CHAPTER ONE: INTRODUCTION

1.1. Definition and Scope of Economics of Agriculture

The term "agriculture" can be defined from two perspectives: economic activity and science.
Agriculture as an economic activity is the rearing of animals, cultivation of land to grow plants
and other life forms for food, fibre, fuel and raw materials which are used to sustain life.
Agriculture as a science is a broad multidisciplinary field that encompasses the parts of natural
and social sciences that are used in the practice and understanding of agriculture (production,
processing, marketing). For example, agribusiness, agricultural economics, plant sciences and
animal sciences are science disciplines related to agriculture. Agriculture is a way of life for rural
people. It is a purposeful work through which the elements in the nature are harnessed to produce
plants and animals for mankind.

Economics of Agriculture can be defined as the application of principles of economics to the

problems of agriculture. It 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 the
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 income. It mainly focuses on principles of
microeconomics, which examines the actions of individuals, households and firms.

Production of plants and animals should be towards the varieties with desirable economic
characteristics such as higher yield and marketability. Agricultural production technologies such
as machineries, chemicals and improved varieties should be affordable. Those are examples of
the role of economics in agriculture.

Historically, Agricultural Economics began in the 19 th 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 of the 1700s and
early 1800s. The works of Adam Smith, Thomas Malthus and David Ricardo discussed land as a
factor of production and issues of human population versus its ability to produce food.

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Since the 1970s, the primary focus topics of Agricultural Economics includes: agricultural
environment and resources; risk and uncertainty; consumption and food supply chains; prices
and incomes; market structures; trade and development; and technical change and human capital.

1.2. Specific Feature of Agricultural Production

There are some unique features of the agricultural sector which make the sector distinct from
other sectors of the economy. Agriculture is different from other sectors in the following major
features:

1) Land is the most important factor of production in agriculture: Predominance of land in

agriculture has some important economic implications and these arise from some basic
characteristics of land as a factor of production. For example, land is fixed in supply. Its
supply can be increased only marginally. This means that in a particular region time will come
when more land cannot be brought under cultivation. After that, any increase in total
agricultural production will take place only through increase in its productivity brought about
by an improvement in the existing technology for production. Land also lacks portability. This
means that a given farm, the unit of agricultural production, will remain fixed in location, i.e.,
location of lands is predetermined. This in turn makes the problem of marketing of
agricultural produce quite important. It is the location (as well as creation) of markets (and not
of the farms) which has to be regulated so that the farmers are able to sell their produce
without any difficulty. However, in case of an industry, problems of marketing, other things
remaining the same, can be solved even by shifting the unit of production close to the market
itself. The fixed location of a farm in agriculture not only creates the problem of marketing of
its produce but also prevents it from moving closer to the source of some other important
inputs like power, skilled labor, irrigation, etc.
2) Nature plays an important role in agricultural production: The vagaries of nature greatly
influence agricultural production in one way or the other. The floods, the drought, the heat,
the cold, the diseases leave their impact on agricultural production both in terms of quality as
well as quantity. Dependence on nature has thus resulted in great deal of yield uncertainty in
agriculture. Thus, farmers as well as the government of a country have to adopt special
measures to minimize the impact of this uncertainty. These measures involve a direct or an
indirect cost and therefore reduce the profitability of agriculture.

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3) Use of machinery is limited in Agriculture: This is not to say that machinery cannot be used
in agriculture at all. It only implies that the production operations for which machinery is used
in agriculture are few in number. The main reason for this is the biological nature of
agriculture. For example, the plant germinates and grows without the aid of machinery but it
depends on nature. Machine is used mainly in operations up to the sowing of a crop or for
harvesting and for post harvesting operations. This feature of agriculture has an important
implication. According to Schultz, traditional agriculture can be transformed mainly by
changing the agricultural technology. For agriculture, this change in technology can be either:
a) Mechanical in nature involving greater use of machines like tractors, threshers,
harvesters etc., or
b) Chemical in nature resulting in greater use of fertilizers or insecticides, or
c) Biological in nature involving use of improved seeds etc.

As the use of machinery is limited in agriculture, chemical and biological innovations will have
to be relied up on to a great extent for improving agricultural production.

