econ intro questions systems 2

– Economics is the study of how individuals and countries decide how to use scarce resources to fulfill their wants.. – Economics is “the science of allocating scarce resources land, la

Agriculture Economics and

the American Economy

Chapter 2

 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

Today’s world is complex and continually changing The successful agribusiness

manager must possess a basic

understanding of economic principles to react to these changes To understand agricultural economics, the agribusiness manager must first understand basic

economic principles

Definitions of Economics

There are many definitions of economics Consider each of the following definitions, look for key words and phrases, and then form your own definition

– Economics is the study of allocation of scarce

resources among competing alternatives.

– Economics is the study of how individuals and

countries decide how to use scarce resources to fulfill their wants.

– Economics is the “study of how society allocates

scarce resources and goods.”

– Economics is “the science of allocating scarce

resources (land, labor, capital, and managements) among different and competing choices and

utilizing them to best satisfy human wants.

– Economics “is a 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.”

– Economics is the 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.

– Economics is “the study of the decisions involved

in producing, distributing, and consuming goods and services.”

– Economics “is a 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.”

– Economics is “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.”

Three major components

resources These resources are considered

scarce because of a society’s tendency to

demand more resources than are available A resource that is not scarce is called a free

resource or good However, economics is

mainly concerned with scarce resources and

goods Scarcity is what motivates the study of how society allocates resources.

Shortage versus Scarcity

Shortage and scarcity are not the same

Scarcity always exists because it relates to

an unlimited or unsatisfied want, whereas

shortages are always temporary Shortages often exist after natural disasters destroy

goods and property Temporary shortages

of products such as gasoline may be cause when imports are dramatically decreased for any reason

Types of Resources

Resources are the inputs that society uses

to produce outputs Traditionally,

economists have classified resources as

natural resources (land), human resources (labor), manufactured resources (capital), and entrepreneurship (management)

Natural Resources (Land)

Land and the mineral deposits in it constitute a huge natural resource in the

agricultural industry

Human Resources (Labor)

The services provided by laborers and

managers for the production of goods and services are human resources and are also

considered scarce

Manufactured Resources

(Capital)

All the property people use to make other

goods and services is capital These

resources take the form of machines,

equipment, and structures

Entrepreneurship (Management)

 Entrepreneurship refers to the ability of

individuals to start new businesses and to introduce new products and techniques

 Today the four resources just discussed are called the factors of production They are used to produce goods and services Goods are the items people buy Services are the activities done for others for a fee

Wants and Needs

 Needs include things that are really crucial

to daily living Basic needs include enough food, clothing, and shelter to survive Most

of us would also consider a good education and adequate health are to be needs Of

course, there are other needs depending on your situation

Wants are things that are not crucial to daily living A basic tractor is a need to a farmer, but a tractor with a cab, air conditioner, and radio may be a want The difference

between needs and wants is not always

clear The tractor with an air conditioned

may be a need if the operator has severe

allergies

Economists use the term insatiable

(unlimited, unsatisfied) wants This means that human wants cannot be satisfied no matter how much or how many goods we have This human trait, in conjunction with scarcity of resources, creates economic

problems The efforts to solve these

problems are the basis of the discipline of economics

Three basic economic

questions

Because of the relationship between scarce

resources and unlimited/unsatisfied wants, all societies have to answer some basic economic questions These questions entail trying to

decide what to sell, how to sell it, and who

should receive the benefits Therefore, all

economic systems must solve the following

three questions:

– What goods should be produced, and how much

of each?

– How should these goods be produced?

– Who should get what and how much?

 What goods, and how much to produce.

– This question is answered every time people buy

goods.

 How to produce goods

– This question is answered by agribusiness

producers or manufacturers according to what will yield the greatest profits.

 Who should get what?

– This question refers to who will receive the

benefits of the goods The question is answered

by determining who has the greatest needs,

wants, and ability to pay

To simplify the economic questions,

assume that all the goods and services in our society or represented by a pie

1. What type of pie to produce?

2. What combination of ingredients to use?

3. How to divide the pie?

Each society answers the three basic

questions (what, how, and for whom)

according to its view of how best to satisfy the needs and wants of its people The

values and goals that a society sets for itself determine the kind of economic system it

will have

Economists have identified six types of economic systems: traditional,

capitalism, fascism, socialism, command (communism), and mixed These terms are often used to designate political

systems as well as economic systems

The major distinction between these

classifications is the degree of control by private individuals versus the group

represented by government.

done.” Economic decisions are based on

customs, religious beliefs, and ways of doing things that have been passed from

generation to generation Today, traditional economic systems exist in very limited parts

of Asia, Africa, the Middle East, and Latin

America

In capitalism, individuals have free reign

over their time and resources, and can

determine exactly how to use those assets, with few legal controls by the government

It is a self-regulating system that excludes the government from economic decisions What capitalism depends on is the will and desires of those involved in the system

Market forces determine prices, assign

resources, and distribute income Market prices indicate the value of resources and economic goods

