories to explain them.

Goods and Services

The study of microeconomics uses theories to explain why consumers purchase and allocate
resources for certain goods and services. This study focuses on supply and demand and the
effects of prices.

While Economists studying macroeconomics tend to focus on the industries as a whole and the
entire economy.

This type of economics doesn't look at supply and demand, but instead focuses on larger issues
that control consumer spending such as unemployment, national income and rate of growth.

Issues Studied

Microeconomics is the study of individual choices, how these choices are decided, what
motivates consumers and the effects they have on the economy. Under this type, economists
study the theory of supply and demand and the factors of production.

Macroeconomics calculates and studies gross domestic product (GDP) and the national debt.

For Example

For example, a micro economist may study the types of cars consumers are purchasing.

He will try to determine the motivating factors, which might include gas prices and
unemployment rates.
If gas prices are high, consumers might be avoiding buying SUVs.

In unemployment rates are low, car sales might be up.

The macro economist will study the car industry as a whole.

He will do an analysis to determine why production is up or down.

He will study inflation rates and average income rates to determine the effects of these things
have on the production of vehicles.

Agricultural economics

In general, one can say that when a large fraction of a country's population depends on
agriculture for its livelihood, average incomes are low. That does not mean that a country is
poor because most of its population is engaged in agriculture; it is closer to the truth to say that
because a country is poor, most of its people must rely upon agriculture for a living.

Agricultural economics: study of the allocation, distribution, and utilization of the resources used,
along with the commodities produced, by farming.

Agricultural economics: plays a role in the economics of development, for a continuous level of
farm surplus is one of the wellsprings of technological and commercial growth.

Economic Development and Growth

Development is a process while growth is a product.

So, growth is the result of development. In agriculture, the application of fertilizers, insecticides,
labor, machines and other productive inputs represents a process or development.

In simple terms, development is input while growth is the output.

In economics, development does not only include economic factors like money, machines and
materials, but also other factors which are non-economic, such as culture, values, religion,
government and education.

These mixtures of economic and non-economic factors which are applied in the creation of
goods and services constitute economic development.
Clearly, it is not effective to solve economic problems with economic solution alone. For
instance, extravagance is not only an economic problem, it is also caused by unfavorable
culture or social

In poor countries which are usually dominated by poverty, illiteracy, unjust distribution of wealth,
income and power, the concept of economic development has more relevant definition.

Under this socio-economic context, economic development refers to a progressive process of

improving human conditions by eliminating or reducing poverty, unemployment, disease,
illiteracy, injustice and exploitation.

Economic theories

Theory - an explanation about how and why a certain event occur.

May be subjected to various empirical tests and scrutiny.

Becomes an accepted theory if its prediction is confirmed by actual observation, and no other is
found to be inconsistent with those observations.

Represents the way in which economists conceptually organize or model the interdependent
components of economic life, to include production, consumption, income, employment, import,
savings and investment.

Development and Growth Theories

1. Laissez Faire Theory

✓ This means economic freedom.

✓ This theory explains that the government should not interfere in economic activities.

✓ It is absolute free-market economy.

✓ The role of the government is only confined in education, justice and public works.

✓ The theory argued that with economic freedom, businesses can be more efficient through free
competition. And this benefits the economy.

2.Keynesian Theory.
✓The government should play the key role in economic development, particularly in less developed
countries, or those with depressed economic conditions.

✓The theory contends that during economic depression, the government should put up massive public
works, like construction of roads and bridges, and other labor-intensive projects.

✓ These generate large-scale employment resulting to more incomes for more people. Such situation
increases the demand for goods and services. This means more production, and this enhances economic
development.

3. Ricardian Theory

✓ This is the theory of David Ricardo, an English classical economist.

✓He believes that the key factor in economic growth is land.

✓This means that agriculture plays a major role in economic development.

✓ They claim that all wealth comes from the land.

✓People cannot live without food and natural resources that's why agriculture is important in economic
development.

4. Harrod-Domar Theory

✓ This theory believes that the key factors in economic development and growth is physical capital like
machines.

✓The theory claims that more products can be produced through the use of machines.

✔In other words, production is far more efficient with the use of machines.

✓ This explain the industrial success of rich countries.

5. Kaldor Theory

✓This theory explain that the key factor is the application of modern technology in the production of
goods and services,

✓and it has been responsible for the economic success of the highly developed countries like US, Japan,
France, Italy and Germany.

6. Innovation Theory
✓ This was developed to stresses the role of innovators or entrepreneurs in economic development.
Schumpeter says that it is the innovator who has the courage and imagination to handle old system, and
be able to transform theory into reality.

✓ It is the innovator who introduces change for the better.

7. Non-economic Theories

✓ There are several other theories which are non-economic in nature. Their key factors are:

- political stability

- efficient public administration

- open society

- positive cultural values.

CIRCULAR FLOW OF ECONOMY

The two sectors:

1)household: who owns the economic resources (factors of production) such as land, labor,
capital and entrepreneurship,

2)business sector, which concerns with productions of goods and services out of the factors of
production that the households. elds supply

On the other hand, any economic activity uses money.

This activity or transaction between the two sector is shown in the lower part, inner loop of the
graph.

Households spend money when they purchase goods and services produced by the business
sector.

ECONOMIC SYSTEM

Economic system refers to a set of economic institutions that dominate a given economy with
the main objective of solving the basic economic problems.

This has an important role on addressing what, how and for whom these goods and services.
1. Traditional Economy makes use of methods in production and distribution that is based on
ways, procedures and systems which were handed down from generation to generation.

It basically duplicates or imitates how the previous societies address the basic economic
problem.

2. Command Economy. When the system makes use of an economic power, i.e. the state, is a
command economy.

The state has the dominant role as it will organize how members of the society conduct the
production and distribution activities.

The state, through its government machineries, plan, do and dictate what and how they could
arrive into decision in solving basic economic problems.

3. Market Economy which derived from the concept of market.

Market refers to a state where buyers and sellers transact economic goods, services and
resources.

It is also the venue where both parties agree on the price or value of all commodities.

In market economy, the interaction that takes place between individual consumers and
businesses define how economic problems are being solved.

4. Mixed Market System.

Most economies oftentimes adopt mixed market system where both private and public
institutions exercise economic control.

It manifests a combined or mixed elements of traditional, command and market in different

degrees.

Private ownership of resources exists side by side with substantial public ownership of
resources and government participation in economic activities.

However, in reality, there is no 100% or pure existence of any one system. They can be just
present in varying degrees in the economy.

The Philippines, for example, is usually classified as market economy system but in reality there
are government interventions like regulatory agencies and statutory laws which are elements of
command system.
Moreover, when farmers or other agricultural methods still employ what they have learned from
their forefathers, features of traditional economy can be found.