For one-semester, introductory courses in Agricultural Economics or Environmental Economics. This innovative text provides a broad view of the food system, with its emphasis on the links among financial institutions, the macroeconomy, world markets, government programs, farms, agribusinesses, food marketing, and the environment. Taking a macro-to-micro approach, the text introduces "high interest" topics students can relate to first, using them to capture student interest before introducing microeconomics topics. It illustrates the six economic concepts which form the foundation of the economist's decision-making process including supply and demand, opportunity cost, diminishing returns, marginality, measuring costs and returns, and the externalities of transactions. Presented in a non-threatening conceptual framework, the material covered in this text maintains a strong attachment to the application of agricultural economics to the real world.
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This text is designed for a one-semester (or two-quarter sequence) introductory course in agricultural and environmental economics. Many texts view agricultural economics in a rather narrow context of the profit maximizing farm business. We prefer a broad view of the food system that emphasizes linkages between and among financial institutions, the macroeconomy, world markets, government programs, farms, agribusinesses, food marketing, and the environment. The objective of this text is to cover many topics lightly rather than any one or two topics in depth. The text is designed to allow a maximum of "skipping around" rather than requiring a strict sequential ordering of the chapters.
Economics is about decision making. It deals with how decisions are made under varied conditions and situations. It also deals with the evaluation or implications of alternative decisions for a given situation. Since decisions are a fact of everyday life, economics is with us in most of what we do. Even monks in a monastery who sell fruitcakes to support their spiritual endeavors make economic decisions when they decide what ingredients to buy and what price to ask for their product.
You, the college student, are surrounded by economic decisions as you pursue academic success at the institution of your choice. Several of the economic decisions you must make will be discussed briefly to introduce you to six economic concepts that will recur throughout this book. These concepts form the foundation of how economists approach decision making. SUPPLY AND DEMAND
There is probably no better known (and more poorly understood) concept in economics than supply and demand. Supply and demand are the central nervous system of the economic organ: they are the key to price determination. One decision that each college or university student must make is, What am I going to major in? The specific answer to that question depends upon the criterion used by the individual student to make a choice.
A student who bases his or her choice of a major on potential income is certainly into the use of supply and demand. In today's market we all know that computer engineers earn more than high school teachers. Why is that? It is a simple matter of supply and demand in the determination of the price for computer engineers and for high school teachers. In Chapter 2 the basic foundations of supply and demand will be examined in detail. OPPORTUNITY COST
A second fundamental concept of economics is the concept of opportunity cost. Whenever a resource is employed in one activity, that means it can't be used in another. Something must be given up to do something else. The value of what is forgone is the opportunity cost of doing something else.
A relevant economic question that each college student should ask is, What does it cost for me to attend the university? Most students will think of "costs" as tuition, residence hall fees, meals, and the like. From the economist's point of view, probably the single biggest cost (if you are in a public university) is the opportunity cost of the student's own time. By attending college you are forgoing the income you would earn flipping burgers at the Burger Barn. Full-time pay at minimum wage (which is probably what you would make as a high school graduate) is about $12,000 a year. Therefore, $12,000 is your annual opportunity cost of attending the university. DIMINISHING RETURNS
A basic concept in economics is that as you add more and more of something while holding everything else constant, the additional benefit from each additional unit eventually begins to decline. That is, the benefits increase at a decreasing rate. This we call diminishing returns.
In the context of the university student this is illustrated by asking a familiar question: How much should I study for the next test? Initially, you might think the answer is "as much as possible," but closer examination will show that after some point the additional benefit associated with each additional hour of study will begin to decline and eventually fall so low that you are probably better off to get some sleep rather than pulling an all-nighter.
Diminishing returns are something we find in all kinds of economic activity. Eating, sleeping, fertilizing house plants, and exercising all exhibit diminishing returns—eventually. MARGINALITY
The discussion of diminishing returns unwittingly introduced you to the concept of marginality. The margin in economic terms refers to the "next additional" unit. So in the above example, when we spoke of "an additional hour of study," we could equally have said "a marginal hour of study." In most economic analyses it is what happens on the margin that dictates decision making.
A question many postsecondary students ask is, Should I get a two-year associate's degree or a four-year bachelor's degree? The economist would evaluate this question by asking what the marginal costs and marginal returns are of the extra two years. That is, assume you have the two-year associate's degree, and then base your decision on the costs and returns of the additional or marginal two years to the bachelor's degree.
