Hawassa University Faculty of Veterinary Medicine: Animal Health Economics (Vetm 5232)

Hawassa University
Faculty of Veterinary Medicine
Animal health economics (VetM 5232)
Gizachew Hailegebreal (DVM, MVSc)

Chapter one: Introduction to principles of
economics
04/20/2023 Gizachew Hg. - AHE 2

Write your own definition….
Definition of Economics
 The word ‘Economics’ originates from the Greek word
‘Oikonomikos’ which can be divided into two parts:
(a) ‘Oikos’, which means ‘Home’, and
(b) ‘Nomos’, which means ‘Management’
• Thus, Economics means ‘Home Management’.

• The head of a family faces the problem of managing the
unlimited wants of the family members within the
limited income of the family.
• In fact, the same is true for a society.
• Thus, Economics means the study of the way in which
mankind organizes itself to tackle the basic problems of
scarcity.
Or
• Economics is the study of making rational
choices/decisions in the allocation of scarce resources
for the achievement of competing goals.
o People's desires are unlimited, but resources are limited,

therefore individuals must make trade-offs/decisions.
o So we need economics to study this fundamental conflict
and how these trade-offs are best made.

So: Animal health economics is concerned with
the allocation of available resources to improve
animal health in order to satisfy human needs.

• Some of the major questions for the economics
of animal health and production.
 What is the optimal level of resource allocation

to the detection and prevention of diseases?
 How much should be invested on surveillance

and vaccination, prevention, control and
eradication of animal diseases?

Branches of Economics
• The study of economics is conventionally divided into two

areas - Micro and Macroeconomics
1. Microeconomics is the branch of economics which is

concerned with the decision-making of a single unit of an
economic system, (i.e. individual/family or firm)
o How does an individual (or a family) decide on how much

of various commodities and services to consume?
o How does a business firm decide how much of its product
(or products) to produce?
2. Macroeconomics is the branch of economics that
deals with the structure, performance, behavior, and
decision-making of the whole, or aggregate economy.
o It has, therefore, been called ‘aggregative economics’.

o “Macroeconomics deals ... not with individual income
but with national income, not with individual prices but
with the price level, not with individual outputs but
with national output”.

Questions of thought
Categorize as micro & macroeconomics
1. Decision made to buy either beef or poultry by

a family.
2. Decision made to establish either a dairy or
apiary farm.
3. Export of live animals from a given country.
4. National disease control program, say FMD.

Important Economic Concepts
• There are some underlying economic concepts

that are important to clarify with regard to the
allocation of scarce resources.
• These are choice and opportunity cost, rational
decisions and the marginal costs and benefits.

Choice and opportunity cost
• When making a choice or decision, there must be some
sacrifice.
o Eg. fertility management by spending more time making
checks of the animals in the late evening.
• In other words, the production or consumption of one
thing involves the sacrifice of alternatives.
• This sacrifice of alternatives in production (or
consumption) of a good is known as its opportunity cost.
• The opportunity cost is the value of the best foregone
alternative.

Rational choices
• When making decisions of how to allocate scarce
resources, people need to assess the costs and benefits
of their actions.
• Therefore, the decision is not made on cost alone, but
also comparing this cost with the benefit that is derived
from spending the money and using the item
purchased.
o E.g. a decision to run a dairy development project may
be affected by a project to build a road, because the
road is thought to benefit the country and its people
more.

Life is full of choices and decisions!

Marginal benefits and costs
• The rational choice focuses on the comparison of total
costs versus total benefits.
• Consumers recognize that livestock product
consumption creates a high pleasure for small
amounts, but additional amounts create less and less
pleasure.
• Therefore, reaching a rational choice on how much of
an input to use or how much of a product to consume
often involves assessing the marginal costs of extra
inputs or products versus the marginal benefits they
create.

• Marginal benefits are the maximum amount a
consumer will pay for an additional good or service.
• The marginal benefit generally decreases as

consumption increases.
• The marginal cost of production is the change in cost

that comes from making more of something.

For example,
o The consumption of strong flavored cheese can create

strong pleasure in small amounts, but in extreme cases
may make people feel ill, if they eat too much.
o Pig farmers making rational decisions on how much

time they need to spend on oestrus detection will
compare the incremental amounts of time versus the
extra benefits they produce.

