Economics of Agriculture
(Econ-4111)
Mohammed Adem (PhD)
Department of Economics
College of Business and Economics
Bahir Dar University
Bahir Dar, Ethiopia
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Course Content
1. Introduction
2. Economics of Agricultural Development
3. Producer Decision making
4. Agricultural marketing
5. Agricultural Finance
6. Uncertainty and Farm Decision making
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Main References
• Soni, R. N. (1995) Leading Issues in Agricultural Economics:
Theoretical and Applied, Delhi.
• Ghatak, S. and Ingersent (1996) Agriculture and Economic
Development, Cambridge University Press: Cambridge.
• Ellis, Frank (1992) Agricultural Policies in Developing
Countries, Cambridge University Press: Norwich.
• Ellis, Frank (1993) The Peasant Economics, Farm Households
and Agrarian Development (second edition), Cambridge
University Press.
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Course Requirements
Assessment Method Weight Tentative Date
Mid Exam 25 Percent Various
Term paper 25 Percent -
Final Exam 50 Percent Official
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Contact Information:
• E-mail:
➢[email protected]
• Office:
➢ Office College Administration Block
➢G+1 #20
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CHAPTER ONE
INTRODUCTION
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Outline
1.1 Definition and Scope of Economics of Agriculture
1.1.1 Definition of Agricultural Economics
1.1.2 Scope of Agricultural Economics
1.2 Historical Development of Agriculture
1.3 Role of Agriculture in Economic Development
1.4 Interdependence of Agriculture and Industry
1.5 Unique Features of the Agricultural Sector
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1.1.1 Definition of Agricultural Economics
• The word Agricultural Economics is made up of two words -
agriculture and economics.
• Agriculture had been associated with production of crops
(known as farming) for a long period of time.
• Agriculture and farming were synonymous till farming was not
commercialized and was done more or less on subsistence
basis.
• Some other off-farm activities, like supply of farm inputs such
as seed, fertilizers, credit, insurance, veterinary services etc.
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1.1.1 Definition of Agricultural Economics
• Modern agriculture has much wider scope
➢it includes the farm supply industries as well as the product-
processing industries and distribution industries.
• Industries closely related to farming are known as agriculturally
related industries or agri-businesses
• Agriculture, at present includes
▪ production of crops
▪ forestry and
▪animal husbandry
• Agriculture covers something more than mere operations on a
farm
• marketing, processing and distribution of agricultural products
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1.1 Definition of Agricultural Economics
• Economics is the science of analyzing the use of limited resources
to achieve desired ends.
• It is a social science which studies how man satisfies his wants
through the allocation of scarce resources.
• Agricultural Economics is an applied science which is mainly
concerned with economic problems (production, marketing and
financing) that are associated with farmers' effort to make a living.
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1.1 Definition of Agricultural Economics
• Thus, Agricultural Economics is concerned with the evolving of
appropriate principles that govern the amount of land, labor and
capital, which a farmer should use to farm most efficiently.
• Agricultural economists can formulate the methods, techniques
and procedures by which the problems of agriculture can be
tackled.
• Agricultural Economics is an applied science
➢It is concerned with the identification, description and
classification of the economic problems of agriculture
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1.1.2 Scope of Agricultural Economics
• How to apply 'micro-economics' or 'price theory’ to the field
agriculture in terms of production, consumption and exchange
• It covers all the four branches of economic life of the agricultural
community; namely, production, exchange, distribution and
consumption
• It is also related with choosing the most profitable enterprise and
operating it at the optimum scale,
• Combining the different factors of production in the most
economical proportion, buying and selling
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1.2 Historical Development of Agriculture
• The domestication of plants and animals started in the new stone
age (Neolithic period)
• A major advance in the agriculture came with the development of
irrigation.
▪ Irrigation became the economic basis of the greater valley civilization
of the Nile and the Mesopotamia
• The most important change was the slow adaptation of technology
which was reaping knives, sickles, grain storing pits, grinding
stones, and ox-drawn plough.
