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The Acharya N. G. Ranga Agricultural University (ANGRAU) (formerly Andhra Pradesh Agricultural University, APAU) was established in 1964. It has an infrastructure of nine colleges, 58 research stations, eight agricultural polytechnics, one horticultural polytechnic, one multipurpose polytechnic, 22 District Agricultural Advisory.
ANGRAU Notes on Principles of Agricultural Economics Course:
Economics – Meaning, Definitions, Subject matter of Economics – Traditional
approach – consumption, production, exchange and distribution
Economics is popularly known as the “Queen of Social Sciences”. It
studies economic activities of a man living in a society. Economic activities are those
activities, which are concerned with the efficient use of scarce means that can satisfy the
wants of man. After the basic needs viz., food, shelter and clothing have been satisfied,
the priorities shift towards other wants. Human wants are unlimited, in the sense, that as
soon as one want is satisfied another crops up. Most of the means of satisfying these
wants are limited, because their supply is less than demand. These means have alternative
uses; there emerge a problem of choice. Resources being scarce in nature ought to be
utilized productively within the available means to derive maximum satisfaction. The
knowledge of economics guides us in making effective decisions. The subject matter of
economics is concerned with wants, efforts and satisfaction. In other words, it deals with
decisions regarding the commodities and services to be produced in the economy, how to
produce them most economically and how to provide for the growth of the economy.
Subject matter of economics
Economics has subject mater of its own . Economics tells how a man utilises his
limited resources for the satisfaction of unlimited wants. Man has limited amount of time
and money. He should spend time and money in such away that he derives maximum
satisfaction. A man wants food, clothing and shelter. To get these things he must have
money. For getting money he must make an effort. Effort leads to satisfaction. Thus,
wants- efforts- satisfaction sums up the subject mater of economics initially in a primitive
society where the connection between wants efforts and satisfaction is direct .
Divisions of Economics
The subject matter of economics can be explained under two approaches viz.,
Traditional approach and Modern approach.
It considered economics as a science of wealth and divided it into four divisions
viz., consumption, production, exchange and distribution
1. Consumption: It means the use of wealth to satisfy human wants. It also means
the destruction of utility or use of commodities and services to satisfy human
2. Production: It is defined as the creation of utility. It involves the processes and
methods employed in transformation of tangible inputs (raw materials, semi3
finished goods, or subassemblies) and intangible inputs (ideas, information, know
-how) into goods or services.
3. Exchange: It implies the transfer of goods from one person to the other. It may
occur among individuals or countries. The exchange of goods leads to an increase
in the welfare of the individuals through creation of higher utilities for goods and
4. Distribution: Distribution refers to sharing of wealth that is produced among the
different factors of production .It refers to personal distribution and functional
distribution of income. Personal distribution relates to the forces governing the
distribution of income and wealth among the various individuals of a country.
Functional distribution or factor share distribution explains the share of total
income received by each factor of production viz., land, labour, capital and
Modern Approach – Microeconomics and macroeconomics - Methods of economic
investigation – Deduction & , Induction
Modern Approach :
This approach divides subject matter of economics into two divisions i.e., micro
economics and macro economics. The terms „micro-„ and „macro-„ economics were first
coined and used by Ragnar Frisch in 1933.
1. Micro-Economics or Price Theory:
The term „micro-economics‟ is derived from the Greek word „micro‟, which means small
or a millionth part. It is also known as „price theory‟. It is an analysis of the behaviour of
small decision-making unit, such as a firm, or an industry, or a consumer, etc. It studies
only the employment in a firm or in an industry. It also studies the flow of economic
resources or factors of production from the resource owners to business firms and the
flow of goods and services from the business firms to households. It studies the
composition of such flows and how the prices of goods and services in the flow are
A noteworthy feature of micro-approach is that, while conducting economic
analysis on a micro basis, generally an assumption of „full employment‟ in the economy
as a whole is made. On that assumption, the economic problem is mainly that of resource
allocation or of theory of price.
Importance of Micro-Economics: Micro-economics occupies a very important place in
the study of economic theory.
Functioning of free enterprise economy: It explains the functioning of a free
enterprise economy. It tells us how millions of consumers and producers in an
economy take decisions about the allocation of productive resources among millions
of goods and services.
Distribution of goods and services: It also explains how through market mechanism
goods and services produced in the economy are distributed.
Determination of prices: It also explains the determination of the relative prices of
various products and productive services.
Efficiency in consumption and production: It explains the conditions of efficiency
both in consumption and production. Formulation of economic policies: It helps in
the formulation of economic policies calculated to promote efficiency in production
and the welfare of the masses.