Summary
• Economics is the study of making rational
choices/decisions in the allocation of scarce resources for
the achievement of competing goals.
• The underlying issue is that there is scarcity and it is not
possible to do every activity at all the levels that one wants.
• Making decisions on how to allocate resources requires
sacrifices that generate opportunity costs.
• These decisions are rational if they compare the cost of the
decision versus the benefit generated.
• In general, such a rational decision-making process will
compare the marginal costs of a decision versus the marginal
benefits.
Production
The key economics questions in agricultural production
are:
 What to produce? (what crop/crops or livestock?)
 How much to produce? (the level of output)
 How to produce? (the combination of inputs/methods)
 When to produce?
 Where to sell and to whom to sell? etc.

What is Production?
• Production is the process of combining various material
inputs and immaterial inputs (plans, knowledge) in order
to make something for consumption (output).
• It is the act of creating an output, a good or service which
has value and contributes to the utility of individuals.
• The area of economics that focuses on production is
referred to as production theory, which is intertwined with
the consumption (or consumer) theory of economics.
• The production process and output directly result from
productively utilizing the original inputs (or factors of
production).
Factors of Production
Three fundamental production factors:
• Labor: can be divided into various grades
• Land : natural resources
• Capital: covers both money itself and production goods such as

livestock and machinery
• Entrepreneurship or management: is sometimes added to cover

and management and risk taking.
• These primary inputs are not significantly altered in the output
process, nor do they become a whole component in the
product.
The factors of production are resources that are the
building blocks of the economy; they are what people use
to produce goods and services

Agricultural Production
• Agricultural production involves many controllable and
uncontrollable inputs.
 The controllable inputs include land, labor, capital, irrigated
water and management
 The uncontrollable inputs include rainfall, other weather
variables and many variables such as animal and plant
nutrition or photosynthesis which are not completely
understood
• The major resources used in agriculture are free and
economic resources

• The free resources are termed free because they are
relatively abundant in supply and hence have no cost
elements attached to them but they are highly essential
in agricultural production.
– They are the air, heat (temp), water (rain) and so on.
• The economic resources are scarce in supply and
limiting production.
• They possess high economic value.
– They are land, labor, capital and knowledge
(management)

Concepts related to production function
(a) Short run and long run
• Short run refers to a time period in which a firm does not have
sufficient time to increase the scale of output.
• It can increase only the level of output by increasing the quantity
of a variable factor and making intensive use of the existing fixed
factors.
• Long run refers to the time period in which the firms can increase
the scale of output by increasing the quantity of all the factor
inputs simultaneously and in the same proportion.
• The distinction between fixed and variable factors is relevant only
in the short run but this distinction disappears in the long run.
(b) Fixed factors and variable factors
• Fixed factors are those factors of production whose

quantity can not be changed with change in the level
of output.
– For example, the quantity of land, machinery etc. can not
be changed during short run.
• Variable factors are those factors of production
whose quantity can easily be changed with change in
the level of output.
– For example, we can easily change the quantity of labor to
increase or decrease the production.
(c) Level of production and scale of production
• When any firm increases production by increasing the

quantity of one factor input where as the quantity of
other factor inputs keeping constant; it increases the
level of production.
• But on the other hand, when the firms increases

production by increasing the quantity of all the factors
of production simultaneously and in the same
proportion, it increases the scale of production

Production functions
• The production function is a technical and systematic

relationship between production inputs (resources)
and outputs.
• Equation that expresses the relationship between the

quantities of productive factors (such as labor and
capital) used and the amount of product obtained
o input quantity is the independent or control variable

o output quantity is the dependent or outcome variable

Production and Productivity

The production function
• If there are two factor inputs: labor (L) and capital (K),
then production function can be written as:
• Qx = f (L, K) where Qx is the quantity of output of
commodity x, f is the function and L and k are the units
of labor and capital, respectively.
• It says that quantity of output depends on units of labor
on capital used in production.
• Here two points are worth considering.
– Firstly, production function must be considered with reference
to particular period of time i.e. short period and long period.
– Secondly, production function is determined by state of
technology
(i) Short run production function
• A production function that shows the changes in output

when only one factor is changed while other factor
remains constant is termed as a short run production
function.
– In the above example of production function, Labor (L) is
considered as the variable factor which can be changed to
influence the level of output.
– The other factor capital (K) is a fixed factor which can not be
changed.

