Build your ability to say no as you say yes if the situation is alright.

1. CHAPTER ONE: INTRODUCTION
1.1. Definition of Economics and Agricultural Economics
 Economics: It is a social science that deals with how
consumers, producers and societies choose among the
alternative uses of scarce resources in the process of
producing, exchanging, and consuming goods and services. or
 It is the study of how scarce resources are allocated to
fulfill the infinite wants of consumers
 Agricultural economics: It is a social science that deals
with the allocation of scarce resources among competing
alternative uses found in the production, processing,
distribution, and consumption of food and fiber.

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– The word “resources” describes anything that can be
used in the production of goods and services.
E.g. water, labor, clean air etc.
– Every resource is relatively scarce, meaning the
availability of every resource is insufficient to
satisfy all of its potential users.
 The study of economics rests on three foundations:
– Unlimited Wants
– Scarcity
– Choice

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 Without scarcity, there would be no need for an allocation
system.
 Choice is important, because without choices there is no
decision to be made.
 Self-interest is what drives the consumer to seek more
“stuff ” at a lower price.
– Needs: are the basic necessities that a person
must have in order to survive
E.g. food, water, shelter and clothing
– Wants: are the desire that people want to have
E.g. bigger homes, modern cars etc.

4. Branches of Economics
 Based on Economic Analysis: Economics can be categorized
as:
– Microeconomics
– Macroeconomics
 Based on Economic thought: Economics can be categorized
as:
– Positive
– Normative economics

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 Microeconomics:
 It is a branch of economics that deals with behavior and
decisions of smaller unit like individuals and businesses.
– Centers on the forces working at the individual
level
– focuses on the needs, desires and buying habits of
the individual consumer
E.g. Firm’s reaction to increased demand for its product
Decision of a worker to work less due to lower wages

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 Macroeconomics
 It is a branch of economics that deals with economic theory
and the economic decisions of large bodies like the
government.
– The sum total of all micro parts
– Looks at the aggregate (sum or total) of individual
markets
 The four main areas of study:
– Growth (increase in total output)
– Price level (inflation)
– Labor Markets (unemployment)
– The balance in the foreign sector
(exports/imports, exchange rates)

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E.g. Studying the effects on all firms in the economy due to a
general increase in demand
Government legislation aimed at increasing taxes on profits
for all firms
Effect on total production in the economy due to taxes
Total hours of labor (and unemployment)

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 Positive Economics/statements
 Deals with how the economic problems facing a society are
actually solved.
– Specifically, it is concerned only with scientific laws of cause
and effect with questions of “what is?” or “what was?” and
“what will be?” or “what would happen if?”
 Capable of being verified or refuted by resorting to fact or
further investigation
 Statement free from speculation and hinting
 Based on facts that can be proved or disproved
E.g. If the price of coffee doubles and the price of tea go
down, people will buy less coffee and more tea.

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Normative Economics/Statements
 Contains a value judgement which cannot be verified by
resort to investigation or research
 Statements are subjective (arguable) and biased
– they cannot be proved or disproved
 It is concerned with making suggestion about the way in
which society’s goal might be more efficiently realized.
 It involves question of “what should” or “what ought to be”
E.g. The current high level of unemployment in Ethiopia
ought/should to be reduced
families of five children with income below birr 10,000
per year should be exempted from income taxes

10. Basic Economic Concepts
 Economic Resources
 Resources are factors of production that are used to
produce output.
 These outputs could be goods or services.
– Goods are tangible (e.g., shoes, bread)
– services are intangible (e.g.,education,
entertainment).
 People use these goods and services to satisfy their wants.

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 Scarcity
 The excess of wants resulting from having limited resources
(land, labor, capital and entrepreneurs) in satisfying the
endless wants of people.
 It is a universal problem for societies – it is not limited to
poor countries.
 To the economist, all goods and services that have a price
are relatively scarce. This means that they are scarce
relative to people’s demand for them.

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Factors of Production
 Land
- natural resources available for production
- renewable resources: those that replenish
- non-renewable resources: cannot be replaced
 Labor
- physical and mental effort of people used in
production
 Capital
- all non-natural (manufactured) resources that are used
in the creation and production of other products
 Enterprise (Entrepreneurship)
- refers to the management, organization and planning
of the other three factors of production

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 Payments to factors of Production
Factors of Production
Land Labor Capital
Enterprise/
Entrepreneurship
Rent Profit
Interest
Wages
INCOME

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Opportunity Cost
 The cost expressed in terms of the next best alternative
sacrificed
 Helps us view the true cost of decision making
 Implies valuing different choices
 Choice
 Since, human wants are infinite and resources are finite,
choices must be made.
 People do not have infinite income, they need to make
choices whenever they purchase goods and services.
 People should decide how to allocate their limited financial
resources i.e. there is always a need to choose between
alternatives.

