AEC 135: Agricultural Economics

BASIC CONCEPTS OF ECONOMICS

Human wants are unlimited. But resources are limited to satisfy these wants. For example, a new
born baby first needs food, shelter, nursing, clothing and then medical care and recreational facilities
and many other things. As resources are limited, the question of primary, secondary and tertiary
choice comes into consideration in order of merit, rank, status and situation. For example, a poor
man desires only food, shelter and clothing but a rich man demands education, health care,
recreational facilities and so on. In order to satisfy various kinds of wants a man is to work with what
he has, otherwise his wants remain unsatisfied.
Economics may be defined as the study of means activities in a rational manner as to satisfy
unlimited wants with limited resources.

Definition of Economics

Economics comes from Greek Word ‘Oikonomia’ means “Household Management” or “one who
manages a household”. Or two Greek words “Oekos” means a house and “Nomos” means to
manage which means managing a house.

Classical Economists: Adam Smith. J.E. Cairnes, J.B. Says, F.A. Walker
According to classical economists (1776): “Economics is the Science of wealth.”
According to the Father of Economics Adam Smith - “Economics concern with an inquiry into the
nature and causes of wealth of nations”.
In those days economics was believed to be a subject concerned with accumulation of wealth only.
That’s why at that time economist defined Economics is a science of wealth.

Criticism: i. In this definition man as social being has being ignored.

ii. by the term wealth abundance of resources or money has meant.

Neo-Classical Economists: Marshall, Pigou, Cannon

According to neo-classical economists (1875): “Economics is the Science of welfare.”
According to Marshall- “Economics is the study of mankind in the ordinary business of life”. Its
means how one gets his income and how he spends it.

Criticism: i. The main argument is that economics is not concerned with material gains only.
ii. Economics is a social science. It promotes social well- being concerning men’s
activities as the vital force of a society. So human welfare can be achieved only with socially
accepted economic activities. Therefore those activities for which the society is ready to accept and
pay for this are considered as economic activities.

Modern Economists: Lionell Robbins, Samuelson, Cairncross

According to modern economists (1930 and above): “Economics is the study of scarcity.”
According to L. Robbins- “Economics is a science which studies human behavior as a relationship
between ends and scarce means which have alternative uses.”
This definition has some basic points of consideration as:
 Unlimited human wants
 Scarcity of resources
 Utilization of scarce resources for alternative uses.

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According to Samuelson (1989), “Economics is the study of how societies use scarce resources to
produce valuable commodities and distribute them among different groups.”

Nature of Economics
 Economics is a science: A science is a systematized body of knowledge ascertainable by
observation and experimentation. It studies cause and effect relationship between economic
phenomena. Applying these characteristics, we find that economics is a branch of knowledge
where the various facts relevant to it have been systematically collected, classified and
analyzed. E.g. Law of demand. It explains the cause and effect relationship between price and
demand for a commodity.
 Economics is an art: Art is nothing but practice of knowledge. Art teaches us to do. Science
is theoretical but art is practical. Its various branches consumption, production and public
finance etc. Provide practical solutions to various economic problems. It helps in solving
various economic problems which we face in our day to day life.
 Economics study both positive science and normative science: A positive science may be
defined as a body of systematised knowledge concerning what is, a normative science as a
body of systematised knowledge relating to criteria of what ought to be. A positive or pure
science analyses cause and effect relationship between variables but it does not pass value
judgment.
Normative science Economics involve value judgments. It is prescriptive in nature and
described what should be the things. Positive science does not indicate what is good or what
is bad to the society.
The statement, "Price rise as demand increase" is related to positive economics, whereas the
statement, "Rising prices is a social evil” is related to normative economics.

Scope of Economics
 It is a social science.
 Dealing with only economic activities in society.
 Main objective of the study is adjust link between unlimited wants and scarce resources.
 The study not only light bearing but also fruit bearing.
 Economics study both positive science and normative science.

The Subject Matter of Economics

Economics tells how a man utilizes his limited resources for the satisfaction of unlimited wants. The
Subject matter of Economics can be explained under two approaches viz. Traditional approach and
modern approach.