The economic theory of the firm is based on marginal revenues and marginal costs. The economic theory of the consumer is based on marginal utility and marginal cost. The investment decision of two more years of higher education is based on the marginal returns and marginal costs (including opportunity costs) of that investment. In pollution control, the decision about more abatement depends on marginal benefits and marginal costs. In other words, it is safe to say that in economics all the action is on the margin. COSTS AND RETURNS
As illustrated above, most of economics deals with the trade-off between costs and returns. Measuring the costs and returns associated with some economic activities can be a little tricky. Identifying the costs associated with most economic activities is usually fairly straightforward once the concept of opportunity cost has been mastered.
The nature of economic returns to an economic activity is a little less cut and dried. We use different terms to refer to returns in different situations, but nonetheless they are all returns. In the theory of the firm we call returns "revenue." In the theory of the consumer we call returns "utility." In investment analysis we call returns "returns." And finally in resource and environmental economics we call returns "benefits." Estimating returns often involves making a number of assumptions. While some would argue just the opposite, the economist contends that by making appropriate assumptions about economic behavior we can strengthen our understanding of it.
For example, what is the return to a bachelor's degree? The main return is that a B.S. graduate earns more than a high school graduate. The salary difference between the two at the present time at different age levels is easy to measure. But will those salary differences still be the same when you reach those age levels? If we assume that they will remain the same, then we can easily calculate the lifetime earnings difference attributed to the B.S. degree. But there are probably other important returns to education that can't be measured, such as the pleasure one receives from being a college student and the networking initiated during the college experience.
What is critical is that we evaluate alternatives by comparing the costs and returns of a marginal decision. That is what economics is all about. EXTERNALITIES
Finally, economists talk about economic activities in terms of transactions. A typical transaction involves a seller and a buyer making a trade. A college student attending the university to increase his or her earning power is an economic transaction.
Frequently, the parties to a transaction do not bear all the economic costs of that transaction and/or do not receive all the economic returns of that transaction. When that happens, we call the costs not borne or the returns not captured externalities of the transaction.
The economics of attending college is full of externalities. On the cost side, much of the cost of attending is not borne by the student but by state government and/or the university foundation through gifts and grants. On the returns side, society captures some returns because a college graduate will presumably be a better citizen and will be less likely to become a burden on society as a prison inmate. These are benefits society receives from your education that you do not directly capture. Hence they are externalities. A FINAL WORD
Economics is frequently called "the dismal science." It is our fervent hope that your study of economics and the reading of this book will not be a dismal experience. In fact, we hope it will be an enlightening and enjoyable one. In an effort to keep a potentially ponderous text somewhat light, we occasionally poke fun at one target or another. Rest assured, our intention is to amuse and not offend. If you feel offended by anything in this text or have any other comments about the text, please drop us a note at the website for this book.
We would like to thank the following reviewers for their valuable input: Delmy Calderon-Salin, Texas A&M University-Kingsville; Bert Greenwalt, Arkansas State University; Robert N. Shulstad, University of Georgia; Larry Eichmeier, North Iowa Area Community College; and Kenneth Pippin, Arkansas Technical University.
H. Evan Drummond
John W. Goodwin
Decisions. Each of us makes hundreds of them every day. Economics is the science of decision making. Economics is the study of how we make decisions, why we make the decisions we make, and how the conditions under which decisions are made affect those decisions. Nearly a quarter of the economic activity in the United States is associated with the agricultural sector. Therefore, Agricultural Economics deals with decision making within the unique context of the broadly defined food and fiber sector.
This text takes a thorough look at agricultural economics from a broad perspective that emphasizes the linkages between and among financial institutions, the macro economy, world markets, government programs, farms, agribusinesses, food marketing, farm services, and the environment. The key concepts forming the foundation of how economists approach decision making—supply and demand, opportunity cost, diminishing returns, marginality, costs and returns, and externalities—are woven throughout the book in a style that is both clear and engaging, with real-world examples that are easily understood by any reader interested in learning about the economics of the food system.Featuring:
Agricultural Economics is designed for flexible use in a one-semester (or two-quarter) undergraduate course, including Introduction to Agricultural Economics.
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