Introduction To Economics PDF

**Chapter 1. Introduction to Economics** The Economics of agriculture is important and interesting! Food and agricultural markets are in the news and on social media every day. Numerous fascinating and complex issues are the subject of this course: food prices, food safety, diet and nutrition, agri...

**Chapter 1. Introduction to Economics** The Economics of agriculture is important and interesting! Food and agricultural markets are in the news and on social media every day. Numerous fascinating and complex issues are the subject of this course: food prices, food safety, diet and nutrition, agricultural policy, globalization, obesity, use of antibiotics and hormones in meat production, hog confinement, and many more. As we work through the course material this semester, please find examples of the economics of food and agriculture in the news. You can earn extra credit by writing a report on a topic that is related to our course material! 1.1.2 Scarcity ============== Economics can be defined as, "the study of choice." The concept of **scarcity** is the foundation of economics. Scarcity reflects the human condition: fixed resources and unlimited wants, needs, and desires. Since we have unlimited desires, and only a fixed amount of resources available to meet those desires, we can't have everything that we want. Thus, scarcity forces us to choose: we can't have everything. Since scarcity forces us to choose, and economics is the study of choice, scarcity is the fundamental concept of all economics. If there were no scarcity, there would be no need to choose between alternatives, and no economics! **Choice** The choices we confront as a result of scarcity raise three sets of issues. Every economy must answer the following questions: **1. What should be produced?** Using the economy's scarce resources to produce one thing requires giving up another. Every society must decide what it will produce with its scarce resources. **2. How should goods and services be produced?** There are all sorts of choices to be made in determining how goods and services should be produced. **3. For whom should goods and services be produced?** If a good or service is produced, a decision must be made about who will get it. A decision to have one person or group receive a good or service usually means it will not be available to someone else. **Opportunity cost** It is within the context of scarcity that economists define what is perhaps the most important concept in all of economics, the concept of opportunity cost. Opportunity cost is the value of the best alternative forgone in making any choice. 1.1.3 Microeconomics and Macroeconomics ======================================= The subject of economics is divided into two major categories: microeconomics and macroeconomics. This course studies microeconomics, the investigation of firm and household decision making. Our basic assumption is that firms desire to maximize profits, and households seek to maximize utility, or satisfaction. **Factors of production** = The factors of production in an economy are its labor, capital, and natural resources. **A. Labor** is human effort that can be applied to production. People who work to repair tires, pilot airplanes, teach children, or enforce laws are all part of the economy's labor. People who would like to work but have not found employment---who are unemployed---are also considered part of the labor available to the economy. **B. Capital** is a factor of production that has been produced for use in the production of other goods and services. Office buildings, machinery, and tools are examples of capital. Natural resources are the resources of nature that can be used for the production of goods and services. **C. Land & natural resources** There are two essential characteristics of natural resources. The first is that they are found in nature---that no human effort has been used to make or alter them. The second is that they can be used for the production of goods and services. That requires knowledge; we must know how to use the things we find in nature before they become resources. **D. Technology & the entrepreneur** Goods and services are produced using the factors of production available to the economy. Two things play a crucial role in putting these factors of production to work. The first is technology, the knowledge that can be applied to the production of goods and services. The second is an individual who plays a key role in a market economy: the entrepreneur. An entrepreneur is a person who, operating within the context of a market economy, seeks to earn profits by finding new ways to organize factors of production. 