Introduction
Chapter – 1
Table of Contents
- Agricultural economics has emerged as a distinct branch of economics and agronomy only recently.
- Historically, while literature on agriculture existed, there was limited focus on agricultural economics as an independent discipline.
- The formal recognition of agricultural economics began in the early 20th century, driven by increased interest in agricultural economic issues in various educational institutions.
- The depression of the 1890s, which severely impacted agriculture, led to organized farm groups focusing on farm management problems and catalyzed interest in agricultural economics.
- Before the industrial revolution, economics was predominantly illustrated through agricultural examples, highlighting its foundational role in economic understanding.
- The industrial revolution stimulated agricultural growth and enhanced the understanding of its significance, paving the way for the evolution of agricultural economics.
- The discipline has gained prominence, resulting in the establishment of agricultural universities and the integration of agricultural economics into academic programs.
- Courses in agricultural economics are offered at various academic levels, with a focus on applied aspects tailored to local conditions, rather than extensive theoretical emphasis.
Concept of Agricultural Economics
- The term agricultural economics combines agriculture and economics.
- Agriculture traditionally referred to the industry of basic food production, primarily farming, which was synonymous with subsistence farming.
- With the commercialization of agriculture, food and fiber production became just one aspect of scientific agriculture.
- Modern agriculture encompasses a broader scope, including farm supply industries, product-processing industries, and distribution industries.
- Industries related to farming are referred to as agriculturally related industries or agribusinesses.
- Agriculture can be defined as the production, processing, marketing, and distribution of crops and livestock, which has evolved beyond farm-centered activities.
- Technological advancements in transportation and communication have led to the specialization and relocation of some agricultural activities away from the farm.
- Economics is the science of analyzing the use of limited resources to achieve desired ends, focusing on how individuals satisfy their wants through resource allocation.
- The word “economics” originates from the Greek word “Oekonomous,” meaning “housekeeping,” emphasizing effective resource use.
- Prof. Lionel Robbins defined economics as the study of human behavior concerning the relationship between ends and scarce means with alternative uses.
- Key aspects of economics include:
- Deciding between alternative uses of limited resources.
- Satisfying human needs and wants, which have varying degrees of preference.
- Considering human behavior and decision-making for optimal resource usage.
- The gap between what people desire and what they can afford is central to economics; this gap drives the study of economics as it seeks to minimize it.
Nature of Agricultural Economics
- Agricultural economics is defined as an applied phase of economics focusing on problems related to agriculture.
- It aids farmers in decisions regarding the type of food to produce, the crops to raise for maximizing profits, and setting product prices.
- This field is a social science concerned with the allocation of scarce resources in producing, processing, and consuming farm products.
- Prof. Gray defines agricultural economics as the application of economic principles and methods to the conditions of the agricultural industry.
- A.W. Ashby describes it as a methodical pursuit of knowledge about economic processes in agriculture, aiming to stabilize or modify their results.
- Hibbard views agricultural economics as the study of relationships in wealth generation and usage in agriculture.
- The field encompasses not just land exploitation but also factors that influence economic activity and the well-being of the farming population.
- According to Jouzier, it regulates the relationships among resources to achieve maximum prosperity for farmers.
- Agricultural economics is concerned with economic problems related to farmers’ livelihoods, categorized into three main areas: Production, Marketing, and Financing.
- It focuses on the principles governing the use of land, labor, and capital for efficient farming.
- The discipline also examines price influences on agricultural goods and the relationship between agriculture and the broader economy.
- Agricultural economists formulate methods and techniques to tackle agricultural problems, a challenging aspect of their role.
- Agricultural economics identifies, describes, and classifies economic problems in agriculture to facilitate solutions.
- The allocation of scarce resources, especially land, is more critical in agriculture due to its limited supply.
- Theoretical agricultural economics provides principles for resource economics, while applied agricultural economics focuses on applying these principles in various agricultural activities.
Scope of Agricultural Economics
- Agriculture is influenced by various forces, including physical, biological, economic, and sociological factors.
- Physical forces are studied by physicians, chemists, geologists, and soil scientists.
- Biological forces are explored by plant physiologists, animal physiologists, pathologists, geneticists, entomologists, and bacteriologists.
- Economic and sociological forces involve relationships among individuals in agriculture as a vocation and way of life.
- Agricultural economists focus on relationships such as:
- Contact relationships between different branches of an enterprise (e.g., raising cereals and animals simultaneously).
- Activity relationships between various means of production (e.g., using machinery alongside human labor).
- Value relations between production means and the product itself.
- Commercial relations with buyers and suppliers of agricultural products.
- Agricultural economics examines elements of agricultural production concerning these relationships to maximize net profit.
- Jouzier describes agricultural economics as the science of coordinating factors in farming (land, labor, equipment) to achieve maximum net profits, and as the art of applying these principles to specific farms.
- Taylor defines the scope of agricultural economics as dealing with farmers’ decisions on what and how to produce, sell, and maximize profits while considering societal interests.
- While agricultural economics does not directly include the distribution and processing of farm products, understanding these aspects is vital for farmers.
- Important questions in agricultural economics include:
- What to distribute?
- Among whom to distribute?
- On what basis to distribute?
- What to consume and how much?
- Agricultural economics encompasses the functioning of government in agriculture, including public management, aid, and regulation.
