Economics

• What is Agricultural Economics


  • Applied field of economics concerned with the application of economic theory in optimizing the production and distribution of food and fiber
• Origins of Agricultural Economics


  • Began as a branch of economics dealing with land usage, focused on maximizing crop yield while maintaining a good soil ecosystem
• Economics has been defined as the study of resource allocation under scarcity
• Agricultural economics applies economic methods to optimizing decisions made by agricultural producers, grew to prominence around the turn of the 20th century
• A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy
• An entrepreneur organizes, manages, and assumes the risks of a firm, turning new ideas or products into successful businesses
• Households are the consuming units in an economy
• The circular flow of economic activity shows the connections between firms and households in input and output markets
• Output markets are where goods and services are exchanged, while input markets are where resources like labor, capital, and land are exchanged
• Payments flow in the opposite direction as the physical flow of resources, goods, and services (counterclockwise)
• Input Markets


  • Labor market, capital market, land market
• Household demand is determined by the price of the product, income available, accumulated wealth, prices of related products, tastes and preferences, and expectations about future income, wealth, and prices
• Quantity Demanded


  The amount (number of units) of a product that a household would buy in a given time period if it could buy all it wanted at the current market price
• Demand in output markets is represented by a demand schedule showing how much of a product a household would be willing to buy at different prices
• Demand schedule


  A table showing how much of a given product a household would be willing to buy at different prices
• Demand curves


  • Usually derived from demand schedules
• The Law of Demand

  States a negative, or inverse, relationship between price and the quantity of a good demanded
• Law of Demand


  • Demand curves slope downward
• Demand curves intersect the quantity (X)-axis

  Due to time limitations and diminishing marginal utility
• Demand curves intersect the (Y)-axis

  Due to limited incomes and wealth
• Income


  The sum of all households' wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure
• Wealth


  The total value of what a household owns minus what it owes. It is a stock measure
• Types of Goods and Services

  • Normal Goods
  • Inferior Goods
  • Substitutes
  • Complements
• Substitutes


  Goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up
• Complements


  Goods that "go together"; a decrease in the price of one results in an increase in demand for the other, and vice versa
• Shift of Demand Versus Movement Along a Demand Curve

  A change in demand is not the same as a change in quantity demanded
• When demand shifts to the right

  Demand increases, causing quantity demanded to be greater than it was prior to the shift, for each and every price level
• Higher income


  • Decreases the demand for an inferior good
  • Increases the demand for a normal good
• Change in price of a good or service

  Leads to Change in quantity demanded (Movement along the curve)
• Change in income, preferences, or prices of other goods or services


  Leads to Change in demand (Shift of curve)
• Higher income


  • Decreases the demand for an inferior good
  • Increases the demand for a normal good
• Price of hamburger rises

  • Demand for complement good (tomato sauce) shifts left
  • Demand for substitute good (chicken) shifts right
  • Quantity of hamburger demanded falls
• From Household to Market Demand

  1. Demand for a good or service can be defined for an individual household, or for a group of households that make up a market

  2. Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
• From Household Demand to Market Demand

  Assuming there are only two households in the market, market demand is derived as follows
• Supply in Output Markets

  1. A supply schedule is a table showing how much of a product firms will supply at different prices

  2. Quantity supplied represents the number of units of a product that a firm would be willing and able to offer for sale at a particular price during a given time period
• The Supply Curve and the Supply Schedule


  A supply curve is a graph illustrating how much of a product a firm will supply at different prices
• The Law of Supply

  • There is a positive relationship between price and quantity of a good supplied
  • Supply curves typically have a positive slope
• Determinants of Supply


  • The price of the good or service
  • The cost of producing the good, which in turn depends on: the price of required inputs (labor, capital, and land), the technologies that can be used to produce the product, the prices of related products
• A Change in Supply Versus a Change in Quantity Supplied


  • A change in supply is not the same as a change in quantity supplied
  • In this example, a higher price causes higher quantity supplied, and a move along the demand curve
  • In this example, changes in determinants of supply, other than price, cause an increase in supply, or a shift of the entire supply curve
• When supply shifts to the right

  • Supply increases
  • This causes quantity supplied to be greater than it was prior to the shift, for each and every price level