Principles of Agricultural Economics Flashcards

Introduction to Economics and Agricultural Economics

• Definition of Economics: Traditionally known as the "Queen of Social Sciences," Economics studies the economic activities of individuals living in society. These activities are focused on the efficient use of scarce means to satisfy human wants.

• The Problem of Choice: Human wants are unlimited and recurring; as soon as one is satisfied, another arises. However, the means to satisfy these wants are limited and have alternative uses, creating the need for effective decision-making regarding resource allocation.

• The Subject Matter of Economics: It primarily concerns the tripartite relationship of Wants-Efforts-Satisfaction. It deals with decisions about what commodities and services to produce, how to produce them economically, and how to provide for economic growth.

Approaches to the Study of Economics

• Traditional Approach: Viewed Economics as a science of wealth, divided into four branches:

  1. Consumption: The use of wealth to satisfy human wants or the destruction of utility in goods and services.

  2. Production: The creation of utility through the transformation of tangible inputs (raw materials) and intangible inputs (ideas, know-how) into goods or services.

  3. Exchange: The transfer of goods between individuals or countries, increasing welfare by creating higher utilities.

  4. Distribution: The sharing of produced wealth among factors of production.

     • Personal Distribution: Relates to income distribution among individuals.

     • Functional Distribution: Explains the share of total income received by each factor: land ($rent$), labour ($wages$), capital ($interest$), and organisation ($profit$).

• Modern Approach: Coined by Ragnar Frisch in $1933$, this approach divides the subject into Micro-economics and Macro-economics.

  1. Micro-Economics (Price Theory): Derived from the Greek word 'micro' (small). It analyzes the behavior of small units like a firm, industry, or consumer. It assumes "full employment" and focuses on resource allocation and price determination.

  2. Macro-Economics (Theory of Income and Employment): Derived from the Greek word 'macro' (large). It analyzes economy-wide aggregates like national income, $GDP$, total employment, and aggregate demand/supply to determine national economic policy.

Major Definitions of Economics

• Etymology: Derived from the Greek word "OIKONOMICAS" ("OIKOS" meaning household and "NOMOS" meaning management).

• Wealth Definition (Adam Smith): Smith, the "Father of Economics," defined it in "Wealth of Nations" ($1776$) as "an enquiry into the nature and causes of wealth of nations."

• Welfare Definition (Alfred Marshall): In "Principles of Economics" ($1890$), Marshall defined it as the study of mankind in the ordinary business of life, focusing on the attainment and use of material requisites of well-being.

• Scarcity Definition (Lionel Robbins): In "Nature and Significance of Economic Science," Robbins defined it as the science studying human behavior as a relationship between ends and scarce means which have alternative uses.

• Growth Definition (J.M. Keynes & Paul Samuelson): Keynes (Father of Modern Economics) focused on the administration of scarce resources and determinants of income/employment. Samuelson emphasized how society chooses to employ scarce resources for producing and distributing commodities over time, including cost-benefit analysis.

Methods of Economic Investigation and Science Status

• Deductive Method: Also known as the abstract or analytical method. It involves reasoning from the general to the particular. It follows four steps: selecting the problem, formulating assumptions, formulating a hypothesis through logical reasoning, and verifying the hypothesis.

• Inductive Method: Also known as the historical or realistic method. It involves reasoning from particulars to the general based on experiments, observations, and detailed data collection.

• Economics as Science and Art: It is a science because it is a systematized body of knowledge where facts speak for themselves. It is an art because it provides formulas and precepts to guide individuals toward their goals.

• Positive vs. Normative Economics:

  • Positive: Concerned with "what is"; objective and provides no value judgment (e.g., "Price rises as demand increases").

  • Normative: Concerned with "what ought to be"; subjective and involves moral judgments (e.g., "Rising prices is a social evil").

