Chapter One

Economics of Agriculture
(Econ-4111)
Mohammed Adem (PhD)
Department of Economics
College of Business and Economics
Bahir Dar University
Bahir Dar, Ethiopia
2/10/2024 Department of Economics 1

Course Content
1. Introduction
2. Economics of Agricultural Development
3. Producer Decision making
4. Agricultural marketing
5. Agricultural Finance
6. Uncertainty and Farm Decision making
2/10/202
Department of Economics 2
Main References
• Soni, R. N. (1995) Leading Issues in Agricultural Economics:
Theoretical and Applied, Delhi.
• Ghatak, S. and Ingersent (1996) Agriculture and Economic

Development, Cambridge University Press: Cambridge.
• Ellis, Frank (1992) Agricultural Policies in Developing

Countries, Cambridge University Press: Norwich.
• Ellis, Frank (1993) The Peasant Economics, Farm Households

and Agrarian Development (second edition), Cambridge
University Press.
2/10/202
Course Requirements
Assessment Method Weight Tentative Date
Mid Exam 25 Percent Various
Term paper 25 Percent -
Final Exam 50 Percent Official
2/10/202
Contact Information:
• E-mail:
➢ademoha@gmail.com
• Office:
➢ Office College Administration Block
➢G+1 #20
2/10/202
CHAPTER ONE
INTRODUCTION
2/10/2024 Department of Economics 6

Outline
1.1 Definition and Scope of Economics of Agriculture
1.1.1 Definition of Agricultural Economics
1.1.2 Scope of Agricultural Economics
1.2 Historical Development of Agriculture
1.3 Role of Agriculture in Economic Development
1.4 Interdependence of Agriculture and Industry
1.5 Unique Features of the Agricultural Sector
2/10/202
• The word Agricultural Economics is made up of two words -

agriculture and economics.
• Agriculture had been associated with production of crops

(known as farming) for a long period of time.
• Agriculture and farming were synonymous till farming was not

commercialized and was done more or less on subsistence
basis.
• Some other off-farm activities, like supply of farm inputs such

as seed, fertilizers, credit, insurance, veterinary services etc.
2/10/202
• Modern agriculture has much wider scope
➢it includes the farm supply industries as well as the product-

processing industries and distribution industries.
• Industries closely related to farming are known as agriculturally

related industries or agri-businesses
• Agriculture, at present includes

▪ production of crops
▪ forestry and
▪animal husbandry
• Agriculture covers something more than mere operations on a
farm
• marketing, processing and distribution of agricultural products

2/10/202
1.1 Definition of Agricultural Economics
• Economics is the science of analyzing the use of limited resources

to achieve desired ends.
• It is a social science which studies how man satisfies his wants

through the allocation of scarce resources.
• Agricultural Economics is an applied science which is mainly

concerned with economic problems (production, marketing and
financing) that are associated with farmers' effort to make a living.
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1.1 Definition of Agricultural Economics
• Thus, Agricultural Economics is concerned with the evolving of

appropriate principles that govern the amount of land, labor and
capital, which a farmer should use to farm most efficiently.
• Agricultural economists can formulate the methods, techniques

and procedures by which the problems of agriculture can be
tackled.
• Agricultural Economics is an applied science
➢It is concerned with the identification, description and

classification of the economic problems of agriculture
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1.1.2 Scope of Agricultural Economics
• How to apply 'micro-economics' or 'price theory’ to the field

agriculture in terms of production, consumption and exchange
• It covers all the four branches of economic life of the agricultural

community; namely, production, exchange, distribution and
consumption
• It is also related with choosing the most profitable enterprise and

operating it at the optimum scale,
• Combining the different factors of production in the most

economical proportion, buying and selling
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• The domestication of plants and animals started in the new stone

age (Neolithic period)
• A major advance in the agriculture came with the development of

irrigation.
▪ Irrigation became the economic basis of the greater valley civilization
of the Nile and the Mesopotamia
• The most important change was the slow adaptation of technology

which was reaping knives, sickles, grain storing pits, grinding
stones, and ox-drawn plough.
▪ This plough invented by the farmers of south west Asia
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• In Ethiopia and the west coast Africa agriculture developed along

the margins of tropical forests and savannas lands where warm
and moist climate conditions existed.
• The major plants domesticated in tropical Africa are yam and oil-
palm trees.
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1.3 The Role of Agriculture in Economic Development
• The agricultural sector provides factor, product, market,

foreign exchange contributions to the economy
▪ which are considered vital for sustained economic

growth
The product contribution
• It provides food to the ever increasing population in an

economy
• In most developing countries, the domestic agricultural

sector is the principal source of food for consumption
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1.3 The Role of Agriculture in Economic Development
• The other product contribution made by agriculture for the

development of the non-agricultural sectors of the economy.
▪ It provides raw materials for the secondary sector
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The market contribution: Expanded market for the products
of other sectors
• Agriculture provides an expanding market for the products of

the other sectors.
• In the initial stages of development of the economy,

agricultural sector also finds the income of its people
increasing
• This increased income, in turn, leads to an additional demand

for the products of other sectors,
• Not only for consumption purposes but also for

production
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The market contribution: Flow of Agricultural
products to other sectors of the economy
• As agriculture develops and its production becomes more

market oriented, many other firms come in to existence
▪generally non-agricultural firms in character
• These firms include those providing processing, packing and

distribution services.
• An agricultural development through providing market for