Limitations of Micro-Economics: Micro-economic analysis suffers from certain
It does not give an idea of the functioning of the economy as a whole. It fails to
analyse the aggregate employment level of the economy, aggregate demand, inflation,
gross domestic product, etc.
It assumes the existence of „full employment‟ in the whole economy, which is
2. Macro-Economics or Theory of Income and Employment:
The term „macro-economics‟ is derived from the Greek word „macro‟, which means
“large”. Macro-economics is an analysis of aggregates and averages pertaing to the
entire economy, such as national income, gross domestic product, total employment, total
output, total consumption, aggregate demand, aggregate supply, etc. Macro-economics
looks to the nation's total economic activity to determine economic policy and promote
Importance of Macro-Economics:
It is helpful in understanding the functioning of a complicated economic system. It
also studies the functioning of global economy. With growth of globalisation and
WTO regime, the study of macro-economics has become more important.
It is very important in the formulation of useful economic policies for the nation to
remove the problems of unemployment, inflation, rising prices and poverty.
Through macro-economics, the national income can be estimated and regulated. The
per capita income and the people‟s living standard are also estimated through macroeconomic
Limitations of Macro-Economics:
Individual is ignored altogether. For example, in macro-economics national saving is
increased through increasing tax on consumption, which directly affects the consumer
The macro-economic analysis overlooks individual differences. For instance, the
general price level may be stable, but the prices of food grains may have gone up
which ruin the poor. A steep rise in manufactured articles may conceal a calamitous
fall in agricultural prices, while the average prices were steady. The agriculturists
may be ruined.
DEFINITIONS OF ECONOMICS
The word economics has been derived from the Greek Word “OIKONOMICAS” with “
OIKOS” meaning a household and “ NOMOS” meaning management. Kautilya, the
great Indian statesman, named his book on state crafts as „Arthashastra‟.
WEALTH DEFINITION OF ECONOMICS : Adam smith defined Economics as “
An enquiry into the nature and causes of wealth of nations” in his book, entitled „ Wealth
of Nations‟. He is regarded as the “Father of Economics”.
Criticisms of Adam smith definition:
WELFARE DEFINITION OF ECONOMICS : Alfred Marshall in his book
“Principles of Economics” defined “Political Economy or Economics as a study of
mankind in the ordinary business of life, it examines that part of individual and social
action which is most closely connected with the attainment and with the use of the
material requisites of well- being . Thus it is on the one side a study of wealth, and on
the other, and more important side, a part of the study of man.
Criticisms of Alfred Marshall definition:
SCARCITY DEFINITION OF ECONOMICS: In his publication „Nature and
Significance of Economic Science‟ Lionel Robbins formulated his conception of
Economics based on the scarcity concept. “Economics is the science which studies
human behaviour as a relationship between ends and scarce means which have alternative
GROWTH DEFINITION OF ECONOMICS: John Maynard Keynes is known as the
Father of Modern Economics. He defined economics as “the study of the administration
of scarce resources and of the determinants of employment and income”.
In the words of Nobel prize winner Prof. Samuelson, “Economics is the study of how
people and society end up choosing with or without the use of money, to employ scarce
productive resources that could have alternative uses, it produces various commodities
over time and distributes them for consumption, now or in the future, among various
persons and groups in society. It analyses costs and benefits of improving patterns of
Economics analyses the economic problems of the society. It plays a major role in the
economic development of the country by proposing the optimum allocation of resources.
Knowledge of economics is useful in understanding various national and international
events and trends.
Amarthya Sen, Bharat Ratna recipient was awarded Nobel Prize for Economics.
Methods of Economics Investigation :
There are two methods of economic investigation that are used in economic
theory i.e., 1) Deductive method and 2) Inductive Method
1. Deductive Method: This method involves reasoning or inference from
the general to the particular or from the universal to the individuals. It is
also known as the abstract, analytical, hypothetical or apriori method.
Deduction involves four steps:
(1) Selecting the problems
(2) Formulating the assumptions
(3) Formulating the hypothesis through the process of logical reasoning whereby
inferences are drawn and
(4) Verifying the hypothesis.
2. Inductive Method: This method is also known as Concrete method,
historical method or realistic method. It involves reasoning from particulars to the general
or from the individual to the universal. This method derives economic generalisations on
the basis of experiments and observations. In this method detailed data are collected on
certain economic phenomenon and effort is then made to arrive at certain generalizations
which follow from the observations collected.