(ii) Long run production function
• A long run production function studies the impact on

output when all the factors of production can be
changed simultaneously and in the same proportion.
• So in the long run size of operation of the firm can be
expanded or contracted depending on the fact that the
factors of production are increased or decreased.

Measures of production
There are mainly three measures of production:
(a) Total product or total physical product denoted by

TPP
(b) Average Product (AP) or Average physical product

denoted by APP
(c) Marginal Product (MP) or marginal physical product

denoted by MPP
(a) Total Physical Product (TPP)
• TPP is the total amount of a commodity that is

produced with a given level of factor inputs and
technology during a given period of time.
– For example, 2 units of labor combined with 2 units of capital
can produce 26 fans per day. Here 26 fans is the total physical
product which is produced with the given level of inputs
(labor and capital)

(b) Average Physical Product (APP)
• APP is the average livestock output per unit of variable
input and can be calculated by dividing the total
livestock output by the amount of variable input used.
• So APP = TPP/L where L is the variable input used.
– For example, if 10 workers make 30 chairs per day, the APP of
a worker per day will be 30 ÷ 10 = 3 chairs.
• If the productivity of a factor increases, it implies that
the output per unit of input has increased.
• This is a measure of how efficiently input is converted
to output

(c) Marginal Physical Product (MPP)
• MPP of an input is the additional output that can be

produced by employing one more unit of that input
while keeping other inputs constant.
– For example, if 10 tailors can make 50 shirts per day and 11
tailors can make 54 shirts per day, the marginal product of 11
workers will be 54 - 50 = 4 shirts per day.
• MPP is equal to the slope of TPP and therefore
represents the rate at which an input is transformed
into an output.

• Productivity is the efficiency of production of goods or
services expressed by some measure.
• Measurements of productivity are often expressed as a
ratio of an aggregate output to a single input or an
aggregate input used in a production process, i.e. output
per unit of input, typically over a specific period of time.
Productivity = Total value of outputs per unit time

Total value of inputs per unit time

 What are the important factors of Production?
 Labor
 Land
 Capital
 Entrepreneurship
 What are the 3 measures of Production?
 TPP
 APP
 MPP
 Which one of these is best to measure efficiency of production?
 APP + MPP
Law of diminishing returns
• In economics, diminishing returns is the decrease in

marginal (incremental) output of a production process as
the amount of a single factor of production is incrementally
increased, holding all other factors of production equal
• When successive increments of a variable resource/input
are added to a fixed resource/input, beyond some point,
the total output of physical product (e.g. milk) will increase
in diminishing amounts with each increment in variable
resource.
• The law of diminishing return appears to represent a reality
in agricultural production conditions
– e.g. excessive application of inorganic fertilizer will cause crop to
lodge or burn.
Law of diminishing returns

Three Stages of Production
Stage One
• Stage one is the period of most growth in a company's
production.
• In this period, each additional variable input will produce more
products.
• This signifies an increasing marginal return; the investment on
the variable input outweighs the cost of producing an
additional product at an increasing rate.
• During this stage, the TPP is increasing at an increasing rate.
• Productivity is therefore increasing during this stage.
• During this stage APP is increasing and MPP is greater than APP.
• MPP also reaches a maximum during this stage.

Stage Two
• Stage two is the period where marginal returns start to
decrease.
• Each additional variable input will still produce
additional units but at a decreasing rate.
• This is because of the law of diminishing returns: Output
steadily decreases on each additional unit of variable
input, holding all other inputs fixed.
• During stage II, TPP is increasing at a diminishing rate
and therefore productivity is decreasing.
• APP is greater than MPP.

