Chapter Two

 Define economics  Explain three major components of economics  Discuss three basic economic questions  Explain six types of economic systems  Discuss economics from a historical perspective

 Discuss the role of government versus individuals in the economic system  Describe the characteristics of the American economy  Differentiate between macroeconomics and microeconomics  Differentiate between positive and normative economics  Explain agricultural economics

 Several definitions~  the study of allocation of scarce resources among competing alternatives  the study of how individuals and countries decide how to use scarce resources to fulfill their wants  the study of how society allocates scarce resources and goods  the science of allocating scarce resources (land, labor, capital, and managements) among different and competing choices and utilizing them to best satisfy human wants

 study of how to get the most satisfaction for a given amount of money or to spend the least money for a given need or want  study of how scarce resources are transformed into goods and services to satisfy our most pressing wants, and how these goods and services are distributed  study of the decisions involved in producing, distributing, and consuming goods and services

 social science that studies how consumers, producers, and societies choose among the alternative uses of scarce resources in the process of producing, exchanging, and consuming goods and services  concerned with overcoming the effects of scarcity by improving the efficiency with which scarce resources are allocated among their many competing uses, so as to best satisfy human wants  What is YOUR definition?

Scarcity Types of Resources Wants and Needs

 Not enough resources available to satisfy people’s needs or wants  Resources are scarce because of a society’s tendency to demand more than are available  Non-scarce is called a free resource or good  Scarcity is what motivates the study of how society allocates resources

 Shortage and scarcity are not the same  Scarcity always exists because it relates to an unlimited or unsatisfied want  Shortages are always temporary  often exist after natural disasters  occur when imports are dramatically decreased for any reason

 Resources are the inputs that society uses to produce outputs  Natural Resources  Land  Human Resources  Labor  Manufactured Resources  Capital  Entrepreneurship  Management

 Natural resources:  Land and the mineral deposits in it  constitute a huge section in the ag industry  Human resources:  services provided by laborers and managers for the production of goods and services  human resources considered scarce

 Manufactured Resources:  all the property people use to make other goods and services is capital  machines, equipment, and structures  Entrepreneurship  ability of individuals to start new businesses and to introduce new products and techniques

 Four resources (Natural, Human, Manufactured, Entrepreneurship)  Used to produce goods and services  Goods are the items people buy  Services are the activities done for others for a fee

 Needs are crucial to daily living  Food  Clothing  Shelter  Tractor is a need for a farmer  Wants are not crucial to daily living  Tractor with a cab, air conditioner, and radio is a want

 Insatiable wants  Unlimited or unsatisfied  means that human wants cannot be satisfied no matter how much or how many goods we have  Insatiable wants and scarcity of resources creates economic problems  Efforts to solve these problems are the basis of the discipline of economics

 What goods should be produced, and how much of each?  answered every time people buy goods  How should these goods be produced?  answered by agribusiness producers or manufacturers according to what yields greatest profits  Who should get what and how much?  answered by determining who has the greatest needs, wants, and ability to pay

 Six Types :  Traditional  Capitalism  Fascism  Socialism  Command (Communism)  Mixed  Used to designate political systems as well as economic systems  Major distinction between these classifications?  degree of control by private individuals versus the group represented by government

 Things are done “the way they have always been done”  Economic decisions based on customs, religious beliefs, and processes that have been passed from generation to generation  Traditional systems in limited parts of:  Asia  Africa  Middle East  Latin America

 Free reign over their time and resources  Few legal controls by the government  Self-regulating system that excludes the government from economic decisions  Depends on will and desires of those involved in the system  Market forces determine prices, assign resources, and distribute income

 Basis is an economic system of public ownership of all productive resources  Government or “state” directs all decisions regarding the utilization of resources by the various sectors of the community  Decisions are therefore made on a centralized basis by government planners

 System in which productive property, though owned by individuals, is used to produce goods that reflect government or state preferences  Suppresses opposition, censors criticism, and denies some freedoms to individuals  Property is privately owned and businesses control production  Government controls labor, employers, and consumers

 Totalitarian system of government  Single, authoritarian political party or body controls government-owned means of production  Government has total control of economic matters and private individuals have none

 Adam Smith, father of economics  Looking for new directions in economic policy to deal with the severe economic conditions  Proposed a system completely opposite to the system operating in England  Capitalism, free enterprise, and laissez-faire  Individuals can control the economy without any government interference

 Free enterprise system  Freedom of private businesses to organize and operate for profit in a competitive environment  Government interference is necessary only for regulation to protect the public interest and to keep the national economy in balance

 Little or no government control  Freedom of enterprise  Freedom of choice  The right to own private property  Profit incentive  Competition

 Freedom of Enterprise  individuals are free to own and make decisions about the factors of production  Freedom of Choice  freedom to fail  buyers make the decisions about what should be produced  success or failure of a good depends on individuals freely choosing what they want

 Private Property  owned by individuals rather than by government  Free to buy whatever you can afford  Profit Incentive  desire to make a profit

 Study of the economy on a large scale or nationally  Looks at the aggregate (total) performances of all the markets in the national economy  Concerned with the choices made by large subsectors of the economy

 Gross domestic product  all final goods and services produced within a country in a given period of time  Aggregate supply  total supply of goods and services produced by a national economy during a specific time period  Aggregate demand  total demand for goods and services in a national economy during a specific time period

 Competition and market structure  competition is determined by the number of buyers and sellers in a particular market  Income distribution  functional distribution  division of an economy’s total income goes into wages and salaries, rent, interest and profit  personal distribution of income  groups different populations by the number of people receiving various amounts of income

 Deals with matters of fact and questions about how things actually are  Do not contain obvious value judgments or emotional content  “What is, what was, and what probably will be”  Emotional or social philosophy  Express a hypothesis that can be analyzed and evaluated

 Higher interest rates will cause a rise in the exchange rate and an increase in the demand for imports.  Lower taxes may stimulate and increase in the active labor supply.  A nationwide minimum wage will probably cause a contraction in the demand for low-skilled labor.

 “That person is hungry.”  What is the cost of feeding that person?  What benefit accrues to you or society if that person is not fed?  What is the cost of not feeding that person?  What is the benefit of not feeding that person?  Positive economics tries to answer such questions objectively, by doing what is called cost-benefit analysis.

 Subjective statements based on opinion only  Without a basis in fact or theory  “What ought to be”  A national minimum wage is undesirable because it does not help the poor and causes higher unemployment and inflation.  The national minimum wage should be increased as a method of reducing poverty.  Protectionism is the only good way to improve the living standards of workers whose jobs are threatened by outsourcing and imports.

 application of economic concepts to agricultural problems  To be a productive agricultural economist, one must first understand basic economic principles  Agricultural economics is an applied science  “an applied social science dealing with how humans choose to use technical knowledge and scarce productive resources such as land, labor, capital, and management to produce food and fiber and to distribute if for consumption to various members of society over time”