Is Economics a Science or an Art
Science is a systematized body of knowledge in which the facts are so arranged
that they speak for themselves. Judged by this standard, economics is certainly a
Economics is also an art because it lays down precepts or formulas to guide
people to reach their goals.
Economics therefore is a science as well as an art.
Economics – A Social Science
Economics deal with the activities of people living in an organized community
or society, in such activities which relate to the earning and use of wealth or with the
problems of scarcity, choice and exchange. Hence it called a social science.
Positive Economics and Normative Economics:
1. Positive economics is concerned with „what is‟ whereas Normative economics is
concerned with „what ought to be‟.
2. Positive economics describe economic behaviours without any value judgment while
normative economics evaluate them with moral judgment.
3. Positive economics is objective while normative economics is subjective.
4. The statement, “ Price rise as demand increase” is related to positive economics,
whereas the statement, “ Rising prices is a social evil” is related to normative economics.
Agricultural Economics – Definitions, Meaning, Importance of Agricultural
Economics – Branches of agricultural economics
A study of economic principles, with emphasis on their application to the solution of
farm, agribusiness, and agricultural industry problems in relationship to other sectors is
known as Agricultural Economics. In other words, it applies principles of economics to
issues of agricultural production, natural resources, and rural development. It mainly
focuses on principles of microeconomics.
Agricultural economics began in the 19th century as a way to apply economic
principles and research methods to crop production and livestock management. The roots
of the discipline, however, can be found in the writings of the classical economists like
The word, agriculture comes from the Latin word ager, referring to the soil and
cultura, to its cultivation. Agriculture, in its widest sense can be defined as the cultivation
and /or production of crop plants or livestock products. It is synonymous with farming:
the field or field –dependent production of food, fodder and industrial organic materials.
Having known the meaning of agriculture, let us know what economics is.
Economics is the science that studies as to how people choose to use scarce productive
resources to produce various goods and to distribute these goods to various members of
society for their consumption. Now having defined agriculture and economics, we look
into the field of agricultural economics.
Agricultural economics is an applied field of economics in which the principles of
choice are applied in the use of scarce resources such as land, labour, capital and
management in farming and allied activities. It deals with the principles that help the
farmer in the efficient use of land, labour and capital. Its role is evident in offering
practicable solutions in using scarce resources of the farmers for maximization of
Prof. Gray has defined agricultural economics as “The science in which the
principles and methods of economics are applied to the special conditions of agricultural
According to Prof.Hibbard, “Agricultural economics is the study of relationships
arising from the wealth-getting and wealth-using activity of man in agriculture”
Snodgras and Wallace defined agricultural economics as “an applied phase of
social science of economics in which attention is given to all aspects of problems related
Importance of agricultural economics
Akin to economics, the field of agricultural economics finds to seek relevance between
cause and effect using the most advanced methods viz, production functions and
programming models. It uses theoretical concepts of economics to provide answers to the
problems of agriculture and agribusiness. Initially earnest efforts were made by the
economists to use the economic theory to agricultural problems. Now the subject matters
of agricultural economics is enriched in many directions and fields taking the relevant
tools of sciences particularly mathematics and statistics. Agricultural depression which
occurred in last quarter of 19th century and middle of 20th century brought about
increased attention and concern to find out plausible cause and solutions for world
agricultural depression. Here in this context the contribution made by agronomists,
economists, horticulturists, etc., is noteworthy. Agriculture is the integral part of the
world food system, having the foundation links between crops and animal production
system. Agricultural economists here have to play a major role in understanding the
intricacies involved in the foundation systems. Knowledge regarding problems in
production, finance, marketing and government policies and their impact on production
and distribution is very essential to find out suitable solutions for the farm problems.
Students of agricultural economics are taught the subject disciplines viz.,
microeconomics, macroeconomics, agricultural production economics, farm
management, agricultural marketing etc., to fulfill the requirements.
Agricultural production economics- Meaning- Definitions- Subject matter –
Objectives - Farm Management – Meaning – scope – Definitions- Objectives
Agricultural production economics
Agricultural production economics is a field of specialization within the subject of
Agricultural Economics. It is concern with the selection of production pattern and
resource use efficiency in order to optimize the objective function of farming community
or the nation within a frame work of limited resources. The goals of agricultural
production economics are:
(1) To provide guidance to individual farmers in using their resources most
(2) To facilitate the most efficient use of resources from the stand point of economy.
Agricultural production economics is an applied field of science wherein the
principles of choice are applied to the use of capital, labour, land and management
resources in the farming industry.
Agricultural production economics involves analysis of production relationships and
principles of rational decisions in order to optimize the use of farm resources on
individual farms and to rationalize the use of inputs from nation‟s point of view. The
primary interest is applying economic logic to problems that occur in agriculture.
