Introduction to Agricultural Economics

Chapter 1

Introduction to Agricultural Economics

Introduction to Economics – You can’t have your cake and eat it too!

What is Economics?

Introduction to Agricultural Economics

Introduction to Economics – You can’t have your cake and eat it too!

What is Economics?

Economics is a social science that deals with how consumers, producers and societies choose amongAlternative uses of scarce resources in the process of producing, exchanging, and consuming goods and services.

Introduction to Agricultural Economics

There are two branches of Economics -- Micro andMacroeconomics.

Macroeconomics focuses on broad aggregates like growth in GDP, interest rates, inflation and employment

Microeconomics focuses on consumer and producerlevel decision making

Types of Resources

Natural and Biological -- example (Land) Human – example (Labor) Manufactured – example (Capital) Management – a special kind of labor

Scarcity – finite quantity of resources available, it’s a relative concept.

Choices and Sacrifices

Opportunity Cost – the value of the benefit forgonefrom the next best alternative to the one you havechosen.

What are some real world examples of opportunity cost?

Graphs and Economics

Economic analysis is used to explain people’s responses to changes in their economic environment.

Economists do this to try and predict future behavior with some accuracy.

Relationships can be complicated and sometimes better explained using graphs.

Graphs and Economics

What is this in mathematical terms?

-2 -1 0 1 2

Graphs and Economics

How about this?

-2 -1 1 2

3

2

1

-1

-2

-3

Graphs and Economics

What kind of values do X and Y take on in Quadrant 1? 2? .. 3? .. 4?

-2 -1 1 2

3

2

1

-1

-2

-3

Quadrant III

III IV

X

Y

Graphs and Economics

-2 -1 1 2

3

2

1

-1

-2

-3

Quadrant III

III IV

X

Y

Graphs and Economics

1 2 3 4

4

3

2

1

In Economics we use Quadrant I almost exclusively, Why is that the case?

Graphs and Economics

1 2 3 4

4

3

2

1

Price is a variable that is denoted in Dollars, prices aren’t negative.Right?

Price $

Graphs and Economics

1 2 3 4

4

3

2

1

What about quantities? Can they be negative? What are theUnits?

Price $

Quantity

Graphs and Economics

1 2 3 4

4

3

2

1

What kind of relationship is denoted between price and quantityIn this graph?

Price $

Quantity

Demand

Graphs and Economics

1 2 3 4

4

3

2

1

What kind of relationship is denoted between price and quantityIn this graph?

Price $

Quantity

Supply

Graphs and Economics

1 2 3 4

4

3

2

1

How would you describe this relationship? What is true about Its slope throughout?

Price $

Quantity

Supply

Graphs and Economics

1 2 3 4

4

3

2

1

How would you describe this relationship? What is true about Its slope?

Price $

Quantity

Graphs and Economics

1 2 3 4

4

3

2

1

How would you describe this relationship? What is true about Its slope?

Costs $

Quantity

Average Total Costs

Graphs and Economics

1 2 3 4

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2

1

Costs $

Quantity

Average Total Costs

This relationship is Convex, It has a minimum. We want to minimize costs.

Graphs and Economics

1 2 3 4

4

3

2

1

How would you describe this relationship? What is true about Its slope?

Output

Quantity Input

Total Physical Product

Graphs and Economics

1 2 3 4

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3

2

1

This relationship is Concave, it has a maximum. We want tomaximize production or profit.

Output

Quantity Input

Total Physical Product

Graphs and Economics

1 2 3 4

4

3

2

1

This relationship is Concave, it looks like a cave!

Output

Quantity Input

What does this lookLike?

Graphs and Economics

1 2 3 4

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3

2

1

This relationship is Concave and Convex, it does have a global maximum though.

Output

Quantity Input

Total Physical Product

One more curvy line

Graphs and Economics

A couple more things:

1 Ceteris paribus means “all other things remaining equal”

This is a simplifying assumption that allows us to determine the impact of single changes in the economic environment.

2 The independent variable is on a different axis to that of your math class. Quantity (X) depends on Price (Y)economics was developed at the same time as mathematics and the econ guy labeled his graphs differently. Sorry!

Graphs and Economics

Actually Three:

3 We make an assumption for most of the remainder of this class that all variables can be considered continuous.

What is the difference between that and being discrete?

I think that about does it for Chapter 1

Graphs and Economics