4) Price elasticity of supply of agricultural products is less than that of the industrial
products: Supply of agricultural products responds slowly to changes in their prices as
compared with the supply of industrial products. This difference is mainly because of the
difference in the nature of productive process involved in the two occupations. Agriculture
involves sowing, waiting and then harvesting of the crop. All this follows more or less a rigid
time schedule set by climatic requirements of the crops. Once the crop has been sown during
the sowing season, the area under it will remain unchanged till its maturity despite changes in
its price. Its supply will thus be insensitive to price changes so far as one crop season is
concerned. The supply of most of the industrial products, on the other hand, is generally more
price elastic when compared with agricultural products. This is because, in most of the
industries the inputs required are not limiting in character and there is no weather bound
schedule for starting or increasing the output of an industry or of all industrial products taken
together. Supply of any industrial product can be changed considerably at any time when so
required in response to changes in prices.
5) Elasticity of demand for most of the agricultural products is low: Most of the agricultural
products are used only for meeting the basic necessities of life, i.e., food and clothing. Their
demand will not change much even when the prices charged for them undergo a change. In
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 fact, price elasticity of demand for such products is less than unity. It is because of this
characteristic of the demand for agricultural products that Samuelson was tempted to say that
it all farmers worked hard and produce more, they would become poorer. The reason for this
lies in the fact that any increase in supply, demand curve remaining the same, will result in a
fall in price, and if the demand is inelastic, fall in price will be so much as would decrease the
total revenue of the producers even after the increased sales. This is what we call the
phenomenon of poverty among plenty. The inelastic demand for a product (or a group of
products) explains this phenomenon.
6) Seasonal nature of turnover of agricultural production: Agricultural production on any
farm is a seasonal occupation. Production takes place only at specific periods of the year. The
consequent concentration of activities in a limited period and the consequent temporary
requirements of ancillary services create special problems of transport, marketing, credit, etc.
7) Many of the agricultural products are perishable in nature: Some products of agriculture
like vegetables, fruit and milk have a very short life, a number of others deteriorate
considerable in quality if stored for more than one crop year. This feature of agricultural
products has two important implications. Firstly, the perishable nature of agricultural products
necessitates a large number of intermediaries who help in the quick movement of the products
from the farm to the final consumer. Secondly, as the storability of most of the agricultural
products for the next year is limited, no difference is generally make between the current
production and the available stock of a commodity when its overall supply position is
reviewed.
8) Area of operation for a worker is relatively large: An agricultural worker invariably moves
over a large area in order to attend to the jobs assigned to him, be it ploughing of the field or
its watering or the harvesting of crops. This is unlike the movement of a factory worker who
remains attached to a machine which itself is fixed in location. The relatively large area of
operation for an agricultural worker has economic implications. Firstly, supervision of the
workers engaged in an agricultural process is difficult. Secondly, the agricultural workers,
because of being scattered over a large area, have found it difficult to organize themselves in
to strong trade unions. The fact that many of these workers are casual labourers and shift from
farm to farm even in the same agricultural season, has further added to this difficulty.

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9) A farm is a multi-product production unit: This means that a farm is engaged in the
production of many independent products simultaneously. For example, each crop is
independent of every other crop and the farmer has to decide which crop to produce and
which not to produce. As a result, problems of resource allocation over different products
become more important in case of a farm than in case of a manufacturing firm which is
generally a single product firm or generally confines its production to a very few products.

1.3. Main Attributes of Traditional Agriculture

According to Schultz, traditional agriculture is an economic concept which is associated with a

particular type of equilibrium. As soon as that equilibrium is reached, agriculture can be said to
have become traditional in character. To him, the critical conditions underlying this type of
equilibrium are:

a) The state of the arts remains constant;

b) The state of preference and motives for holding and acquiring sources of income remains
constant; and
c) Both of the above states remain constant long enough for marginal preferences and
motives for acquiring agricultural factors as sources of incomes to arrive at an equilibrium
with the marginal productivity of these sources viewed as an investment in permanent
income streams and with net savings approaching zero.

According to this definition, agriculture can become traditional only if in the first instance, the
art of cultivation becomes static. The farmers use the same factors of production and in the same
manner as their fore fathers have been doing. Neither new factors of production are introduced
nor is there any change in the relative importance attached to the existing factors as sources of
income. When such a situation comes to prevail in agriculture, farmers, as a result of their long
experience, start expecting a well-defined and at the sometime, an unchanging pattern of returns
(in physical terms) to various factors being used in production. Such a certainty in returns, in
turn, will encourage agricultural production to move towards equilibrium. Farmers will continue
employing more and more of each of the existing factors till a situation arrives that the cost of
each factor becomes equal to its marginal return (at given input and output prices). Equilibrium
is then reached. And there is no incentive to invest beyond this point of equilibrium because the
marginal return to a factor of production will be less than its cost. So, there is no incentive to

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make additional savings. Such equilibrium will indicate that agriculture has become traditional
and will remain as long as the art of cultivation and motives and preferences to hold productive
assets remain static.