Stage Three
• In stage three, marginal returns start to turn negative.
• Adding more variable inputs becomes counterproductive;
an additional source of labor will lessen overall production.
• This may be due to factors such as labor capacity and
efficiency limitations.
• In this stage, the total product curve starts to trend down,
the average product curve continues its descent and the
marginal curve becomes negative.
• During this stage, TPP declines, MPP is negative and APP is
declining.
• It would be wasteful if producers were at this stage of the
production function.
How Much Input to Use
• Do not produce in Stage III, because more output can
be produced with less input in the other stage.
• Do not normally produce in Stage I because the average

productivity of the inputs continues to rise in this stage.
• Stage II is the “rational stage” of production.

Cost function
• Production costs play an important role in the decisions
of the farmers.
• Explicitly or implicitly, most of the producers keep in
mind the cost of producing additional units of output.
• In general, at given level of prices, a farmer can increase
his farm income in two ways, i.e., i) by increasing
production and / or ii) by reducing the cost of
production.
• Since cost minimization is an individual skill, degree of
success in this direction directly adds to the profits of
the farm.
Cost…
• Costs refer to the money value of effort extended or
sacrifice made in producing an article or rendering a
service or achieving a specific purpose.
• Costs, thus, are the expenses incurred in organizing and
carrying out the production process.
• Include outlays of funds for inputs and services used in
production.
• Money value of all inputs used in the production process
is termed as the total cost.
• If the inputs used are represented by X1, X2,..., Xn and
the respective prices by Px1, Px2, ..., Pxn, then the total
cost (TC) can be expressed as: TC = Px1.X1 + Px2.X2 + ... +
Pxn Xn.
Total costs
• The total cost comprises of two components, i.e., fixed and
variable costs.
• Costs of fixed inputs are called fixed costs, while costs of
variable inputs are called variable costs.
• TVC and TC increase as output increases.
• Fixed costs do not change in magnitude as the amount of
output of the production process changes and are incurred
even when production is not undertaken, i.e., fixed costs are
independent of output.
• Land revenue, taxes, contractual payments such as rent and
interest on capital for the use of fixed resources, and the value
of services from fixed resources all represent fixed costs.

• In farming, cash fixed costs include land taxes, rent,
insurance premium, etc.
• Non-cash fixed costs include depreciation of building,
machineries and equipment caused by the passing of
time, interest on capital investment, charges for family
labour and charges for management.
• Variable costs constitute the outlay of funds that are a
function of output in a given production period, i.e.,
they vary with the level of output.
• The outlays of funds on medicine, fertilizer, insecticide,
casual labour, fuel and oil, feeds, etc, are a few
examples of variable costs.
• Total fixed costs and total variable costs are denoted by
TFC and TVC, respectively.
• In short run, total costs include fixed and variable costs.
• When no variable input is used, TC=TFC.
• The TC curve at any point is equal to the vertical addition
of TFC and TVC.
• In the long run, all costs are considered variable costs
because all inputs are variable.
• Conventionally, total cost (TC) is thought of as a function
of output (Y), rather than that of inputs, i.e., TC = f (Y).
• Such a cost curve is illustrated with TC on the vertical axis
and Y (output) on the horizontal axis.
The relationship between TC, TVC and TFC

AFC, AVC and ATC
Average Fixed Cost (AFC): is computed by dividing total fixed cost
by the amount of output.
• AFC varies depending on the amount of production. AFC=TFC/Y
Average variable cost (AVC): It is computed by dividing total
variable cost by the amount of output.
• AVC varies depending on the amount of production.
• The shape of the AVC curve depends upon the shape of the
production function while AFC always has the same shape
regardless of the production function.
Average Total Costs (ATC): It can be computed in two ways.
• Total costs can be divided by output or AFC and AVC can be
added.
• ATC = TC / Y. (or) ATC = AFC+AVC.
AVC and APP
• Average variable cost (AVC) is inversely related to average
physical product (APP).
• When APP is increasing, AVC is decreasing.
• When APP is at its maximum, AVC attains a minimum value.
• When APP is decreasing, AVC is increasing.
• Thus, for a production function, APP measures the efficiency
of the variable input, while AVC provides the same measure
for cost curves.
• When AVC is decreasing, the efficiency of the variable input
is increasing; efficiency is at a maximum level when AVC is a
minimum and is decreasing when AVC is increasing.