▪ This plough invented by the farmers of south west Asia
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1.2 Historical Development of Agriculture
• In Ethiopia and the west coast Africa agriculture developed along
the margins of tropical forests and savannas lands where warm
and moist climate conditions existed.
• The major plants domesticated in tropical Africa are yam and oil-
palm trees.
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1.3 The Role of Agriculture in Economic Development
• The agricultural sector provides factor, product, market,
foreign exchange contributions to the economy
▪ which are considered vital for sustained economic
growth
The product contribution
• It provides food to the ever increasing population in an
economy
• In most developing countries, the domestic agricultural
sector is the principal source of food for consumption
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1.3 The Role of Agriculture in Economic Development
• The other product contribution made by agriculture for the
development of the non-agricultural sectors of the economy.
▪ It provides raw materials for the secondary sector
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The market contribution: Expanded market for the products
of other sectors
• Agriculture provides an expanding market for the products of
the other sectors.
• In the initial stages of development of the economy,
agricultural sector also finds the income of its people
increasing
• This increased income, in turn, leads to an additional demand
for the products of other sectors,
• Not only for consumption purposes but also for
production
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The market contribution: Flow of Agricultural
products to other sectors of the economy
• As agriculture develops and its production becomes more
market oriented, many other firms come in to existence
▪generally non-agricultural firms in character
• These firms include those providing processing, packing and
distribution services.
• An agricultural development through providing market for
agricultural inputs and consumer’s goods, promotes the
development of industrial sector.
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The market contribution: Flow of Agricultural
products to other sectors of the economy
• Developed industrial sector, in turn helps in the development of
the agricultural sector
▪through the spread of modern technology in agriculture and
by providing an expanded market for agricultural products
• This is a virtuous process that gives rise to institutions by
facilitating two way exchanges of commodities.
• Farmer's expenditures on industrial goods-both consumer
goods (clothes, furniture, household utensils, building
materials) and producer goods ( fertilizers, pesticides, tools
and implements )
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The market contribution: Development of
International Trade
• Surplus products from the agricultural sector can move to the
international market.
• This, in turn, can result in the flow of necessary capital as well as
consumer goods from outside.
• The growth process of the economy as a whole can thus gain
momentum.
• So, agriculture contributes to the development of international
trade by providing factors for non agricultural sectors
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The factor contribution
• A developing country needs large amount of capital to finance
infrastructures, basic and heavy industries.
• Increasing the marketable surplus from the rural sector without
reducing the consumption levels of farm population can provide
capital.
• Labor as the principal input can be a source of capital formation
when it is reduced on the farm and employed in other productive
works.
• The agricultural sector also produces outputs which can be used as
raw materials for other sectors of the economy
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Foreign Exchange Contribution
• In an open economy, agricultural sector can be a source of
foreign exchange earnings
• An expansion of agricultural exports offers a number of potential
advantages not shared by exports of manufactured goods
• export outlets in developed countries may provide capital and
technical advice on production and product improvement.
• The benefits of such advice may spread from the export sector to
the production of food for the domestic market.
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• In general, the agriculture sector occupies a central place in the
national economy.
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1.4 Interdependence Of Agriculture And Industry
• Industry provides market for the products of the agricultural
sector
• Provision of Modern Agricultural Inputs
• Reduction in the pressure of population on land
• Supply of Consumption Goods
• Provision of Infrastructure for Agricultural Development
• Intellectual Environment
➢Such an environment includes creation of new skills, capital
formation, decreasing birth rate, technical innovations creation
of an entrepreneurial class.
➢
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1.5 Unique Features of the Agricultural Sector
• Land is the most important factor of production in agriculture
• Nature plays an important role in agricultural production
• Use of machinery is limited in Agriculture
• Price elasticity of supply of agricultural products is less than that
of the industrial products.
• Elasticity of demand for most of the agricultural products is low
• Seasonal nature of turnover of agricultural production.
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1.5 Unique Features of the Agricultural Sector
• Many of the agricultural products are perishable in
nature
• Area of operation for a worker is relatively large in
agriculture as compared with that in an industry
• A farm is a multi-product production unit
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