Agricultural production economics is concerned with the productivity of inputs.
As a study of resource productivity, it deals with resource use efficiency, resource
combination, resource allocation, resource management and resource administration.
The subject matter of production economics involves topics like factor-product
relationship, factor-factor relationship and product- product relationship, size of farm,
returns to scale, credit and risk and uncertainty, etc.
1. To determine and outline the conditions which give the optimum use of capital,
labour, land and management resources in the production of crops and livestock.
2. To determine the extent to which the existing use of resources deviates from the
3. To analyse the forces which condition existing production pattern and resource
4. To explain means and methods in getting from the existing use to optimum use of
In the context of increased accent on commercialization there is a greater need to
improve the managerial abilities of the farmers. So far the managers in general have
responded admirably to technological changes that occurred in Indian agriculture. But
response of some of the farmers is not in line with needed direction. We can always
differentiate those farmers performing against those not performing. Hence, it is of
paramount importance for the farm managers to identify the changes that take place and
respond suitably, for any lapse on his part does not help him to survive in the changing
economy. This speaks of the need for the managers to sharpen the skills to tackle varying
problems that crop up from time to time in the organization of farm business.
The role of farm management, therefore, is to supply the information from the
farmers for sound planning. All farm management tools are helpful to the farmers in
solving their managerial problems for successful operation of the farm business.
Farm management is considered to fall in the field of microeconomics. It treats every
farm as separate unit because of differences in the ability of resources, problems and
potentiality. The main concern of farm management is the farm as a unit. Farm
management deals with the allocation of inputs at the level of individual farms. The
objective of farm management is to maximize returns from the farm as a whole. It is
interested in the profitability along with practicability. What crops, livestock enterprises
and their combination to grow, what amount of resources to be applied, how the various
farm activity to be performed, etc., all these fall within the scope of farm management.
Farm management is defined as the science that deals with organization and operation of
the farm in the context of efficiency and continuous profits (J. N.Efferson)
Farm management is defined as the art of managing a farm successfully as measured by
the test of profitableness (Gray)
Farm management is a branch of agricultural economics, which deals with wealth earning
and wealth spending activities of farmer in relation to the organization and operation of
the individual farm unit for securing maximum possible net income (Bradford and
1. To examine production pattern and resource use on the farm.
2. To identify the factors responsible for the present production pattern and resource
use on the farm.
3. To determine the conditions of optimality in the resource use and the production
pattern on the farm.
4. To analyse the extent of sub optimality in the resource use on the farm, and
5. To suggest ways and means in getting the present use of resources to optimality
on the farm.
Agricultural finance – Meaning – Definitions – micro vs macro finance –need for
agricultural finance-Agricultural marketing – meaning, definition , importance of
Agricultural finance generally means studying, examining and analyzing the
financial aspects pertaining to farm business, which is the core sector of the country. The
financial aspects include money matters relating to production of agricultural products
and their disposal.
According to Murray (1953), “It is an economic study of borrowing finds by farmers; of
the organization and operation of farm lending agencies, and of society‟s interest in credit
According to Tandon and Dhandyal (1962), “as a branch of agricultural economics,
which deals with the provision, and management of bank services and financial resources
related to individual farm units”
Micro Vs Macro finance
Agricultural finance is viewed both at macro level and micro level. Macro finance
deals with the different sources of raising funds for agriculture as a whole in the economy
and it is also concern with the lending procedures, rules, regulations, monitoring and
controlling procedures of different agricultural institutions. Thus, macro finance pertains
to financial agriculture at the aggregate.
Micro finance deals with financing the individual farm business units and it is
concern with the study as to how the individual farmer considers various sources of credit
to be borrowed from each source and how he allocates the same among the alternative
uses within the farm.
Need for agricultural finance
Given the requirement of finance in agricultural sector, very few farmers will have
capital of their own to invest in agriculture. Therefore, a need arises to provide credit to
all those farmers who require it. Even if we look into the expenditure pattern of the farm
families, they have hardly any savings to fall back on. Therefore, credit enables the
farmers to advantageously use seeds, fertilizers, irrigation, machinery, etc. Farmer has to
invariably search for a source which supplies adequate farm credit. Above all, small and
marginal farmers constitute majority of the farming community.
The term, agricultural marketing implies selling of goods and services by the farmers and
ranchers. It includes various functions viz., assembling, transportation, storing, buying,
selling, standardization, grading, processing, sales promotion, etc.