Marginal Cost
• Marginal Cost, MC: It is defined as the change in total cost per
unit increase in output.
• It is the cost of producing an additional unit of output.
• MC is computed by dividing the change in total costs, ΔTC, by
the corresponding change in output, ΔY,
• i.e., MC =ΔTC / ΔY.
• By definition, the only change possible in total costs is the
change in variable cost, because fixed cost does not vary as
output varies.
• Thus, ΔTC=ΔTVC.
• Therefore, MC could also be computed by dividing the change
in total variable cost by the change in output.
Methods of Determining the Optimum Level
• The problem here is to determine the most profitable
point of operation for an enterprise in the short-run.
• This can be done by determining either the most
profitable amount of input or the most profitable level
of output.
• As the production function relates the input to output in
a unique manner in stage II, either method results
ultimately the same answer.
• In economic terminology, the “most profitable” amount
can be called the “optimum” amount.

Methods….
• Input-output relationship
• Input combination (factor - factor relationship)

 Least cost combinations
• Output combinations (product - product

relationship)
 Revenue maximization

Input-output relationship
• The underlying process of a livestock production system
is biological with the level of output being directly
related to the amount of input.
• Such a relationship can take on various forms of which
the most common are the following:
1. Constant productivity is one where each unit of
variable input added to the fixed inputs increases the
livestock output by the same amount.
• Best examples of this type of relationship are bulky items
such as the addition of new housing facilities for animals.

2. Diminishing productivity is one where each additional
unit of the variable input adds less to the total livestock
output than the previous unit.
• Many examples of this sort of response are seen in
natural situations, an example would be additions of
protein supplement to beef cattle.
3. Increasing productivity is one where each additional
unit of the variable input adds more to total livestock
output than the previous one.
• This sort of response will generally only be seen at very
low levels of input use. Perhaps an example would be
the period of compensatory growth seen in cattle that
have been through the dry season.
Input-output relationship
• In order to identify the optimum level of input use and the

consequent level of output, economic data is required.
• We consider first the case of profit maximizing rule when a
single variable input is used
• Following, we consider more general and realistic situation
when a number of inputs are being used
• From an economic view point, the optimal level of input use
is that level which contribute to the maximization of profit
• Profit is defined as the difference b/n total (gross) revenue
and total cost.

• How can we find out the input use that maximize
profit?
• Given the low of diminishing return, the addition to
revenue from each additional unit of inputs is not
uniform: first increase then decline.
• On the other hand, it can be assumed that the price of
a unit of input does not change with each additional
unit used. [competitive market is assumed]
• The rule is: as long as the addition to the revenue
generated by additional unit of input exceeds the cost
of that inputs, it is advisable to continue applying the
input.
Input combination (factor - factor relationship)
• is concerned with the possibilities of substituting one

input/factor (X1) for another input/factor (X2) for
producing a given level of output.
• It answers the crucial question of finding out the
optimum or least cost combination of two or more
resources in producing the given amount of output.
• Example 1 -- a business is producing a crop (output) on a
fixed quantity of land (fixed input) and a limited amount
of cash to be used for fertilizer and irrigation (variable
inputs).
Product–Product Relationships
• The examination of the relationship between the

production of two livestock products or the production
of a livestock product and a crop product called the
product–product relationship will help to answer the
following question:
• What combination of enterprises should be produced
from a given bundle of fixed and variable inputs?
• A competitive relationship is where the switch of inputs
from one livestock enterprise to another leads to the
increase in the livestock output of one enterprise and
decrease in output of the other
• Complementary relationship: Where the production of
one livestock product can increase the production of
another product, this is said to be a complementary
relationship.
• An example is cattle being fed the straw from a cereal crop
and producing manure and draught power to produce the
crop in the future.
• Supplementary relationship: There are also instances
where expansion of one livestock enterprise will leave
other enterprise production levels unaffected.
• Examples would be sheep fattening over the winter on an
arable farm; chicken and pig fattening on a mixed farm, the
growing of crops during the dry season using irrigation.