- Specific scope includes:
- Choice of farming occupation, farm and livestock, machinery and labor, crops, and cropping systems.
- Size of production units, grouping production factors, cultivation intensity, soil conservation, selling products, land systems, agricultural finance, wages, prices, costs, and profits.
- Standard of living and national dividend.
- The primary problem is choosing the most profitable enterprise and operating it effectively.
- Agricultural economics is vast, affecting every phase of activities related to farmers’ livelihoods.
- At the farm level, it develops means for organizing production to yield maximum returns.
- At the sector level, it addresses collective changes in farming practices, land conservation, cooperative purchasing, and marketing.
- Agricultural economics also tackles problems needing government participation, such as price control, credit supply, and international trade.
Types of Agricultural Economics
- Agricultural economics is both a social science and a natural science.
- As a social science, it parallels general economics in scope; farmers’ activities and decisions are influenced by society, which is also affected by these decisions.
- Farmer decisions are impacted by psychology, social institutions, and cultural taboos, making precise measurement challenging compared to laboratory experiments.
- Economic calculations in agricultural economics follow the same accuracy standards as general economics.
- As a natural science, it involves a thorough examination of scientific innovations from soil scientists, with agricultural economics originating from agronomy.
- Agricultural economics is considered an applied science, emphasizing practical wisdom over theoretical knowledge; theoretical and practical aspects must be studied together.
- The learning process in agriculture must be convincingly applicable for economic purposes.
- The unique nature of agricultural economics arises from the significant role of nature in agricultural practices, making the problem of maximizing returns complex and uncertain.
- Agroclimatic conditions, economic systems, and soil fertility create inter-regional and intra-regional heterogeneity in agricultural production.
- This heterogeneity leads to differential achievements under varying geoeconomic conditions, making agricultural production problems multidimensional.
- Seasonality is a distinguishing factor of agricultural production, leading to sharper and more frequent market fluctuations.
- Agricultural enterprises involve the entire family in livelihood pursuits, creating unique organizational and institutional differences compared to non-agricultural activities.
Relationship with other Disciplines
- It is incorrect to assume that economics is the only science relevant to agricultural economists.
- Applied or technical agricultural sciences such as agronomy, animal husbandry, and agricultural engineeringprovide essential data on the effects of practices and equipment on output.
- This information is crucial for addressing problems of production efficiency.
- Accurate determination of the effects of technical practices necessitates maintaining records and complete farm accounts.
- Agricultural economists rely on bookkeeping and accounting sciences for rules and procedures to gather accurate data on farm business phases.
- Statistics is another vital science for agricultural economists, aiding in the collection, analysis, and evaluation of data related to specific farm problems.
- Decision-making under uncertainties requires insights from psychology alongside economics.
- Sociology plays a role in production and resource use, addressing community organization and acceptance of new production techniques.
- Political science, when viewed through the lens of choice and decision-making, integrates with production and consumption principles.
- Physical resources and physical sciences define what can be produced, while economics determines how resources should be utilized in production.
- Other social sciences, including sociology, psychology, ethics, and political science, outline the limitations on choices imposed by laws, customs, and values of individuals and groups.
Industrial Development and Agriculture
- The economic history of many advanced countries reveals that revolutions in the agricultural sector preceded and facilitated revolutions in the industrial sector.
- Industrial development requires capital for investment, labor for factory operations, raw materials for inputs, and demand for products.
- A developed agriculture supplies all these essential components for the rapid growth of the industrial sector.
- Conversely, a thriving industrial sector acts as a catalyst for further development in agriculture.
- Over time, the agricultural sector increasingly relies on the industrial sector for its development, leading to interdependence between both sectors.
- It is no longer productive to debate industrial development versus agricultural development; the focus should be on how each sector can enhance the other.
- The linkage between agriculture and industry operates through two primary channels: production and demand.
- Agriculture requires industrial inputs like fertilizers and pesticides, while agro-based industries depend on agricultural raw materials.
- Income generated in the agricultural sector creates demand for industrial goods, and vice versa, incomes from the industrial sector generate demand for agricultural products.
- To quantify these linkages, the transactions between the sectors can be illustrated using input-output tables.
Significance of Agricultural Economics
- Agricultural economics is not fundamentally different from general economics; it applies the same economic principles and methodologies relevant to both agriculture and industry.
- Concepts such as demand, supply, value, and price analysis are applicable in both sectors.
- The question arises: why study agricultural economics separately? While production goals and management decisionsare similar, there are key differences that warrant a distinct study.
- Agriculture uniquely combines mode of life and business enterprise, influenced by sociological, political, and sentimental factors, unlike modern industry.
- Farmers primarily produce for their own needs, maintaining a level of self-sufficiency, especially prevalent in underdeveloped countries.
- Many agricultural commodities are joint products, making it difficult to separate costs associated with different outputs, unlike in industrial production.
- Agriculture requires a greater proportion of land relative to other factors of production, contributing to the law of diminishing returns and the significance of land tenure systems.
- Farming is typically conducted in small-sized units, limiting opportunities for division of labor and large-scale organization, common in industry.
- Combinations or cooperatives are challenging in farming due to numerous small farm holdings, leading to intense competition among farmers.
- Farmers have limited control over production, leading to potential maladjustments—overproduction at times of low prices and underproduction when prices are high.