Unit 1

Basic Concepts and

Principles
Objectives

 To explain the basic difference between Economics

& Agricultural Economics.
 To introduce key economic concepts like scarcity,
rationality, equilibrium, time perspective and
opportunity cost.
 To help analyze how economic decisions are made
about what, how and for whom to produce.
 To define agricultural economics and its importance
& scope in decision making.
 To explain the role of economic actors in decision
making.
What is Economics?
 Discusses how a society tries to solve the human
problems of unlimited wants and scarce resources.
 Scientific study of the choices made by individuals and
societies with regard to the alternative uses of scarce
resources employed to satisfy wants.
 Theoretical aspect and an applied science in its practical
aspects.
 Not an exact science; An “art” as well
 A social science
 Deals with the society as a whole and human behaviour in
particular
 Studies the production, distribution, and consumption of
goods and services.
 A science in its methodology, and art in its application.
Economics

 Economics deals with the problems of allocative

efficiency i.e. choice between various alternative uses-
particularly when resources are scarce— to maximize
some given ends. Thus it provides analytical techniques
for evaluating different allocations of resources among
alternative uses
Agricultural Economics

 Agricultural economics is an applied phase of the social

science of economics in which attention is given to all
aspects of problems related to agriculture.
 Agricultural economics treats of the selection of land,
labour, and equipment for a farm, the choice of crops to
be grown, the selection of livestock enterprises to be
carried on and the whole question of the proportions in
which all these agencies should be combined.
Basic Assumptions
 Ceteris Paribus
 Latin phrase
 “With other things (being) the same” or “all other
things being equal”.
 Rationality
 Consumers maximize utility subject to given money
income.
 Producers maximize profit subject to given resources
or minimize cost subject to target return.
 Types of Economic Analysis
 Micro and Macro
 Microeconomics (“micro” meaning small): study of
the behaviour of small economic units
 An individual consumer, a seller/ a producer/ a
firm, or a product.
 Focus on basic theories of supply and demand in
individual markets
 Macroeconomics ( “ macro ” meaning large):
study of aggregates.
 Industry as a unit, and not the firm.
 Focus on aggregate demand and aggregate
supply, national income, employment, inflation,
etc.
Types of Economic Analysis
contd..

 Short Run and Long Run

 Short run: Time period not enough for consumers and
producers to adjust completely to any new situation.
 Some inputs are fixed and others are variable

 Long run: Time period long enough for consumers and

producers to adjust to any new situation.
 All inputs are variable

 Decisions to adjust capacity, to introduce a larger

plant or continue with the existing one, to change
product lines.
Economic Activities
 economic activities are divided into production,
exchange, distribution and consumption.
 agricultural economics cover all of them-what to
produce, how to produce, how much to produce, what to
sell, where to sell and at what price to sell; what to
distribute, among whom to distribute and on what basis
to distribute; and what to consume and how much to
consume.
Fundamental Problem
 agricultural economics includes the choice of farming as
an occupation, the choice between cultivator and animal
husbandry of machinery and labour; combination of
various factors of production, intensity of cultivation
irrigation, manuring, marketing, soil conservation, land
revenues system, costs, prices, wages, profits, finance,
credit, employment, etc.
 the fundamental problem before the agricultural
economist is to recommend the combination of factors of
production in ideal proportion under given conditions in
the economic interests of the agricultural community.
Scope of Agricultural Economics

 Study of a farmer at the farm level (the micro analysis).

 Instability of agriculture and agricultural unemployment
are the problems, mainly at the macro level.
 agricultural economics not only develops concerning
the use of scarce resources in agriculture proper but
also examines the principles (a) regarding the out flow
of scare resources to other sectors of the economy and
(b) about the flow of these resources from other
sectors into the agricultural sector itself.
Economic Principles

 Concept of scarcity
 Unlimited human wants
 Limited resources available to satisfy such wants
 Best possible use of resources to get:
 maximum satisfaction (from the point of view of consumers) or
 maximum output (from the point of view of producers or firms)
 Concept of opportunity cost
 Opportunity cost is the benefit forgone from the alternative
that is not selected.
 Highlights the capacity of one resource to satisfy multitude of
wants
 Helps in making rational choices in all aspects of business,
since resources are scarce and wants are unlimited
Economic Principles Relevant to
Decisions Contd…

 Concept of margin or increment

 Marginality: a unit increase in cost or revenue or
utility.
 Marginal cost: change in Total Cost due to a unit change in
output.
 Marginal revenue: change in Total Revenue due to a unit
change in sales.
 Marginal utility: change in Total Utility due to a unit change
in consumption.
 Incremental:applied when the changes are in bulk,
say 10% increase in sales.
Economic Principles Relevant to
Decisions
 Discounting Principle
 Time value of money : Value of money depreciates
with time
 A rupee in hand today is worth more than a rupee received
tomorrow.
 Outflow and inflow of money and resources at
different points of time
1
PVF = (1  r) n
where
PVF = Present Value of Fund,
n = period (year, etc.)
R = rate of discount
Production Possibilities Curve
Contd…

Food

Technically
P Infeasible Area
FP

FQ Q

Productively
Inefficient Area

O
CP CQ Clothing
Figure 1.3: PPC for the Society
Production Possibilities Curve
Contd…

 All points on the PPC (like P and Q) are points of

maximum productive efficiency.
 In the figure, OFp of food and OCp of clothing can be
produced at Point P and OFQ of food and OCQ
respectively at point Q, when production is run efficiently.
 All points inside the frontier are feasible but productively
inefficient.
 All points to the right of (or above) the curve are
technically impossible (or cannot be sustained for long).
 A move from P to Q indicates an increase in the units of
clothing produced and vice versa.
 It also implies a decrease in the units of food produced.
This decrease in the units of food is the opportunity cost
of producing more clothing.
Economic Actors

 who intervene the economy under certain rules

determined by the economic system and economic
institutions. They make decisions trying to resolve an
optimization or choice problem. In this process, they mold
the economy; for example, they decide the distribution
of goods and services, taxes, laws, tariffs, etc.
 Households
 Firms
 Governments
 The Rest of the World