In sharp contrast to capitalism, the basis of socialism as an economic system is public

ownership of all productive resources

Instead of little to no involvement in the

system (as with capitalism), the government

or “state” directs all decisions regarding the utilization of resources (both human and

nonhuman) by the various sectors of the

community Decisions are therefore made

on a centralized basis by government

planners

criticism, and denies some freedoms to

individuals Although property is privately owned and businesses control production, the government controls labor, employers, and consumers

Communism is a totalitarian system of

government in which a single, authoritarian political party or body controls government-owned means of production In other words, the government has total control of

economic matters and private individuals

have none

Economics – A historical

perspective

 The Father of Economics

– England was the major center of intellectual

activity during the 18 th century and much current economic policy based on economic ideas

presented during that period Economic

historians contend that all the ideas presented

by Adam Smith had been introduced by other

economists.

Adam Smith, like most economists of that time, was looking for new directions in

economic policy to deal with the severe

economic conditions he saw around him He proposed a system completely opposite to the system operating in England and many other countries at that time Several names have been coined for the system he

proposed The major ones include pure

capitalism, free enterprise, and laissez-faire All of these terms are used interchangeably, and they mean basically the same thing

The basic meaning is that individuals can

control the economy without any

government interference

“What is the role of government versus the role of individuals?” Adam Smith said, “The government should provide a police force

for internal and external protection and

nothing else Economic matters should be the sole responsibility of private individuals.”

He said, “Let each individual seek his or her own personal gain,” and that society would

be guided by an “invisible hand” in such a way that as a whole it would be better off than it would with government intervention

In other words, let each individual operate independently rather than having some

government agency decide what should and should not be done

Characteristics of the

American Economy

A common term for the U.S economic

system is the free enterprise system It is the 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

The American economy has six

The six characteristics could be referred to

as free enterprise with some regulations

Notice the influence of Adam Smith in these six characteristics, which are discussed in the following subsections

Freedom of Enterprise

Our economic system is also called the free enterprise system This term emphasizes that individuals are free to own and make decisions about the factors of production

Freedom of Choice

Part of freedom of choice is the freedom to fail Freedom of choice means that buyers make the decisions about what should be produced The success or failure of a good

or service in the marketplace depends on individuals freely choosing what they want

Profit Incentive

 The desire to make a profit is called the

profit incentive

Macroeconomics versus

Microeconomics

The total body of economic knowledge

today is too extensive for a person to be a general economist The most common

division of economics is into

macroeconomics and microeconomics

The prefix macro means “large,” indicating that macroeconomics is the study of the

economy on a large scale or nationally

Macroeconomics looks at the aggregate

(total) performances of all the markets in

the national economy and is concerned with the choices made by large subsectors of the economy

 Gross domestic product – the GDP of a

country is defined as the market value of all final goods and services produced within

that country in a given period of time

 Aggregate supply – aggregate supply is the total supply of goods and services produced

by a national economy during a specific time period

the total demand for goods and services in a national economy during a specific time

period

 Unemployment rate – the unemployment rate is the number of unemployed workers divided by the total civilian labor force,

which includes all those willing and able to work for pay – both unemployed and

 Monetary policy – monetary policy is the

government process of managing the money supply to achieve specific goals, such as

constraining inflation, maintaining an

exchange rate, and achieving full

employment or economic growth

 Fiscal policy – fiscal policy determines

changes in taxes, government spending on goods and services, and transfer payments that are intended to affect overall

(aggregate) demand in the economy

economy and is concerned with the

decisions made by small economic units

such as individuals, single firms, and

individual government agencies such as the USDA and state governments

enable buyers and sellers to exchange goods and services The amount of money people pay in

exchange for a good or service is the price of that good or service.

quantities of a resource, good, or service that will

be offered to consumers at various prices during a certain amount of time Demand is economic want backed up by purchasing power, expressing

different amounts of product buyers are willing and able to buy at possible prices.

 Competition and market structure –

competition is determined by the number of buyers and sellers in a particular market

 Income distribution – there are two

classifications of income distribution The

first is functional distribution, where the

division of an economy’s total income goes into wages and salaries, rent, interest and profit Income distribution also can be

classified by personal distribution of income, which groups different populations by the

number of people receiving various amounts

of income

Positive versus Normative

Economics

The media often contain statements about economic issues These statements can be classified into “what is” and “what should

be.” These two main categories are called

positive and normative economics,

respectively

Positive Economics

 Positive economics consists of objective statements dealing with matters of fact and questions about how things actually are Positive statements do not contain obvious value judgments or emotional

content.

 Positive economics can be described as “what is, what was, and what probably will be” economics: emotion or social philosophy Often these

statements express a hypothesis that can be

analyzed and evaluated (continue to next slide)

…such as the following

examples:

 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

person? Positive economics tries to answer such questions objectively, by doing what is called cost-benefit analysis.

Normative Economic

Normative economics consists of subjective

statements based on opinion only, often

without a basis in fact or theory They are

value-based, emotional statements that focus

on “what ought to be.” Consider the following examples:

– 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.