1. Traditional approach: It considered economics as a science of wealth and according to the

traditional approach the subject matter of economics can be divided into five parts.
i) Consumption: Economics deals only with those activities of man through which man tries to
satisfy his economic wants. There are three fundamental economic wants. Food, clothing,
shelter. In order to satisfy the economic wants man uses goods and services. This is known as
consumption in economics. In the Theory of Consumption we try to analyze the behaviour of
the consumer. It means the use of wealth to satisfy wants.
ii) Production: For the purpose of consumption, there is a need for production. In the Theory of
Production we try to analyze the behaviour of the producer. We try to find out how the
producer will allocate his resources so as to get the maximum profit out of his production. It
is defined as the creation of utility.
iii) Distribution: For the purpose of production, we must take the help of the factors of
production. There are four factors of production, such as land, labour, capital and

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organization. When we try to study the distribution of the national income among the factors
of production, it is called distribution in Economics.
In the Theory of Distribution, we try to analyze the principle of distribution of national
income. It refers to shearing of wealth that is produced among the different factors of
production.
iv) Exchange: In course of time man has specialized in different economic activities. Because of
this specialization, the exchange system has developed in the society.
In the Theory of Exchange we study the different problems of exchange. It implies the
transfer of goods from one person to another.
v) Public Finance: With the development of state, state is helping man in the satisfaction of
economic wants. A branch of Economics deals only with the income and expenditure of the
state. This is known as Public Finance. In the Theory of Public Finance we try to analyze the
different sources of income of the government. We also try to analyze how the government
spends its income.

2. Modern approach: The subject matter of economics is divided into two:

i) Microeconomics
ii) Macroeconomics

Microeconomics: The word micro has been derived from Greek word Micros means small or
little. Microeconomics deals with the analysis of small individual units of economy such as buyers,
sellers, individual farms, households, individuals units or a group of enterprises. According to
Boulding, “Microeconomics is the study of particular firms, particular household, individual prices,
wages, incomes, individual industries, and particular commodities.”
So, Microeconomics is the study of individuals, households and firms' behavior in decision
making and allocation of resources.

Macroeconomics: The word macro has been derived from Greek word Macros means large or
total and therefore macroeconomics deals with the economics activities in the large. According to
Boulding, “Macroeconomics deals not with individual incomes but with national income; not with
individual prices but with price level; not with individual output but with the national output.”
Macroeconomics is concerned with the economics activities as a whole or in totality. For example
total national product, income and employment generation.

Micro economics vs macro economics

Micro economics Macro economics
1. Micro economics is the study of particular 1. Macro economics deals not with individual
firms, particular household, individual prices, incomes but with national income; not with
wages, incomes, individual industries, and individual prices but with price level; not with
particular commodities. individual output but with the national output.
2. Micro economics is concerned with the 2. Macro economics is concerned with the
economic action of individuals and well defined analyses the behavior of the whole economic
groups of individuals. system in totality.
3. Greek word Micros means small or little. 3. Greek word Macros means large or total.
4. It deals with individual income. 4. It deals with national income.
5. It discuss about individual price. 5. It discuss about price level.

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Agricultural Economics
Agricultural economies, as its little implies, is that branch of knowledge which ties agricultural and
economies together. It is an applied phase of the social science of economics in which attention is
given to all aspects of problems related to agricultural.
Agriculture is the art and science of farming.
Agriculture is the science, art or practice of cultivating the soil, producing crops and raising
livestock and in varying degrees the preparation and marketing of the resulting products.
Some definition of agricultural economics is:
The study of economic principles, with emphasis on their application to the solution of farm,
agribusiness, and agricultural industry problems in relationship to other sectors is known as
agricultural economics.
Prof. Gray has defined agricultural economics “as the science in which the principles and

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methods of economics are applied to the special conditions of agricultural industry.”

Prof. Hibbard, "Agricultural economics is the study of relationships arising from the wealth-getting
and wealth-using activity of man in agriculture"
So, Agricultural economics is an applied field of economics concerned with the application of
economic theory in optimizing the production and distribution of food and fiber.

Importance /Scope of Agricultural Economics

 It is a branch of agricultural science
 It is the study of management and organizational problem of the farm and farmer. Which
underlies the problem what to produce, how to produce, when to sell, where to sell, etc.
in order to secure largest net profit.
 It deals with ownership and distribution of resource used in agricultural production.
 It deals with the demand and supply of agricultural commodities and inputs.
 It helps to develop government policy and planning related to agricultural production and
consumption.
 It deals with the concerned agricultural institution.
 It helps to develop agricultural as a more productive sector.
 It works for the welfare of farmers and above all welfare of mankind.