Agricultural Economics: Meaning and Scope

• Definition: An applied field that uses economic principles (primarily microeconomics) to solve problems in farming, agribusiness, and the agricultural industry. Etymologically, "Agriculture" comes from Latin "ager" (soil) and "cultura" (cultivation).

• Definitions by Scholars:

  • Prof. Gray: The science applying economic methods to the special conditions of the agricultural industry.

  • Prof. Hibbard: The study of relationships arising from wealth-getting and wealth-using activities in agriculture.

  • Snodgrass and Wallace: An applied phase of social science focusing on all problems related to agriculture.

• Agricultural Production Economics: Specifically concerned with selecting production patterns and resource use efficiency to optimize goals within limited resources. It analyzes factor-product, factor-factor, and product-product relationships.

• Farm Management: A microeconomic branch dealing with the organization and operation of individual farm units for continuous profits and efficiency. It treats each farm as a separate unit (J.N. Efferson, Gray, Bradford and Jhonson definitions).

Goods, Services, and Utility

• Goods vs. Services:

  • Goods: Tangible material outcomes of production (e.g., foodgrains, seeds).

  • Services: Intangible, non-material, inseparable, and perishable professional activities (e.g., medical advice, teaching).

• Classification of Goods:

  • By Supply: Free goods (unlimited gifts of nature like air) vs. Economic goods (scarce and requires payment).

  • By Consumption: Consumer goods (Goods of First Order) vs. Producer goods (Goods of Second Order used to make other goods).

  • By Durability: Mono Period (used once, e.g., fertilizers) vs. Poly Period (repeated use, e.g., machinery).

  • By Transferability: Categorized as External/Internal and Material/Non-material (e.g., land is External Material Transferable; IQ is Internal Non-material Non-Transferable).

• Utility: The power of a commodity to satisfy a human want.

  • Characteristics: Subjective, varies with purpose, time, and ownership; distinct from pleasure and satisfaction (satisfaction is the end result; utility is the potential).

  • Kinds of Utility:

    1. Form Utility: Created by changing the physical form (e.g., paddy to rice).

    2. Place Utility: Created by spatial movement (e.g., Shimla apples to other states).

    3. Time Utility: Created by storage (e.g., seasonal products during off-season).

    4. Possession Utility: Created by transfer of ownership (e.g., buying/selling land).

  • Measurement: Cardinal (quantifiably measured in utils) vs. Ordinal (ranked preferences).

Theoretical Laws of Consumption

• Law of Diminishing Marginal Utility (LDMU): Formulated by H.H. Gossen ($1854$) and stated by Marshall. It posited that the additional benefit a person derives from an increase in the stock of a thing diminishes with every increase in the stock.

  • Mathematical Relation: $MU_a = TU_a - TU_{a-1}$

  • Schedule Example:

    • Unit $1$: $TU = 7$, $MU = 7$

    • Unit $2$: $TU = 11$, $MU = 4$

    • Unit $5$: $TU = 14$, $MU = 0$ (Point of Satiety)

    • Unit $6$: $TU = 13$, $MU = -1$

  • Importance: Explains the Law of Demand, Diamond-Water Paradox (water is abundant so $MU$ is low; diamonds are scarce so $MU$ is high), and Progressive Taxation.

• Law of Equi-marginal Utility (LEMU): Also known as Gossen’s Second Law or the Law of Substitution. A consumer maximizes satisfaction by allocating expenditure so that the utility of the last unit of money spent on each item is equal.

  • Equilibrium Formula: $\frac{MU_a}{P_a} = \frac{MU_b}{P_b} = ... = \frac{MU_n}{P_n}$

  • Example: With $Rs. 5$, a consumer yields max satisfaction ($48$ units) by spending $Rs. 2$ on Pencils ($MU=8$) and $Rs. 3$ on Erasers ($MU=8$).

• Consumer’s Surplus: Introduced by Marshall ($1895$). It is the difference between the price a consumer is willing to pay and the price they actually pay.

