2014  ECONOMICS OF AGRICULTURE (EOA611S)  LECTURER: E.J. Ngeendepi   Tel:

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UNIT 1 The Nature and Methods of Economics

Objectives After completing this section, students should be able to:  Understand the characteristics of Agriculture  Define Agricultural Economics  Define Economics  Understand the differences Between Micro & Macro Economics  Understand Economic Theories and Models  Understand the importance of Economics  Understand what are Economic Goals  Understand Resources or Factors of Production and their payment  Differentiate between, choices, scarcity and alternative resource use  Understand Graphs and Their Meaning References: Chapter 1 Agricultural Economics and Agribusiness: Gail and Cramer, Clarence Jensen and Douglas Southgate.

1. Agricultural Economics Characteristics of Agriculture There are at least 2 important characteristics of the agricultural industry making it distinct from all the others. I. Cyclical nature of production: Caused by Physical and Biological factors. I. Biological Factors: Time it takes to raise livestock/ grow fruits. II. Physical Factors: Climate conditions & diseases effect on agric production. II. Price instability : Caused by changes in agricultural product market. This factors include: I. Producer decisions: Shifting between crops and livestock affect agric prices. II. Competition in Agric industry: Competitive, with many producer but none produce in large quantities to influence prices. III. Homogeneous product: Same products from all producers. These conditions cause supply and demand to influence prices.

Definitions of Economics What is Economics: It is social science that studies the principles governing the effective utilisation of limited resources with numerous alternative applications to satisfy multiple needs. We can also say it is the study of choice under conditions of scarcity.  Social science: It deals with the interaction of people as they buy, sell, produce and consume.  Resources (Factors of production): Anything used to produce goods/services. They are divided into two. I. Human resources = Labor and Entrepreneurial skills. II. Material resources = Land and Capital. Economics has two parts: Micro and Macro.

M ICRO VS M ACRO ECONOMICS MicroeconomicsMacroeconomics 1. Concerns with the behavior of Economic units, Individual firms, industry or households economy Economy as a whole Aggregate or subdivision of the gov’t and business sectors of the economy 2. Concentrates on Specific2. Concentrates on Total Output/price of productsOutput/ general price levels Number of workers employed by a firm.Total number employment in the economy Revenue, income/expenditure of a single firm or household Total income, expenditure in the economy.

I MPORTANCE OF ECONOMICS  For good citizenship.  Aids personal/ business decision.  Assist in solving social problems.

T HE FOUR RESOURCES A) Human  Labor: Physical and mental effort of human. Payment= Wage.  Entrepreneurship: Those who organize and manage resources to produce goods and services. Payment = Profit b)Material  Land: The ground and natural resources- rivers, trees, minerals used in producing goods and services. Payment = Rent.  Capital: Include buildings, equipments e.tc. Used to produce goods and services. Payment: Interest.

Scarcity, alternative uses and choices 1. Scarcity and alternative uses: Scarcity does not refer to the quantity. E.g. Land is available yet most land is scarce because it has alternative uses. 2. Goods and services: Anything from which individuals receive satisfaction or utility. 3. Choice and society: Implies the existence of alternatives. Thus, choices are made from the alternatives. Choices are determined by society’s laws, customs and practices. These constitute a society’s Economic system. There are two types of major Economic Systems. a) Capitalism b) Socialism

E CONOMIC SYSTEMS  They are laws, institution, customs, habits and practices that taken together establish the way in which society allocates its scarce resources to satisfy unlimited wants.  Unlimited wants and scarce resources: Resources are scarce/limited but material wants are unlimited. Material wants are the desires of people to use goods and services that provide utility or satisfaction.  Two types of Economic system: 1) Capitalism: Competitive, Free market system or Laissez Faire. 2) Socialism: Authoritarian, Command Economy or public ownership of resources.

D IFFERENCE BETWEEN CAPITALISM AND SOCIALISM CapitalismSocialism Resource ownership Human resources owned by individualsHuman resources owned by individual Material resources owned by businesses and individual Material resources owned by Government All resources are privately ownedAll resources are Government owned Method of Resource use Private individual decide how to utilize resources for the purpose of profit. Government authority decide how to use resources but not driven by profit motives.

M ETHODOLOGY OR ECONOMIC ANALYSIS a) Variable: Measure of an event or a quantity that can take different values e.g. Price, number of books. b) Relationship between variables can be studied in this forms: I. Hypothesis: When there is no evidence to support it. II. Theory: If there is evidence. III. Law or principle: If it is certain. c) Model: The theory, law or principle may take the form of a model. May be expressed in the form of words, diagram, graphs and mathematical equations. E.g. If Y = profit; R= Revenue; and C= Cost. Then Y= f(R-C). d)Graphical Expression of models: Models may take the form of graphs to assist in visualising and understanding quantitative relationships. Graph can be used to express the relationship between variables.