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 Economic Problems
 The basis of all economic activities arise from the fact that
scarcity of productive resources to satisfy human needs.
 The major economic problems are:
– What to produce?
– How to produce?
– How much to produce?
– When to produce?
– For whom to produce?

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 What to produce:
 It concerns on the allocation of scarce resources in relation
to the composition of total output in the economy.
 Society has to decide about the mix of goods and services
to produce and what quantities of these goods and services
to produce over time.
E.g. Decision on to produce wheat, maize or barley or both.
 How to produce:
 Concerns on different combination of inputs and techniques
of production.
 Every economic system chooses what combination and
technique to use in order to produce the desired level of
output at the least possible cost.

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 For whom to produce:
 Refers to the problem of who gets how much of what is
produced in the economy.
 How is the total national product to be distributed among
different individuals in the economy?

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 Production Possibility Curves (Frontier) also known as PPF
 Production – output of goods and services
 Possibility – maximum attainable amount
 Frontier – border or boundary
 PPF Shows the different combinations of goods and services
that can be produced on the boundary of what is possible
with a given amount of resources
– Any point inside the curve – suggests resources are
not being utilised efficiently (Point B in Figure 1)
– Any point outside the curve – represents
unattainable point with the current level of
resources (Point C in Figure 1)
 Useful to demonstrate economic growth and opportunity
cost

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 PPF graph
Figure 1
Capital Goods
Consumer Goods
Yo
Xo
A
.B
•C
Y1
X1

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 Economic growth: It is an increase in the total output of
the economy.
• It occurs when a society acquires new resources, or when it
learns to produce more using existing resources.
• The main sources of growth are increases in the quantity
and quality of the economy's resources (land, labour, capital
and entrepreneurship).
• It is measured by measuring total national output in an
economy in two different time periods.

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 Types of Goods
 Based on Supply: The goods are categorized as economic
goods and free goods based on the supply criteria
 Free Goods: those goods which are provided freely by
nature ,their supply is abundant that no price is paid for
securing them .e.g. air, water, sunlight ,etc
• All free gifts of nature are free goods.
• No cost so no choice. No market and zero price.
 Economic Goods: are those goods which are relatively
scarce .
• Cost is incurred for producing them and price is paid for
purchasing them.
• Exchanged through markets

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 Based on Consumption: Goods can be categorized as
Consumer goods and Producer Goods.
• Consumer goods: are those which yield satisfaction
directly. They are used by consumer directly to satisfy the
wants.
Example: food, clothing, etc.
• Producer goods: are those goods which help us to produce
other goods. They give satisfaction indirectly by producing
other goods which will yield final satisfaction.
Example: machinery, tools etc.

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 Based on Durability: This classification criterion
emphasized on the nature of the goods and their usage.
• Mono Period Goods are those goods which can be used only
once in the production and consumption process.
Example: Seeds, Fertilizers, food etc.,
• Poly Period Goods are those which can be used repeatedly
during the production and consumption process over several
periods.
Example: refrigerator, machinery, implements, etc.,

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 Alternative Economic Systems
ECONOMIC SYSTEM
MARKET COMMAND MIXED

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 Planned Economies
• Sometimes it is called
– Centrally planned economy or
– Command economy
• Decisions as what to produce, how to produce, and whom to
produce, are made by a central body i.e. the government.
• All resources all collectively owned.
• The quantity of decisions to be made, data to be analyzed,
and factors of production to be allocated are immense. This
makes central planning very difficult.

26. Ctd…
 Free Market Economies
• Sometimes it is called:
– Private enterprise economy or
– Capitalist economy
• All production is in private hands
• For few cases of surpluses and shortages, there will be
minimal government intervention.
(If there are changes in the pattern of demand, then there
will be changes in the pattern of supply in order to meet the
new demand pattern)
• It is a self-righting system

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 Mixed Economies
• In reality, all economies are mixed economies
• Some countries have high levels of planning and government
involvement in the economy (E.g. China)
• Government involvement is deemed essential, since there
are some dangers that will exist if the free market is left
to operate without interference.

28. • End of CH-1