Basic Problems of an Economy

The economic problem sometimes called the basic or central economic problem-asserts that an
economy's finite resources are insufficient to satisfy all human wants and needs. It assumes that
human wants are unlimited, but the means to satisfy human wants are scarce.
Following three questions have to face all economies:
i) What to produce? - What and how much will you produce?' This question lies with
selecting the type of supply and the quantity of the supply, focusing on efficiency.
ii) How to produce? - How do you produce this?' This question deals with the assets and
procedures used while making the product, also focusing on efficiency.
e.g. "Should I hire more workers, or do I invest in more machinery?"
iii) For whom to produce? - To whom and how will you distribute the goods? and 'For whom
will you produce this for?' arises from this question. This question deals with distributing
goods that have been produced, focusing on efficiency and equity.
e.g. "Do I give more dividends to stock holders, or do I increase worker wages?"

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Goods and Classification of Goods

Goods
Good is a commodity, or a physical, tangible item that satisfies some human want or need, or
something that people find useful or desirable.
In economics, a good is a material that satisfies human wants and provides utility. Goods that are
scarce (are in limited supply in relation to demand) are called economic goods, whereas those whose
supply is unlimited and that require neither payment nor effort to acquire, (such as air) are called free
goods.

Characteristics of goods:
 Good is something that one can use or consume, like food, books, a car & clothes.
 Goods are satisfy human wants
 Goods are tangible means it can be touched

Types of goods
Goods diversity allows of their classification into different categories based on distinctive
characteristics, such as
 Normal goods: If the demand for a good falls when income falls, the good is called a normal
good.
 Inferior goods: If the demand for a good raises when income falls, the good is called an
inferior good. Example: Corse rice, Bus rides, if income falls you are less likely to buy a car
or take a cab and more likely to ride a bus.
 Superior or luxury goods: is a good for which demand increases more than proportionally
as income rises. Example: Gold, Diamond, Car etc.
 Substitute goods: When a fall in the price of one good reduces the demand for another good.
Example, Tea and coffee.
 Complementary goods: When a fall in the price of one good raises the demand for another
good. Example, if the price of the sugar fall the demand for tea raises.
 Giffen good: A Giffen good is a product that people consume more of as the price rises.
Example: Corse rice.
 Public goods: Ownership of this good is government. Example: park, zoo etc.
 Private goods: Individual ownership. Example: car, television etc.

Wealth

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Wealth is a measure of the value of all of the assets of worth owned by a person, community,
company or country. Wealth is the found by taking the total market value of all the physical and
intangible assets of the entity and then subtracting all debts.

Generally wealth is a tangible or intangible thing that makes a person, family, or group better off.
Again wealth is those materials thing which are produced by labour, can satisfy human wants and
must have an exchange value.

Economically wealth is total of all assets of an economic unit that generate current income or have
the potential to generate future income. It includes natural resources and human capital but generally
excludes money and securities because they represent only claims to wealth.

Two common types of economic wealth are:

i. Monetary wealth: anything that can be bought and sold, for which there is market and hence
a price. The market price, however, reflects only the commodity price and not necessarily its
value. For example, water is essential for human existence but is usually very cheap.
ii. Non-monetary wealth: things which depend on scarce resources, and for which there is
demand, but are not bought and sold in a market and hence have no price. Examples are
education, health, and defense.

Wants
Want is something that is desired. Economic wants are defined as desires that can be satisfied by
consuming a good, service or leisure activity. Because resources are limited, people cannot have all
the goods and services they want; as a result, they must choose some things and give up others.
Every desire cannot be a want. If a poor person desires to have a car, his desire cannot be called a
want. A desire can become a want only when a consumer has the money to purchase the thing and he
is also ready to spend the money. For a desire to become a want, the following four elements must be
present:

1. The desire for a thing.

2. Efforts to satisfy the desire.
3. The means (i.e. money) to purchase the thing.

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4. Readiness to spend the means (i.e. money) to satisfy the desire.

Characteristics of Wants
1. Wants are unlimited
2. Any particular want is satiable
3. Wants are complementary
4. Wants are competitive
5. Some Wants are both complementary and competitive
6. Wants are alternative
7. Wants vary with time place and person
8. Wants vary in Urgency and Intensity
9. Wants multiply with civilization
10. Wants are recur
11. Wants change into habits
12. Wants are influenced by income, fashion and advertisement
13. Present wants are more important than future wants.
Production
Production means creation of utility for the satisfaction of human wants.
Factors of production
 Land: This includes all natural physical resources e.g. land, sea and the materials associated
with them. Such as coal, Diamond.
 Labour: Labour is the human input into production. This includes the number of people
willing and able to work in an economy, and the skills that they have.
 Capital: Capital goods are used to produce other consumer goods and services in the future.
This involves the quantity and quality of capital equipment in an economy, such as
machinery, offices and transport etc.
 Organization: This refers to the ability of managers to think of new ideas, to manage peoples
effectively, and to take risks.