agricultural inputs and consumer’s goods, promotes the
development of industrial sector.
2/10/202
The market contribution: Flow of Agricultural
products to other sectors of the economy
• Developed industrial sector, in turn helps in the development of

the agricultural sector
▪through the spread of modern technology in agriculture and

by providing an expanded market for agricultural products
• This is a virtuous process that gives rise to institutions by

facilitating two way exchanges of commodities.
• Farmer's expenditures on industrial goods-both consumer

goods (clothes, furniture, household utensils, building
materials) and producer goods ( fertilizers, pesticides, tools
and implements )
2/10/202
The market contribution: Development of
International Trade
• Surplus products from the agricultural sector can move to the

international market.
• This, in turn, can result in the flow of necessary capital as well as

consumer goods from outside.
• The growth process of the economy as a whole can thus gain

momentum.
• So, agriculture contributes to the development of international

trade by providing factors for non agricultural sectors
2/10/202
The factor contribution
• A developing country needs large amount of capital to finance
infrastructures, basic and heavy industries.
• Increasing the marketable surplus from the rural sector without

reducing the consumption levels of farm population can provide
capital.
• Labor as the principal input can be a source of capital formation

when it is reduced on the farm and employed in other productive
works.
• The agricultural sector also produces outputs which can be used as

raw materials for other sectors of the economy
2/10/202
Foreign Exchange Contribution
• In an open economy, agricultural sector can be a source of

foreign exchange earnings
• An expansion of agricultural exports offers a number of potential

advantages not shared by exports of manufactured goods
• export outlets in developed countries may provide capital and

technical advice on production and product improvement.
• The benefits of such advice may spread from the export sector to
the production of food for the domestic market.
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• In general, the agriculture sector occupies a central place in the
national economy.
2/10/202
1.4 Interdependence Of Agriculture And Industry
• Industry provides market for the products of the agricultural

sector
• Provision of Modern Agricultural Inputs
• Reduction in the pressure of population on land
• Supply of Consumption Goods
• Provision of Infrastructure for Agricultural Development
• Intellectual Environment
➢Such an environment includes creation of new skills, capital

formation, decreasing birth rate, technical innovations creation
of an entrepreneurial class.
➢
2/10/202
• Land is the most important factor of production in agriculture
• Nature plays an important role in agricultural production
• Use of machinery is limited in Agriculture
• Price elasticity of supply of agricultural products is less than that

of the industrial products.
• Elasticity of demand for most of the agricultural products is low
• Seasonal nature of turnover of agricultural production.
2/10/202
• Many of the agricultural products are perishable in

nature
• Area of operation for a worker is relatively large in

agriculture as compared with that in an industry
• A farm is a multi-product production unit
2/10/202

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Chapter One

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Economics of Agriculture

Bahir Dar, Ethiopia

2/10/2024 Department of Economics 1

2. Economics of Agricultural Development

3. Producer Decision making

6. Uncertainty and Farm Decision making

• Ghatak, S. and Ingersent (1996) Agriculture and Economic

• Ellis, Frank (1992) Agricultural Policies in Developing

• Ellis, Frank (1993) The Peasant Economics, Farm Households

Assessment Method Weight Tentative Date

Mid Exam 25 Percent Various

Term paper 25 Percent -

Final Exam 50 Percent Official

➢ Office College Administration Block

2/10/2024 Department of Economics 6

1.1.1 Definition of Agricultural Economics

1.1.2 Scope of Agricultural Economics

1.2 Historical Development of Agriculture

1.3 Role of Agriculture in Economic Development

1.4 Interdependence of Agriculture and Industry

1.5 Unique Features of the Agricultural Sector

• The word Agricultural Economics is made up of two words -

• Agriculture had been associated with production of crops

• Agriculture and farming were synonymous till farming was not

• Some other off-farm activities, like supply of farm inputs such

• Modern agriculture has much wider scope

➢it includes the farm supply industries as well as the product-

• Industries closely related to farming are known as agriculturally

• Agriculture, at present includes

• marketing, processing and distribution of agricultural products

• Economics is the science of analyzing the use of limited resources

• It is a social science which studies how man satisfies his wants

• Agricultural Economics is an applied science which is mainly

• Thus, Agricultural Economics is concerned with the evolving of

• Agricultural economists can formulate the methods, techniques

• Agricultural Economics is an applied science

➢It is concerned with the identification, description and

• How to apply 'micro-economics' or 'price theory’ to the field

• It covers all the four branches of economic life of the agricultural

• It is also related with choosing the most profitable enterprise and

• Combining the different factors of production in the most

• The domestication of plants and animals started in the new stone

• A major advance in the agriculture came with the development of

• The most important change was the slow adaptation of technology

• In Ethiopia and the west coast Africa agriculture developed along

• The agricultural sector provides factor, product, market,

▪ which are considered vital for sustained economic

The product contribution

• It provides food to the ever increasing population in an

• In most developing countries, the domestic agricultural

• The other product contribution made by agriculture for the

▪ It provides raw materials for the secondary sector

• Agriculture provides an expanding market for the products of

• In the initial stages of development of the economy,

• This increased income, in turn, leads to an additional demand

• Not only for consumption purposes but also for

• As agriculture develops and its production becomes more

▪generally non-agricultural firms in character

• These firms include those providing processing, packing and

• An agricultural development through providing market for

• Developed industrial sector, in turn helps in the development of

▪through the spread of modern technology in agriculture and

• This is a virtuous process that gives rise to institutions by