1.1.4 Economic Models and Theories ================================== The real world is enormously complex. Think of how complicated your daily life is: just waking up and getting ready for class has a huge number of possible complications! Since our world is complicated, we must simplify the real world to understand it. A **Model** is a simplified representation of the world, not intended to be realistic. We frequently use models in sciences such as chemistry and physics. Think of the model of an atom, with the atomic particles: neutron, proton, and electrons. No one has ever seen an atom, but there is significant evidence for this model. It is easy to be critical of economic models, since we are more familiar with economic events. When we simplify supply and demand into a model, we can think of many oversimplifications and limitations of the theory... the real world is complicated. However, this is how all science works: we must simplify the complex real world in order to understand it. 1.1.4.1 The Scientific Method ----------------------------- Our economic models are built and used following the **Scientific Method**. The major characteristic of the scientific method is to use measurable evidence to support or detract from a given model or theory. Following this method, economists will keep a theory as long as evidence backs it up. If the evidence does not support the model, the theory will be modified or replaced. Science, or knowledge, advances in this imperfect manner. To repeat, "We have to simplify the real world in order to understand it." 1.1.5 Positive Economics and Normative Economics ================================================ As social scientists, economists seek to be unbiased and objective in their study of the world. Economists have developed two terms to separate factual statements from value judgments, or opinions. In our study of food and agriculture, we will strive to purge our analysis and understanding from opinions and value judgments. Our background and experience can make this challenging. For example, a corn producer might say, "The price of corn is higher, which is a good thing." But, the buyer of the corn, a feedlot operator, might see things differently. All price changes have winners and losers, so economists try to avoid describing price movements in terms of "good" or "bad." **PRINCIPLE OF SUPPLY AND DEMAND** **DEMAND** - Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants---a consumer may be able to differentiate between a need and a want, but from an economist's perspective, they are the same thing. Demand is also based on ability to pay. If you can't pay for it, you have no effective demand. ***Demand determinants*** **1. NON-PRICE DETERMINANTS OF DEMAND** ** Taste and preferences:** Tastes can change over time, as can preferences and fashions, and demand can increase or decrease to reflect these changes. For example, cigarette smoking is much less fashionable than it used to be. ** Number of buyers**: more consumers that want to buy the product buyers lead to an increase in demand; fewer buyers lead to decrease. ** Income**: When considering the impact of income on demand, economists differentiate normal and inferior goods. ** Normal goods:** Generally, for normal goods, the higher the income of a consumer the greater the quantity demanded. ** Inferior goods:** an increase in income will lead to a reduction in demand. For example, individuals on very low incomes are less likely to demand new motor cars, and more likely to take the bus. However, if they obtain higher income, demand for public transport may fall, while the demand for private transport is likely to rise. In this case, private transport is a normal good and public transport an inferior one. ** Price of other goods** (either complementary or substitute): ** Complementary goods**: Many products have complements, which are either bought at the same time as the product, or are needed to make the product work. For example, batteries are a complement to many portable electronic products. As the price of complements rise, the demand for a product is likely to fall. A situation where complementary products are bought at the same time it is referred to as joint demand. ** Substitute goods:** Substitute goods are goods which can be replaced by each other in the mind of consumers. For instance, tea and coffee are for many (but not all) consumers interchangeable goods. If the price of tea goes up, the purchases of tea will decrease and the purchases of coffee will increase. Thus, the relationship between the price of tea and the quantity of coffee is direct. Butter and margarine, tea and coffee, taxi and bus, pen and pencil, hotel and motel, radio and record player, are all items which, for most people, can be replaced by each other. They are substitute goods. ** Expectations about future:** Consumer expectations can influence the demand for many items. This is especially true with expensive and luxury items, including the demand for housing, for motor cars and expensive consumer electronics products. **SUPPLY** - When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price. Price is what the producer receives for selling one unit of a good or service. A rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied. When the price of gasoline rises, for example, it encourages profit-seeking firms to take several actions: expand exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants where it can be refined into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or keep existing gas stations open longer hours. ***Supply determinants*** Price is the major determinant of the quantity supplied. However, Supply is also affected by a number of other non-price factors. **NON-PRICE DETERMINANTS OF SUPPLY** Price is the major determinant of supply. Nonprice determinants include the following: Number of sellers or producers Costs of production (including taxes) Technology (since it affects costs) Prices of other goods (as sources of possible profits) Expectations (but the effect is ambiguous)