  • Formula: $CS = TU - (Price \times Quantity)$

  • Limitations: Difficulty in cardinal measurement, existence of substitutes, and non-constant $MU$ of money.

Demand, Supply, and Market Equilibrium

• Demand: Desire backed by willingness and ability to pay, expressed at a price and per unit of time.

  • Law of Demand: Inverse relationship between price and quantity demanded.

  • Elasticity of Demand ($Ep$): $\% \text{change in quantity demanded} / \% \text{change in price}$.

  • Degrees: Perfectly Elastic ($E = ∞$), Perfectly Inelastic ($E = 0$), Unitary ($E = 1$), Relatively Elastic (E > 1), Relatively Inelastic (E < 1).

• Supply: Amount sellers are able and willing to offer for sale at different prices. Unlike stock (total quantity existing), supply is the quantity actually brought to market.

  • Law of Supply: Direct relationship between price and quantity supplied (upward sloping curve).

• Price Determination: Equilibrium is reached where Market Demand equals Market Supply.

  • Market Price (Very Short Run): For perishables (e.g., fish), supply is a vertical line; price depends entirely on demand. For non-perishables, there is a "Reserve Price" below which sellers will not sell.

Market Structures

• Perfect Competition: Many buyers/sellers, homogeneous products, free entry/exit, perfect knowledge, and no transport costs. The firm is a "price taker" with a horizontal demand curve.

• Monopoly: Single seller, no close substitutes, entry blocked, the firm is the industry.

• Monopolistic Competition: Large number of firms, product differentiation (brands), selling/advertising costs (Chamberlin's concept).

• Oligopoly: Few large sellers, interdependent decision-making, high entry barriers. Features the "Kinked Demand Curve" (prices are rigid as rivals match price cuts but not increases).

National Income and Public Finance

• National Income Concepts:

  • $GDP$: Value of all final goods produced within domestic territory.

  • $GNP$: $GDP + \text{Net factor income from abroad}$.

  • $NNP$: $GNP - \text{Depreciation}$.

  • Disposable Income: $Personal Income - \text{Personal Taxes}$.

• Measurement Methods: Product/Output Method (Value-added), Income Method (summing factor payments), and Expenditure Method ($GDP = C + I + G + (X - M)$).

• Public Finance: Deals with government revenue and expenditure.

  • Revenue Sources: Major (Taxes, Prices), Minor (Fees, Special Assessments, Escheat, Grants).

  • Taxation Methods:

    • Proportional: Same percentage for all incomes.

    • Progressive: Rate increases with income (Canon of Equality).

    • Regressive: Burden falls heavier on the poor.

  • Adam Smith’s Canons: Equality, Certainty, Convenience, and Economy.

Inflation

• Definition: A persistent rise in the general price level or "too much money chasing too few goods."

• Types by Rate:

  • Creeping: < 3\% per annum.

  • Walking/Trotting: $3\% – 10\%$.

  • Running: $10\% – 20\%$.

  • Galloping/Hyperinflation: $20\% – 100\%$ or more.

• Types by Cause: Demand-pull (excess demand) vs. Cost-push (rising input costs/wages).

• Measurement Tools:

  • $CPI$ (Cost-of-living index): $(\text{Cost of bundle in given period} / \text{Cost in base year}) \times 100$.

  • $WPI$ (Wholesale Price Index).

  • $GDP$ Deflator: $(\text{Nominal GDP} / \text{Real GDP}) \times 100$.

• Remedies:

  • Monetary: Credit control, demonetisation.

  • Fiscal: Increased taxes, reduced public expenditure, surplus budgets.

References

• Dewett, K.K. and Chand, A. ($1979$), Modern Economic Theory.

• Dewett, K.K. and Varma, J.D. ($1986$), Elementary Economics.

• Jhingan, M.L. ($1990$), Advanced Economic Theory.

• Subba Reddy, S., et al. ($2009$), Agricultural Economics.