Consumption
Consumption means the use of wealth to satisfy wants. Consumption can be defined in different
ways, but is best described as the final purchase of goods and services by individuals.

In economics, the use of goods and services by households. The purchase of a new pair of shoes, a
hamburger at the fast food restaurant or services, like getting your house cleaned, are all examples of

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consumption. It is also often referred to as consumer spending. Many topics in economics explore
how the income of families and individuals affects consumption and spending habits.

Distribution
Distribution in economics refers to the way total output, income, or wealth is distributed among
individuals or among the factors of production (such as labour, land, and capital and organization).
Factors of distribution
 Rent
 Wage
 Interest
 Profit
Economic Development = Production + Distribution
Income
Income represents all of the earnings in the economy. For example income earned by companies
(corporations), employees, and the self-employed.
The amount of money or its equivalent received during a period of time in exchange for labour or
services, from the sale of goods or property, or as profit from financial investments.
Some different types of income are:
 Personal income: Personal income is the sum of all incomes actually received by all
individuals or households during a year.
 National income: National income is the total value a country’s final output of all new goods
and services produced in one year.
 Disposable income: A good number of money is paid to government from personal income,
thus remain of personal income is called disposable income.

Disposable income= Personal income- Personal Taxes

Savings
Savings is that part of income which is not used; the withholding of money from expenditure on
goods and services.
Savings include money put into a bank or into a pension fund.
Micro Economics: Personal saving
Macro Economics: National saving

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Investment
In an economic sense, an investment is the purchase of goods that are not consumed today but are
used in the future to create wealth.
There are two types of investment:
i. Autonomous investment: When income increased but level of investment is fixed i.e. it is
not influenced by income, rate of interest and other factors. Long term concept. Related to
public sector.
ii. Induced investment: If level of investment increased with the increase in income, rate of
interest and other investment favorable aspects, then it is called induced investment. Short
term concept. Related to private sector.

Capital
These things as produced by man and which are used for further production. In economics, capital
implies the produced means of production.
The term capital is commonly used to mean the amount of money invested in same business. Indeed
capital refers to the stock of capital assets such as factories, machines, tools and equipments,
transport vehicles etc.
Some feature/characteristics of capital
 It is artificial, as it is produced by man and not natural resources
 It is results of saving
 It has production cost
 It is the sources of future income
 It is highly productive
 All capital is wealth

Utility and Types of Utility

Utility
Stanley, Jevons, a noted classical Economist, originated the concept of utility as the fundamental
basis of consumer demand for a commodity. Utility refers to the wants satisfying power or
capacity of a commodity or services assumed by the consumer.
Utility is a measure of happiness or satisfaction.
Utility means the capacity of a commodity or services to satisfy the human need.

Types of Utility

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On the basis of production there are four types of utility:

 Form utility: The processing function adds form utility to the product by changing the raw
material into a finished form. With the change, the product becomes more useful than it is in
the form in which it is produced by the farmer. For example, through processing, oilseeds
converted into oil, sugarcane into sugar, cotton in cloth and wheat into flour and bread. The
processed forms are more useful than the original raw materials.
 Place utility: The transportation function adds place utility to products by shifting them to a
place of need form the place of plenty. Products command higher prices at the place of need
than at the place of production because of the increased utility of the product.
 Time utility: The storage function adds time utility to the products by making them available
at the time when they are needed.
 Possession utility: The marketing function of buying and selling helps in the transfer of
owner ship from one person to another. Products are transferred through marketing to person
having a higher utility from persons having a low utility.
On the basis of consumption there are two types of utility:
i. Total utility
ii. Marginal utility
 Total utility: means total satisfaction gained by the consumer regarding all units of a
commodity taken together in consumption or acquired at a time.
 Marginal utility: means the extra utility added by the last unit of a good consumed by a
consumer
Value and Price
Value is a measure of the benefit that may be gained from goods or service.
In economics value are based on what people want – their preferences. The concept is viewed as the
relationship between quality and price - a service or product gets higher value ratings as the benefits
offered are expanded or the price is reduced.
Price means the money value of a unit of a good, service, or resource.
Again, price, the amount of money that has to be paid to acquire a given product.
In so far, as the amount people are prepared to pay for a product represents its value, price is also a
measure of value.

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