econ intro questions systems 2

Agriculture Economics and
the American Economy

Chapter 2


Objectives:
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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.


Objectives cont.’d
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Describe the characteristics of the American
economy.
Differentiate between macroeconomics and
microeconomics.
Differentiate between positive and
normative economics.
Explain agricultural economics.


Introduction
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
of Economics
Three key words or phrases can be drawn
from each of these definitions: scarcity,
types of resources, and wants and needs.


Scarcity
Scarcity is the economic term for a situation in
which there are not enough resources available
to satisfy people’s needs or wants. Economics is
the study of society’s allocation of scarce
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)
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Entrepreneurship refers to the ability of
individuals to start new businesses and to
introduce new products and techniques.

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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
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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?


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What goods, and how much to produce.
– This question is answered every time people buy
goods.

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How to produce goods.
– This question is answered by agribusiness
producers or manufacturers according to what
will yield the greatest profits.

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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.
2.
3.

What type of pie to produce?
What combination of ingredients to use?
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.


Traditional System
A pure traditional economic system answers
the three basic questions according to
tradition. In a traditional system, things are
done “the way they have always been
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.


Capitalism
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.