Chapter 1What Is Economics?Contents: General OverviewMajor Areas of EconomicsEconomic Research in Agricultural and Natural ResourcesBiology and EconomicsEconomics in the Policy ProcessThe Economics ProfessionSubdiciplines of Environmental and Resource EconomicsGeneral OverviewEconomics analyzes and evaluates what people produce and consume; the patternsof trade (what is bought and sold and at what price); and how time is allocated, income isdistributed, and wealth is accumulated.Economics also analyzes the behavior of individuals (consumers, producers, andfarmers), institutions, nations, and the global economy. Economic research is both positive(explains behavior) and normative (evaluates outcomes and presents policies to improve thesituation).The key assumption in economics is that individuals are rational and pursue self-interest. Economics tries to predict behavior based on these assumptions under alternativeconditions.Economists put much effort in understanding the behavior of prices andperformance of markets. Economists also analyze outcomes under alternative legal systems,property right regimes, and community arrangements. Understanding and comparingperformances of alternative institutions is a major interest to economists.Major Areas of EconomicsMicroeconomics: Studies the behavior of individuals (consumers, firms) and theirinteractions within markets. Provides basic theory to the more applied field.Macroeconomics: Analyzes the performances of the economy as a whole. Attempts tounderstand and predict unemployment and inflation rates and the causes ofrecession and depression. It also provides the foundation for governmentintervention in the economy.International Trade: Analyzes exchange between countries. It explains patterns ofexport and import, relative strength of currencies, etc.Public Economics: Analyzes when and how the government should interfere in theeconomy to finance government. It develops methodologies for assessing publicprojects and compares the performance of alternative taxation schemes.Development Economics: Studies economies in less-developed countries. Tries toanalyze issues of poverty, industrialization, and agricultural reform.Industrial Organization: Studies the behavior of industries with noncompetitive-2-markets. Analyzes the behavior of companies with market power in terms ofproduct development, promotion, pricing, and sales and especially interested in theinteraction between firms.Game Theory: A new conceptual approach to studying strategic behavior in theeconomy. It plays a growing role in industrial organization and the branches ofeconomics.Econometrics: Develops methodologies to apply statistical techniques to analyzeeconomic issues. Econometrics is used to provide estimates of economic variableand to test economic theories.Agricultural Economics: Studies the behavior of the agricultural sector. Issues include:a. Farm Managementb. Agricultural Prices and Tradec. Agricultural Policyd. Rural DevelopmentEnvironmental and Resource Economics: Analyzes patterns of use of naturalresources—both nonrenewable (oil, minerals) and renewable (forests, fish).Studies issues of environmental quality and pollution control. Investigatesmanagement of ecosystems, conditions for resource preservation, and sustainability.Other Fields: Labor Economics, Law and Economics, Public Health EconomicsAll fields of economics use similar tools and follow the same logic. However,applied fields adjust the theory to the peculiarities of the problems they address. Ouremphasis will be on microeconomics and how it applies to issues of agriculture, theenvironment, and resource management.Economic Research in Agricultural and Natural ResourcesPositive Research: Explains choices and predicts outcomes. For example: studiesanalyze choices of conservation technology by farmers and estimate the likelihoodof adoption of new technologies under alternative policies.Quantitative Studies: Estimate prices and quantities of food products. Predict impact ofpolicy. Two important concepts in price estimation are supply and demand.Demand denotes how much people want to buy at a given price. Demand changeswith price and income. Supply is the amount producers will be willing to sell as a functionof price. Supply changes with the price and weather.Economics recognizes the importance of risk and uncertainty in the analysis ofchoices. Studies on risk:• show that increase in uncertainty reduces production levels.• explain the evolution of alternative insurance schemes to address risky situations.• predict willingness to pay to reduce risk.• are used to design crop insurance.-3-Normative Studies: Determine efficient outcomes from a societal perspective.Economic models show that markets may be the most efficient mechanisms toallocate resources under some circumstances (the invisible hand makes all people better offwhen they trade). However, there are situations of market failure (i.e., when markets lead tosuboptimal outcomes).Policy research incorporates normative and positive elements. For example,research on pesticides addresses:• Pesticide productivity.• Health effects on pesticides.• Impacts of alternative policies:- Banning chemicals- Taxing chemicals- LabelingPolicy impacts include the overall economy; consumers, producers, andemployment; and comparisons of alternative policies.Research on agricultural policy include:• Impacts of subsidy programs and price-support policies.• Design of alternative mechanisms for privatizing agricultural trade.• Impacts of GATT and NAFTA on agricultural trade.International trade considerations are important elements of economic analysis.There is much evidence that society and the world gain from free trade. Barriers to tradecause losses and lead to trade wars.Biology and EconomicsBiological knowledge is essential to policy modeling. Economists need biologists todevelop key relationships in many areas, for example:In pest control this includes:• Pest management regime.• Productivity of pesticides.• Resistance dynamics.• Predator/prey dynamics.• Health effects of pesticides.• Environmental effect of pesticides.Incorporation of economics of biology will lead to:• Design of pesticide taxes.• Subsidies for biological control, scouting.• Pesticides tolerance of food.-4-In the soil erosion area, scientists provide:• Data on soil erosion.• Performance measures of tillage practices.•