Chapter 2: Market Behavior

Principles of Economics
Laws of Supply and demand
Elasticity
Market Equilibrium

Supply and Demand
• are certainly the two words that economists use most

often.
• are the forces that make market economies work
efficiently.
• A market is a group of buyers and sellers of a particular
good or service.
 Buyers determine demand while Sellers determine
supply
• Quantity demanded is the amount of a good that
buyers are willing and able to purchase
• Market demand is the sum of individual demands.
Demand
• Demand is an economic principle referring to a
consumer's desire to purchase goods and services and
willingness to pay a price for a specific good or service.
• Holding all other factors constant, an increase in the
price of a good or service will decrease the quantity
demanded, and vice versa.

Demand curve
• What is the demand curve? It is a curve showing
the quantity that will be bought on the market
at different prices.
• The lower the price, the more will be
demanded; the higher the price the less will be
demanded.
• In economics, demand is backed by money – it
is not just a need or a desire, but people do
have the money to buy and are prepared to buy.

Law of demand
• Table: demand for meat
Price (Birr) Quantity (Demand)
15 10
50 8
100 6
150 5
250 3
350 2
450 1
• The law of demand states that there is an inverse

relationship between price and quantity demanded.
• What factors determines demand?
(What determines how much meat will be
bought)

Five Determinants of Demand

Determinants of demand
• What are the factors that determine how much of
a product is bought in the market for that product?
– Market price
– Consumer income
– Prices of related goods
– Expectations about future
– Tastes of consumers
– Quality
– Number of consumers
Demand function
• Demand function represents the relationship between
the quantity demanded for a commodity (dependent
variable) and the price of the commodity
(independent variable).
• A demand function is a mathematical equation which
expresses the demand of a product or service as a
function of the its price and other factors such as the
prices of the substitutes and complementary goods,
income, etc

Supply
• Supply is a fundamental economic concept that
describes the total amount of a specific good or
service that is available to consumers.
• Supply can relate to the amount available at a specific

price or the amount available across a range of prices if
displayed on a graph.

Supply
• Goods and services are supplied to the market by
producers who are also sellers.
• Quantity supplied is the amount of a good or service that
sellers are willing and able to sell.
What determines the quantity supplied?

o Market price, Input prices (of those used in its
production)
o Technology (with which it was produced)
o Expectations about the future level of prices
o Number of producers of the good or service
• The law of supply states that there is a direct
(positive) relationship between price and the
quantity supplied.
Supply curve
• The supply curve is a curve showing the
quantity that will be offered on the market at
different prices

Supply curve

• Let’s put both the demand and supply curves on the
same diagram.
• At the equilibrium price/market clearing price, the
quantity demanded just equals the quantity supplied.
• The equilibrium price is the only price where the plans of
consumers and the plans of producers agree—that is,
where the amount of the product consumers want to
buy (quantity demanded) is equal to the amount
producers want to sell (quantity supplied).
• This common quantity is called the equilibrium quantity.
• This “happy’’ situation happens at the intersection of D
and S with price P and quantity Q.

The equilibrium price

Markets not in equilibrium
• To understand the meaning of market equilibrium we can
look at a market not in equilibrium
• Outside of equilibrium there will be either unsold products or
unsatisfied customer demand
• Excess Supply
o Price is above equilibrium price
o Producers are unable to sell all they want at the going price.
• Excess Demand
o Price is below equilibrium price.
o Consumers are unable to buy all they want at the going price.

market equilibrium/market not in equilibrium

Elasticity
• In economics, elasticity measures the percentage change of
one economic variable in response to a percentage change
in another
• is the measurement of how responsive an economic
variable is to a change in another.
• It gives answers to questions such as:
• "If I lower the price of a product, how much more will sell?“
Eg. Football hall fee.
1)The presence or absence of alternative sources
2)The time available to customers to investigate alternatives;
3)The size of the investment made by the purchaser.

o Necessities: goods that people must buy for natural or
similar reasons, like food, shelter, medical services.
o Luxuries: goods that are bought for pleasure like
fashion, entertainment.
o Close substitutes: different categories of food are
usually very close substitutes, like beans and
chickpeas.
• We will learn about three types of elasticity

o Price elasticity of demand
o Income elasticity of demand
o Price elasticity of supply
I. Price elasticity of demand
• Price elasticity of demand is the percentage

change in quantity demanded given a one
percent change in the price.
• The price elasticity of demand is computed as the
percentage change in the quantity demanded
divided by the percentage change in price.
• Price elasticity of demand =
% change in quantity demand
% change in price

