1.3: Introduction to the Study of Economics

Learning Objectives

• Define agricultural economics and explain how it connects to real-world food and agriculture sectors.
• Describe scarcity and opportunity cost in agricultural decision-making.
• Explain the role of economics in food production, agribusiness, and policy.
• Identify major players across the food and agricultural supply chain.

Economics is Important and Interesting!

The Economics of food and 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, immigration, agricultural labor markets, 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. Application of economic principles to food and agricultural issues in real time will enhance the relevance, timeliness, and importance of learning economics.

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.

Scarcity = Unlimited wants and needs, together with fixed resources.

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!

Microeconomics and Macroeconomics

The subject of economics is divided into two major categories: microeconomics and macroeconomics.

Microeconomics = The study of individual decision-making units, such as firms and households.

Macroeconomics = The study of economy-wide aggregates, such as inflation, unemployment, economic growth, and international trade.

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, also called satisfaction.

 

Agricultural Decisions Across Communities

Although economic models often refer broadly to “firms” and “households,” agricultural producers and consumers do not all face the same economic circumstances. Access to land, credit, transportation, technology, labor, and markets can vary across communities and can affect the choices available to individuals and businesses.

For example, María, a beginning farmer operating a small family farm in California’s San Joaquin Valley, may face different financing and resource constraints than a large established agricultural company. Similarly, households in rural communities may experience different food prices, transportation costs, and access to food retailers than households in urban areas. Cultural food traditions can also influence consumer preferences and demand.

Economic models help us analyze these decisions, but it is important to consider how income, geography, culture, access to resources, and community conditions can shape the choices available to producers and consumers.

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.

Model = A theoretical construct, or representation of a system using symbols, such as a flow chart, schematic, or equation.

We frequently use models in physical sciences such as biology, 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 in many cases more familiar with economic events than scientific observations. 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.

The Scientific Method

Our economic models are built and used following the Scientific Method.

Scientific Method = A body of techniques for investigating phenomena, acquiring new knowledge, or correcting and integrating previous knowledge.

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.” Science is limited, and the human condition continues to be one of imperfect knowledge, finite lives, and an enduring search for solutions to poverty, pain, and suffering.

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.

Positive Economics = Statements that include only factual information, with no value judgments. “What is.”

Normative Economics = Statements that include value judgments, or opinions. “What ought to be.”

In our study of food and agriculture, we will strive to purge our discussions, 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 livestock 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.”

Economists who study food and agriculture seek to be neutral, unbiased, and professional in their work. This can be challenging at times, when we present our finding and observations to individuals or groups who may not like the outcomes. For example, an economist might be asked to study organic, natural, or local foods and report eh results to farmers and ranchers of conventional food products. Economists could be asked to study and report Chipotle’s impact on the demand for beef, or the profit margins on cage-free eggs. Although some individuals may not like the results of these studies, economists try to be unbiased and objective in reporting their scientific work.