Graphical Expression of models: 1) Axis: There are two Axes ( Horizontal and Vertical). a) Horizontal axis (X axis): Measure dependent variables. b) Vertical axis (Y axis): Measure independent variable.  X axis = horizontal Line  Y axis = vertical line  0 = point of interception  Quadrant = 4 parts of graph  Coordinates = points on graph 2. Graphs Relationships i. Direct/ Positive relationship: If 2 variables move in the same direction. As X increases, Y also increases vice versa. Graph for the 2 variables will slope up from left to right ( Positive slope). ii. Inverse, Indirect or Negative relationship: If X-increases, Y tend to decrease vice versa. Graph slope from down from left to right and has a negative slope.

Graphical Expression of models….. iii.Slope: Changes in Y- variable Changes in X- variable Linear graph: Straight line graph. Y = a +bx whereby; Y- dependent variable, x- independent variable, a- intercept and b-slope. iv.Non linear graph: Not a straight line and slope varies as you move along the graph.

E CONOMIC GOALS OF OUR ECONOMIC SYSTEM  Economic growth or higher standard of living.  Full employment or efficiency: All available resources must be fully employed or all resources must realize full production. This is indicated in production possibilities analysis by producing a combination of goods that places the economy on the production possibilities curve.  Full employment entail efficiency. There are two types of efficiency: a) Technical or productive efficiency: When goods/services are produced in the least costly way then the economy have attained Technical efficiency (producing maximum output by using minimum input).  It is the ratio of Output to Input.  T.E = Physical Output Physical input

b) Allocative or Economic Efficiency: Resources are being used to produce the combinations of goods and services that society wants most, given their income levels.  Economic or allocative efficiency is a concept that include Technical efficiency.  Equitable distribution of resources or income: Implies fairness in the distribution of society’s output. Society’s resources must be shared according to skills levels.  Price level stability: General price level should be stable in order to avoid inflation and deflation.  Economic Freedom: Consumers and Businesses should enjoy high degree of economic freedom in their economic activities.  Economic stability: Provision should be made for those who are disabled, aged handicapped and chronically ill etc.

A GRICULTURE ECONOMICS DEF :  Is an applied social science that deals with the usage of the resources (Land, labour, Capital and Entrepreneurship) to produce food and fiber, and distribute to society for consumption. NOTE: Agricultural economics uses economic theory to find answers to problems in agriculture.

T HE A GRIBUSINESS INDUSTRY AND ITS ORGANIZATION  Agricultural industries are related to the Marketing industry that transform, transport and transfer food and fiber to consumers.  Agriculture industry is comprised of large number of industries that manufacture and distribute goods and other farm supplies used in agriculture. I. Farm supplies: Include feed, seeds, fertilizer, petroleum products, farm machinery, chemicals and other farm supplies. II. Food Processors and Assemblers: Are the link between farmers and food wholesalers and retailers. They add form utility to the raw farm products products; e.g. transformation of pot bellies into sausages. In Namibia this sector consist of subsistence and commercial farms with farms from 3000 to 8000ha. The sector is mainly controlled by individuals and partners. III. Wholesalers and food brokers: Processor sell their agricultural products to wholesalers and retailers through food brokers. The broker is an independent sale agent for the processor who neither takes possession nor title to grocery product. Food wholesalers link food processor with retailers who sell directly to consumers and institutional outlets e.g. Namib mills, Agra etc. IV. iv) Retailers: Sell agricultural products directly to consumers and institutional outlets. A retail chain is a group of stores owned and operated by the same firm. Chain stores combine wholesaling with retailing and are able to lower costs.

Modern Agribusiness system includes: The modern agribusiness system is made up of the following three sectors: 1) Agricultural input sector: Firms supplying seed, fertilizers and credit to farms. 2) Production sector: Farmers producing agricultural products. 3) Processing and manufacturing sector: Include food processors and manufacturers and distribution firms. Figure 1: The modern agribusiness system Input SectorProduction sector Processing and Manufacturing sector

T HE ECONOMIZING PROBLEM To satisfy society’s wants these questions need to be addressed:  Resource use: At what level should our resource be used?  Level of goods and services produced: What goods and services should our society produce with our resources and in what quantities?  Organising production: How should total output be produced? What is the best combination of resources, what is the best technology to be used?  Distribution of output: How should output of the economy be shared among the various economic units.

Society’s Production Possibilities Assumptions:  Two goods  Fixed factors of production  Common resources  Full employment

Production Possibility Curve  Production possibilities, which analyzes the alternative combinations of two goods that an economy can produce with given resources and technology, indicates full employment when production is on the production possibilities curve.  Full employment is the condition that exists when all available resources are engaged in the production of goods and services.  In particular, each point on the production possibilities curve is based on the presumption that all existing resources are used to produce the two goods. This means that full employment exists at every point ON the production possibilities curve.

END OF UNIT 1: THANK YOU!!! QUESTIONS???