An Introduction to Economics

Concepts for Students of Agriculture and the Rural Sector

Berkeley Hill

• Publisher: CAB International
• Year: 2021
• ISBN:
  9781800620087
• Edition: 5
• Topic: Business
• Subtopic: Agribusiness
• Index: Business

Updated and revised, this fifth edition incorporates recent developments in the environment in which agriculture operates. Issues that have gained prominence since the previous edition (2014) include climate change and agriculture's mitigating role, concern with animal welfare, the social contributions that agriculture makes, risks associated with globalization, and rising concern over sustainability. Important for UK and EU readers are the adjustments needed now that the UK is no longer a member of the European Union and the nature of the national policies developed to replace the EU's Common Agricultural Policy. Containing all the major economic principles with agriculture-specific examples, An Introduction to Economics, 5th Edition provides a rounded and up-to-date introduction to the subject. The inclusion of updated chapter-focused exercises, essay questions and suggestions for further reading make this textbook an invaluable learning tool.This book: Is updated to include new developments, such as Brexit, importance of climate change and animal welfare.Includes exercises and essay questions.Suggests further reading to supplement the text.This book is recommended for students of agriculture, economics and related sectors.

1 What is Economics?

Introduction – the Essence of Economics

Economics is concerned with choice at all levels of society: choice by individuals, by firms, by local and central governments, and by international organizations. Economics is the study of why choices are necessary and how they are made, a study generally undertaken with the aim of understanding better the processes involved and of improving in some way the outcome of choices.

At the level of the individual, a person leaving school and faced with a variety of alternative college or university courses has to select just one, knowing that the selection will heavily influence how the rest of his or her life is spent. Having made this major choice, whether to study economics or law or whatever, the student while at college must allocate time between the study of the chosen subject and leisure. If the objective is to pass the examinations and yet enjoy some sport, choice must be made on how time is spent in order to achieve academic success and still have pleasure from leisure. It will soon become clear that more hours spent playing football inevitably means fewer hours are available for work. Achieving a good balance between work and non-work is something that is of increasing concern in modern society.

Businesses, from family firms to multinational companies, can use their manpower, capital and premises or land in a variety of ways and it is the task of their managements to choose to allocate the firm’s resources in the best ways, which usually means most profitably. Taking an agricultural example, a farmer can perhaps grow wheat on his farm and have no other enterprises, or grow grass and keep dairy cows, or maybe he can have a mixture of grass and wheat. It is up to the farmer to choose how to allocate his land and other resources, such as his labour force, between the alternative enterprises, bearing in mind what he is attempting to achieve from his farming. With a farm of a given size, using more land for cereals means that less is available for other crops.

The government, or state, acting on behalf of society, raises money through taxation or borrowing and spends it on defence, roads, health care and social services, pensions, education, and in many other ways. With a budget of a certain size, if the government wishes to spend more on the health service it will have to cut back on something else – say, welfare benefits. Just as with individuals, the government has to choose how to allocate its resources between many possible ways of spending, and by spending money on one thing it loses the opportunity of spending it on another.

The environment is another area where choice by society is involved. For example, society has sometimes to choose between either building a new airport in an area important for nature conservation or having the wildlife but also suffering congestion at existing airports. By enjoying the convenience of an extra airport, the opportunity of enjoying the unspoilt countryside is lost. Another choice may be between production systems that, on the one hand, prioritize high standards of animal welfare and, on the other, bring the benefit of lower food prices which may be of particular significance to low income households in mitigating their poverty.At the international level, it is increasingly clear that society faces a choice between using fossil fuels to generate power and risking further global warming of the planet, with the many forms of harm that this brings (economic, biological, social etc.). But, unlike decisions at a national level where who has the authority to make choices is fairly clear, climate change impacts across national boundaries and the process of combating it involves achieving cooperation and agreement between governments, something which is often difficult to secure. The economic characteristics of environmental damage are considered later (Chapter 7).

Opportunity Cost

Whenever choice is involved, taking one alternative automatically means that all the others have to be left, or forgone. If the choice is made to build houses on a piece of land to meet a need for accommodation, the opportunity to use that land for other purposes is ruled out – for a nature reserve, or for farming, or for a golf course, etc.

The cost to society of having more houses may be thought of as what has to be gone without by having them. If the land is currently used for farming, being judged the best way to use it before the housing development was proposed, then this activity has to be forgone when the housing is built. Costs are commonly thought of in terms of money, but money in this context is really only a useful common denominator in which the various items lost and gained can be expressed and compared. We should note that some of the important costs of having more housing, such as the extra traffic congestion and the aesthetic loss of unspoiled countryside and reduced biodiversity, are very difficult to express in money terms and may well get left out of the calculation, making nonsense of any precise monetary figure that may be arrived at.

In the example, the land could be used for a whole range of purposes, but only one at a time. If it is used for house building, the cost of using it as such is really the best alternative use forgone, in this case for farming – this is termed the opportunity cost of using the land for more houses.

The opportunity cost of any choice is the best alternative that is forgone by making that choice.

Another example is given by the student who can spend an evening drinking, or going to a cinema, or buying a book and studying it. If the pub is chosen, but the cinema would be next on the list of enjoyments, the opportunity cost of the night in the pub is the visit to the cinema.

Scarcity

Choice becomes necessary because the resources which individuals and society have at their disposal are insufficient to satisfy all their wants simultaneously and completely. As individuals we often come up against money, or rather spending power, as a scarce resource, so we have to choose how we use it. Governments frequently have limits to the budgets they are able to spend on competing projects. Time is another scarce resource, and it seems increasingly important to make best use of time as one becomes older.