Ranges of elasticity
• Perfectly Inelastic when the quantity demanded
remains unchanged when price changes.
• Inelastic Demand when the quantity demanded does
not respond strongly to price changes.
• Unit Elastic when the quantity demanded changes by
the same percentage as the price
• Elastic Demand when the quantity demanded
responds strongly to changes in price
• Perfectly Elastic when the quantity demanded
changes by very large amounts with small changes in
price
II. Income elasticity of demand
• Income elasticity of demand measures how much

the quantity demanded of a good responds to a
change in consumers’ income.
• It is computed as the percentage change in the
quantity demanded divided by the percentage
change in income.
• Income elasticity of demand =
% change in quantity demand
% change in income

• Income elasticity of demand tells us about the
behaviour of demand when income changes.
• Higher income raises the quantity demanded for
normal goods but lowers the quantity demanded for
inferior goods.
• Goods consumers regard as necessities usually have
low income elasticity of demand
 Examples include food, fuel, clothing, utilities, and
medical services
• Goods consumers regard as luxuries usually have
high income elasticity of demand
 Examples include sports cars, and expensive foods
III. Price elasticity of supply
• Price elasticity of supply measures the response of

quantity supplied to changes in price.
• Price elasticity of supply is the percentage change in
quantity supplied resulting from a one percent change in
price.
• The price elasticity of supply is computed as the
percentage change in the quantity supplied divided by
the percentage change in price.
• Elasticity of supply = % change in quantity supplied
% change in price

Determinants of elasticity of supply
• Price elasticity of supply measures the speed of the

change in the production of a good or service demanded
in the market
• The supply /availability or non-availability/ of a good is
influenced by many factors like:
 Nature of the good/service
o Beach-front land is limited by nature (inelastic supply)
o Manufactured goods like books, cars...can be produced
at will (elastic supply)
 Time period
o Supply is more elastic in the long run

Hawassa University Faculty of Veterinary Medicine: Animal Health Economics (Vetm 5232)

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Hawassa University Faculty of Veterinary Medicine: Animal Health Economics (Vetm 5232)

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Hawassa University

Faculty of Veterinary Medicine

Animal health economics (VetM 5232)

Gizachew Hailegebreal (DVM, MVSc)

04/20/2023 Gizachew Hg. - AHE 2

• Thus, Economics means ‘Home Management’.

o People's desires are unlimited, but resources are limited,

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 What is the optimal level of resource allocation

 How much should be invested on surveillance

04/20/2023 Gizachew Hg. - AHE 7

• The study of economics is conventionally divided into two

1. Microeconomics is the branch of economics which is

o How does an individual (or a family) decide on how much

o It has, therefore, been called ‘aggregative economics’.

04/20/2023 Gizachew Hg. - AHE 10

Categorize as micro & macroeconomics

1. Decision made to buy either beef or poultry by

04/20/2023 Gizachew Hg. - AHE 12

• There are some underlying economic concepts

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• The marginal benefit generally decreases as

• The marginal cost of production is the change in cost

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o The consumption of strong flavored cheese can create

o Pig farmers making rational decisions on how much

04/20/2023 Gizachew Hg. - AHE 21

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• Land : natural resources

• Capital: covers both money itself and production goods such as

• Entrepreneurship or management: is sometimes added to cover

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• Fixed factors are those factors of production whose

• When any firm increases production by increasing the

• But on the other hand, when the firms increases

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• The production function is a technical and systematic

• Equation that expresses the relationship between the

o input quantity is the independent or control variable

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• A production function that shows the changes in output

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• A long run production function studies the impact on

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(a) Total product or total physical product denoted by

(b) Average Product (AP) or Average physical product

(c) Marginal Product (MP) or marginal physical product

• TPP is the total amount of a commodity that is

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• MPP of an input is the additional output that can be

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Productivity = Total value of outputs per unit time

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• In economics, diminishing returns is the decrease in