1.4. Agricultural Systems

1.4.1. Low External Input Agriculture

Low external input agriculture (LEIA) is a type of agriculture that relies on low amounts of
external inputs such as synthetic fertilizers, pesticides, and fossil fuels. This approach focuses on
using local resources and knowledge to promote sustainable farming practices that improve soil
health, conserve natural resources, and increase biodiversity.

Advantages of LEIA:

Environmental sustainability: LEIA practices promote environmental sustainability by

reducing the use of synthetic inputs, which can lead to soil degradation, water pollution, and loss
of biodiversity.

Improved soil health: It improves soil health by increasing organic matter, nutrients, and
microbial activity, which can increase soil fertility and productivity.

Lower carbon footprint: LEIA has a lower carbon footprint compared to HEIA due to reduced
use of fossil fuels and synthetic inputs.

Reduced health risks: It can reduce health risks to farmers and consumers by minimizing
exposure to synthetic inputs.

Increased biodiversity: LEIA practices promote increased biodiversity through the use of crop
rotations, intercropping, and other techniques that support beneficial insects and other wildlife.

Disadvantages of LEIA:

Lower yields: LEIA practices may result in lower yields compared to HEIA practices due to the
reduced use of synthetic inputs.

Higher labor requirements: It can require more labour-intensive work due to the use of
traditional farming techniques.

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Limited access to external inputs: LEIA practices can limit access to external inputs such as
synthetic fertilizers and pesticides, which can be necessary in certain circumstances to address
specific pests or nutrient deficiencies.

Dependence on local resources: LEIA practices rely heavily on local resources and knowledge,
which may limit the ability to scale up or adapt to changing environmental conditions or market
demands.

Overall, LEIA practices can provide a more sustainable approach to agriculture that prioritizes
environmental and social sustainability. While there may be some challenges associated with this
approach, the benefits of promoting sustainable agriculture practices can help to address many of
the environmental, social, and economic challenges facing modern agriculture.

1.4.2. High External Input Agriculture

High external input agriculture (HEIA) is a term used to describe a type of agriculture that relies
heavily on external inputs such as synthetic fertilizers, pesticides, and fossil fuels. This type of
agriculture often focuses on maximizing yields and profits in the short-term, without considering
the long-term impacts on the environment or on the health and well-being of farmers and
consumers.

HEIA can lead to soil degradation, water pollution, and loss of biodiversity, as well as contribute
to climate change through greenhouse gas emissions from the production and use of synthetic
inputs and from the loss of soil carbon. It can also have negative social impacts, such as the
displacement of small-scale farmers and the concentration of power and wealth in the hands of a
few large agribusiness corporations.

Advantages of HEIA:

High yields: HEIA practices often result in higher yields and profits in the short term due to the
heavy use of synthetic inputs.

Increased food production: HEIA can increase the overall food production, which can help to
feed a growing population. Malnutrition problem can be easily managed.

Lower labor requirements: HEIA practices can reduce labor requirements for farmers due to
the use of machinery and synthetic inputs.

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Lower food prices: HEIA can result in lower food prices due to increased production and lower
labor requirements.

Increase in income and profit margin: HEIA can result in lower average costs and high yields.

Productivity of land is increased: The use of synthetic inputs may increase the seasonal
productivity of the land.

Disadvantages of HEIA:

Environmental degradation: HEIA practices can contribute to environmental degradation,

including soil erosion, water pollution, and loss of biodiversity.

Soil degradation: The excessive use of synthetic inputs can degrade the quality of the soil over
time, reducing its productivity and resilience.

Health risks: HEIA can pose health risks to farmers and consumers due to the use of synthetic
inputs, which can lead to pesticide exposure and food contamination.

Contribution to climate change: HEIA contributes to climate change through the production
and use of synthetic inputs, as well as through the loss of soil carbon.

Dependency on external inputs: HEIA practices can create dependency on external inputs such
as synthetic fertilizers and pesticides, which can be expensive and subject to price volatility.

Traditional varieties of seeds face extinction: Some indigenous varieties may extinct.