Some commodities are not economically scarce: we do not normally have to choose how to allocate oxygen in the air – there is sufficient for each of us to use as much as we want for all purposes. It has no opportunity cost – we can use more of it by lighting a fire without having to breathe less. Such commodities are called free goods . A distinction should be made between scarcity of occurrence and economic scarcity. Discarded bedsteads that sometimes adorn ditches and lay-bys are not scarce in the economic sense because they are plentiful in relation to the desire or want for them. Essentially, no one has any use for them.

A commodity is economically scarce when insufficient is available to satisfy all wants completely and the question of its allocation arises.

What is an Economic Problem?

An economic problem is said to occur whenever choice between alternatives presents itself. The government, faced with decisions on how to allocate its revenue between education, defence, housing, healthcare or social services, is facing an economic problem. So is the farmer allocating his labour force over a range of jobs. So is the obese person who has to choose between a range of slimming diets on which to spend their money and time. The objective of the overweight person’s choice is clear, at least on first examination: it is to lose weight. The issue how to achieve it. This leads us on to consider what lies behind any choice – its objective or final goal.

Objectives of choice

The obese person in the above example appears to have an easily identifiable objective, or goal – that of losing weight. However, by questioning more closely, we may find that the taste of the diet is important too; there are therefore two simultaneous goals, weight loss plus a diet that is not unpalatable. A third goal might be cheapness of the diet, because lower food costs mean that more can be spent more on other goods and services that give satisfaction. The eventual choice of diet will be the result of the individual trying to achieve a whole range of goals simultaneously. It is difficult for an outsider to list all the goals and even harder to ascribe to each goal some measure of its relative importance. Yet the individual must have all these goals balanced, probably subconsciously, and the final choice will be the way of best achieving them. Choice will be rational and not just by chance. If presented with the same range of diets at some other time, as long as the objectives had not changed we would expect the individual to make the same, or a very similar, choice. While it is difficult to specify the objectives, it is clear that they exist. Economists say that the individual is attempting to maximise their satisfaction (or utility) by choosing as they do and make the assumption that the object of any choice is to get the greatest satisfaction which can be attained from the range of available alternatives.

The objectives of society in any choice are equally complex. Some of the objectives which are followed simultaneously and which are common to most countries, though with different balances that reflect circumstances, are:

• national security (external defence and internal policing, etc.);

• a healthy population;

• a high level of employment;

• a fair distribution of income and wealth;

• housing for all;

• stable prices;

• protection of the environment (biodiversity, landscape quality, prevention of water and air pollution, etc.);

• mitigation of and adaption to global warming;

• a high level of education for the population;

• sustained economic growth;

• promotion of harmonious international trade;

• individual liberty and the individual’s control of his or her own environment; and

• democratic participation in major policy decisions.

Some of these objectives conflict with each other, and politicians will find themselves ‘trading-off’ one objective against another. For example, to curb inflation it may be necessary to impose regulation on factories more tightly and force them to produce their goods in a cleaner but more costly way; this may push up prices, hamper international competitiveness and retard economic growth. To curb the spread of harmful viruses, such as Covid-19, it may be necessary to restrict people’s freedom to travel and meet, which involves trading off public health against a loss of business profits, employment and personal incomes. To protect farm cattle from a disease it may be necessary to cull forms of wildlife that carry and transmit it. Society has, in its choices, to balance all its competing objectives according to their various weights of importance. In a democracy these weights are indicated primarily in the way that people vote at elections for parties or individuals who present different packages of objectives in their election manifestos. These may change over time to reflect shifts in what are perceived as the problems facing society. It can be argued that, at least in a democracy, the political system can be expected to put in power the parties and individuals who, broadly speaking, reflect the wishes of society.

The objectives of firms are generally easier to define. Their prime objective is to make profit by providing customers with what they want, but other objectives might be the minimization of risk to the business, or to enhance the prestige of the company. In agriculture a farmer might consider profit to be relatively unimportant as a goal once a level has been attained which gives him an adequate living standard. He may then be more interested in doing what gives him pleasure – such as caring for animals and cultivating crops or building up herds of pedigree livestock, or spending time at local markets socializing with fellow members of the farming community, or being able to pass the land and buildings to the next generation – and will arrange his farm with these non-profit motives in mind.

While objectives are generally difficult to define precisely, it is clear that individuals, society and firms all have them and that their behaviour is directed towards achieving them. Economics is concerned with how these objectives are approached.

We have dealt with scarcity of resources, choice and objectives. They can be combined into a definition of economics .

Economics is the study of how people as individuals and society choose to allocate scarce resources between alternative uses in the pursuit of given objectives.

The Mechanism of Allocating Scarce Resources

In terms of how countries allocate their scarce resources, history suggests that two chief types of society can be distinguished: (i) the society with a planned economic system (sometimes called a command economy ); and (ii) the society with a free-market economic system (or market economy ). Problems of the allocation of the resources which can produce goods and services (i.e. land and natural resources, the labour force and managerial ability, and capital such as machines, buildings, power stations, etc.) occur in both systems. However, the ways in which the choices are made differ.

For the purposes of comparison of the two approaches it is useful to consider each in its most extreme form, i.e. a totally planned system of production and resource allocation contrasted with one relying entirely on the market with no central coordination. This approach, which uses ‘models’ of each system, is an attempt to capture the essential elements of a real-world situation without the complexities that would be encountered if we were to examine the details of the allocative process in real countries. The use of models permeates economic theory and will be encountered in this text when we consider the behaviour of individual consumers, of firms, of the whole economy and in a range of other contexts. Although mod...