LECTURE 1

INTRODUCTION

Definition

Agricultural Economics Is the discipline that adapts the principles

of economics to: Farming activities Farm Input manufacturing and distribution. Food processing. Wholesaling and retailing.

Integration of these activities gives rise to a set of products and services that are passed on until they reach the consumer.

DefinitionIt helps people to decide what kind

of food and how much of each should be produced in order to supply the needs of a country.

It also aids decisions about which crops are most profitable for the farmer to grow.

Definition Resources available restrict the ability of the

producer to supply demand, especially the availability of land, labour and capital.

The farmer has to decide on the best use of each resource to bring the highest return.

Agricultural production economics is primarily concerned with economic theory as it relates to the producer of agricultural commodities.

DefinitionAgricultural Management

Is the application of management principles to agricultural production.

Combines the inputs of labour, capital, services and natural resources to yield farm products.

Organises the production, distribution, consumption and investment of the farm products and resources.

Agricultural Economics Concerns

Major concerns include: Farming goals and objectives Choice of output to be produced Allocation of resources among outputs Assumption of risk and uncertainty

Farming Goals and Objectives Assumption is that:

The objective of any farm manager is that of maximizing profits

Reality: Individual farmers have unique goals.

One farmer might be more interested in obtaining ownership of the largest farm in the area.

Another might have as his/her goal that of owning the best set of farm machinery.

Still another might be interested in minimizing his/her debt load.

Farming Goals and Objectives

The goals and objectives of a farm manager are closely intertwined with a person’s psychological makeup, and the goals selected by a particular person may have very little to do with profit maximization.

Choice of output to be produced Farm manager faces an array of options with regard

to what to produce given available land, labour, machinery and equipment.

Choices to be made include: What to produce How much to produce How to allocate available resource to competing uses

Other constraints Government may restrict number of acres of a commodity a

farmer may grow. Farmers knowledge of certain commodities may be limited Limited labour and machinery and other inputs

Resource Allocation

Farmer needs to decide how available resources are to be allocated among outputs.

Questions to answer include which field is to be used for the production

of each crop What amount of farm labor, machinery

and time must be allocated to each crop and livestock activity, consistent with the farmer’s overall objective.

Risk and uncertainty Assumption Economic production models assume that the

farm manager knows with certainty the Applicable production function Prices of inputs to be purchased and outputs to be

sold.

This assumption is almost never met. Weather is a key challenge but nature

presents other challenges such as Cattle developing diseases and dying Insects and diseases destroying crops.

Risk and uncertainty AssumptionFarmers may know the prices of they

must pay for fuel, fertilizer and seed at the time they purchase these inputs.

However they are almost never aware at the beginning of the production season the prices that will prevail when outputs are sold.

Agricultural Economic PrinciplesHelp producers produce the goods that

the consumer wants to buy, in quantities that fit the demand and at the time the goods are required.

Help producers allocate restricted resources among competing uses

Help producers decide on the best use of each resource to bring the highest return.

Agricultural Economic Principles Help producers answer the basic questions in

organizing the production such as: Which inputs to use What quantity of different inputs to use Which technology to use e.g. in controlling downy

mildew what combination of resources and technology will minimize crop losses for the least possible cost? You could:

Choose a resistant variety or cultivars Control environment to minimize incidence and spread

e.g. Use of greenhouses Utilize a fungicide spray program

Agricultural Economic PrinciplesSince resources are limited in every

economy, when more of them are used to produce certain goods and services, fewer resources are left to produce other goods and services.

Help producers choose the technique (technology) that results in the least cost possible (in terms of resources used) to produce each unit of a good or service that the society wants.

Agricultural Economic Principles

Help producers organize the production process through the price mechanism. The price of an input normally represents

its relative scarcity. If the price of an input increases in relation to

the price of other inputs used in the production process of a commodity, producers will switch to a technique that uses less of the more expensive input in order to minimize their cost of production.

Agricultural Economic Principles

Dictate that the best technique to use in the production process is the one that results in the least cost of production. If fuel prices increase, then minimum tillage

could be used If greenhouse labor prices increase, then

the farmer could decide to use automated watering technology

The opposite occurs when the relative price of an input decreases

Agricultural Economic Principles The problem of distributing resources,

commodities and proceeds from the production process is also answered the price mechanism.

Resources are distributed to producers who have the money to pay for them while commodities are distributed to consumers who have the money to pay for them.

Proceeds are paid to producers for commodities efficiently provided while proceeds are paid to consumers for resources provided.

Agricultural Economic Principles In distribution there is government

intervention in order to provide for “equitable” distribution of resources commodities and proceeds.

The government taxes wealthy individuals and business enterprises and redistributes to the poor in form of subsidies or in order to provide certain public goods such as public education, national defense, law and order, agricultural extension as well as agricultural commodity programs.

Importance Of Agriculture Provision of food for the ever-increasing

population. Provision of jobs in the agricultural industry

as for farmers, crop processors, traders, middlemen and transporters.

Government revenue through taxes. Agricultural products are a major source of

domestic and international trade.

Foreign Exchange earnings through export. Used to pay for essential import goods

Importance Of Agriculture

Provision of market for other industries Serves as a large consumer market for

industrial products such as plastic shoes and boots, buckets, fertilisers, pesticides, agricultural tools and machinery, building and construction materials, bicycles, trucks, lorries, tractors, boats and many others.

Importance Of Agriculture Provision of raw materials for the

Industries. The ratio of agricultural raw materials to non-

agricultural raw materials used in industries is 4:1.

Education and Training: Many agricultural education institutions are

established to educate and train people in the science of agriculture. This provides people with a career