3315 AAEC Agricultural Price Theory
Chapter 1 Introduction
INTRODUCTION
Economics is the study of how to allocate scarce resources to produce goods & services that help satisfy unlimited human wants.
INTRODUCTION
Three important aspects of definition:
"Economics is the study of how to allocate scarce resources
(inputs or factors of production) to produce goods & services that help satisfy unlimited human wants."
Limited Resources (Resource Scarcity) Unlimited Wants - most basic assumption is that each individual has a desire for more - more is preferred to less (ex. money) Allocation - making decisions about how to use our resources or capabilities among unlimited wants.
IMPORTANT CHARACTERISTICS OF RESOURCES
Resources have economic value Producers generally must pay to use resources Resources have alternative uses Since resources have alternative uses, trade-offs must be made Opportunity costs are the measure of this trade-off
OPPORTUNITY COSTS
If you use a good for one purpose, you give up the opportunity to use it elsewhere; opportunity costs reflect the value of alternative opportunities foregone or sacrificed
ALLOCATION OVER TIME
Time is another important element in economic decisions.
Someone
has to make the decision whether to use a resource today or in the future. (ex. Gas, Water, etc.)
All economic systems need to answer four basic questions:
What to produce? How to produce? For whom it will be produced? How to achieve economic growth?
Alternative approaches to address the four basic questions:
Tradition (custom and traditions) Central direction The Market System or the Price System
The Market System or the Price System
The U.S. and many other market-driven economies performs the four principal functions based on, at least in part, the price system.
What be should produced is decided by the amount of each good that the consumers want and the price they are willing to pay for it. How should resources be used is decided by the relative value of various types of materials and equipment. How should output be distributed (For whom it will be produced) is decided by, in general, the purchasing power of individuals. The purchasing power of individuals depends largely on the prices of resources they own. Decisions regarding economic growth is also motivated, at least in part, through the price system.
The Price System and Microeconomics
Microeconomics or at least a major part of it is often called price theory because so much of it is concerned so directly with the workings of the price system. Microeconomics - the study of economic decisions at the individual producer & consumer level (ex - profit maximizing level of output for a firm, how to spend your weekly budget)
MACROECONOMICS
Macroeconomics
is primarily concerned with the study of fluctuations in the levels of employment, aggregate income, and the general price level, and of the ways to prevent such fl...