econ intro questions systems 2

Agriculture Economics and the American Economy Chapter Objectives:       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     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 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 Macroeconomics 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 Cont.’d    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 Aggregate demand – aggregate demand is 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 employed  Inflation and deflation – inflation is a rise in the general level of prices, as measured against some baseline of purchasing power Deflation is a decrease in the general price level, over a period of time  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 Microeconomics The prefix micro means “small,” indicating that microeconomics studies the economy on a small scale Microeconomics considers the individual markets that make up the 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 Cont.’d  Market and prices – markets are institutions that 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  Supply and demand – supply is the different 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 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 lowskilled labor Cost-benefit analysis “That person is hungry.” What is the cost of feeding that person? What benefit accrues to you or society if that person is not fed? What is the cost of not feeding that person? What is the benefit of not feeding that 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 Agriculture Economics Agriculture economics may be defined in several ways, but basically it refers to the application of economic concepts to agricultural problems Therefore, as stated earlier, to be a productive agricultural economist, one must first understand basic economic principles Economics is sometimes called a basic science, whereas agricultural economics is an applied science Cont.’d The following definition is a good example of merging general economics with agriculture Agricultural economics is “an applied social science dealing with how humans choose to use technical knowledge and scarce productive resources such as land, labor, capital, and management to produce food and fiber and to distribute if for consumption to various members of society over time.”