According to Thomsen, “agricultural marketing comprises all the operations, and
the agencies conducting them involved in the movement of farm produced foods, raw
materials and their derivatives, such as textiles, from the farms to the final consumer and
effects of such operations on farmers, middlemen and consumers.”
Importance of agricultural marketing
Marketing gives signals to increase production and thereby ensures the availability of
goods, and services. If the marketing activity is developed, demand for goods increases as
a result, production of goods also increases. Due to increased production, the demand for
inputs increases i.e., demand for input is derived from the increase in demand for the
output. To distribute the required input to the farm sector, the input marketing has to be
Basic terms and concepts in economics – Goods & Services – free and economic
goods, Utility – Cardinal and Ordinal approaches. Characteristics of utility - Forms
BASIC TERMS AND CONCEPTS IN ECONOMICS
GOODS and SERVICES
Economics is concerned with the production and distribution of goods and services.
Goods: It is defined as anything that satisfies human wants or needs.
Characteristic features of goods:
1. They are tangible in nature
2. They are the material outcome of production
Example: Foodgrains, Machinery, Seeds, Fertilizers etc.,
Services would be the performance of any duties or work for another or professional
Characteristic Features of Services:
1. They are intangible
2. Non- Materialistic
Example: Services rendered by agricultural labourers, doctors, teachers etc.,
Classification of Goods
The goods are classified based on supply, durability, consumption and transferability.
1) Based on Supply: The goods are categorized as economic goods and free goods based
on the supply criteria
Free goods are those goods that exist in lenty that can be used as much as we like. They
are gifts of nature and used without payment Example: Air, sunshine etc.
The economic goods, on the other hand, are scarce and can be had only on payment.
They are limited and generally man- made and hence those can be available only on
payment. In Economics, we are concerned with economic goods only. Economic goods
Thus there would have been no science of economics if all goods had been free goods.
The distinction between free goods and economic goods, of course is not permanent, for
instance air is a free good but when we receive it under fan it is an economic good.
2) Based on Consumption: The Goods are categorized as Consumer goods and Producer
Consumer goods are those which yield, satisfaction directly. They are used by consumer
directly to satisfy the wants Example: food, clothing, etc. These goods are known as the
Goods of First order.
Producer goods are these 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. They are also termed goods of the second order.
.3) Based on Durability: This classification emphasized on the nature of the goods and
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
4) Based on Transferability:
External Material Transferable good. Example: Land, Buildings etc.,
External material non-Transferable good. Example: Degree Certificate, PAN Card etc.,
External non material transferable good. Example: Goodwill of a business
External non material Non-transferable good. Example: Friendship,light
Internal non material Non-Transferable good. Example: Intelligence Quotient ,ability
CLASSIFICATION OF GOODS
SUPPLY CONSUMPTION DURABILITY TRANSFERABILITY
Free Economic Consumer Producer Mono Poly External Internal
Goods Goods Goods Goods Period goods Period goods
Material non material
Transferable Non- Transferable Non - transferable transferable goods
goods goods goods
The basis of consumer behaviour is that people tend to choose those goods
and services they value high. Based on this premise economists developed the notion of
utility to describe the consumption patterns adopted by the consumers.
Definition : Utility means the power to satisfy a human want. Any commodity or
service which can satisfy a human want is said to have utility
Characteristics of Utility :
1. Utility is subjective: Utility varies from person to person, for Eg:- A high yielding
variety seed gives more utility to the farmer. The same seed provided to a cloth
merchant gives zero utility.
2. Utility varies with purpose : For Eg:- Coconut oil is used as coking oil or hair oil or
3. Utility varies with time : The Intensity of a person‟s desire for a commodity is
different at various time periods, for Eg:- Labour requirement for paddy is peak
during transplantation harvesting and threshing period than other operations taken
up in paddy cultivation.
4. Utility varies with ownership : Ownership of a good creates greater utility from a
good than when it is hired Eg:- owning a tractors gives more utility than hiring it.
5. Utility need not be synonymous with pleasure: For Eg:- A sick man has to consume
medicines for getting cured. He does not get pleasure during the process.
6. Utility does not mean satisfaction: utility is distinct from satisfaction. It implies
potentiality of satisfaction in a given commodity. But the satisfaction is the end result
of consumption. Satisfaction is what we get and the utility is the quality in agood
which gives satisfaction.
KINDS OR TYPES OF UTILITY
The kinds or types of utilities are 1) Form utility 2) Place utility 3) Time utility and
4) Possession utility.
1. Form Utility : The Change in the form offers greater utility to the good than in its
original form. For example:
Acharya N G Ranga Agricultural University
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