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1. Werabe University
College of Business and Economics
Course Title: Agricultural Economics
Course Code: Econ- 4111
Target group: Fourth Year Economics Department Regular Student
Course Instructor: Musba Siraj (Msc)
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2. CHAPTER ONE: INTRODUCTION
1.1. INTRODUCTION
 It is only recently that agricultural economics has come to be studied as a
separate branch of economics and agronomy.
 Agricultural economics as a separate discipline started only in the beginning of
20th century when interest in economic issues related to agriculture erupted in
several educational centers.
 It was only after the depression of 1890's which seriously affected agriculture,
that organized farm groups stirred considerable interest in farm management
problems. This new field of agricultural interest was later designated as
agricultural economics.
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3.  Agricultural Economics VS General Economics
 What is Agricultural Economics about?
 Before we define agricultural economics as a whole, it would be appropriate to
define agriculture and economics separately.
 Agriculture is the purposeful tending of crop(s) & livestock w/c encompasses
interrelated activities like the planting, raising, subsequent care and final
disposition of crops & livestock.
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4. Modern agriculture has much wider scope today and it includes the
farm supply industries as well as the product processing industries
and distribution industries, too.
Industries closely related to farming are known as agriculturally
related industries or agribusinesses.
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5.  Agriculture thus, may be defined as the production, processing, marketing and
distribution of crops and livestock.
 These four activities were previously all farm-centered. However, with
improvement in technology, transport and communication developments and
specialization of labor, some of these activities have moved away from farm into
certain strategic control points.
 Modern agriculture also includes the farm supporting industries as well as
product processing and distribution industries.
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6.  Scope of Modern agriculture
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7.  What is Economics
 Economics is the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses.
 A common theme in most definitions of economics is scarcity and choice.
 Society must choose between competing uses when resources are wanted for
different productive activities, and must choose between competing ends when
products are desired by different individuals.
 The science of economics is therefore concerned with the way society organizes
the allocation of scarce resources in order to satisfy alternative wants.
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11. 1.2.Definition and scope of economics of agriculture
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12. Cont…
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13.  Nature of Agricultural Economics
 After having discussed the definitions of agriculture and economics separately,
we are now in a position to define agricultural economics.
 In a very simple language, agricultural economics may be defined as an applied
phase of economics in which attention is given to all aspects of problems related
to agriculture.
 It helps the farmer in deciding about what kind of food should he produce, which
crop should he raise to maximize his profits and at what level should he price his
products.
 As such, it is a social science concerned with the allocation of scarce resources
among the uses associated with producing, processing and consuming the farm
products.
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14. Cont….
 In short, we may define agricultural economics as an applied science which is
mainly concerned with economic problems that are associated with farmers'
effort to make a living. Their problems as we know are numerous and varied in
character but can be grouped under three main heads:(i) Production; (ii)
Marketing; and (iii) Financing.
 Thus, agricultural economics is concerned with the evolving of appropriate
principles that govern the amount of land, labour and capital, which a farmer
should use to farm most efficiently.
 Agricultural economics is equally concerned with the forces that affect the
prices of the things he buys, sells or in other words, the relation between
agriculture and the rest of the economy.
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15. Cont….
 As an applied science, an important role of agricultural
economists is to formulate the methods, techniques and
procedures by which the problems of agriculture may be tackled.
This perhaps is the most difficult function which the agricultural
economist is called upon to perform.
 Hence –we may conclude by saying that "agricultural economics
is an applied science and as such is concerned with the
identification, description and classification of the economic
problems of agriculture, to the end that these problems may be
solved."
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16. Cont….
 The scope of agricultural economics is, thus, extended to the
distribution and consumption problems of farm products as well;
what to distribute, among whom to distribute and on what basis
to distribute; what to consume and how much to consume are,
therefore, some of the important questions dealt in agricultural
economics.
 A study of agricultural economics also includes the functioning
of government in agriculture.
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17. Cont….
 To be specific, the scope of agricultural economics can be stated to include the
choice of farming as an occupation, the choice of farm and livestock, of
machinery and labor, of crops and cropping system, the size of the unit of
production, the grouping of the factors of production, intensity of cultivation,
manuring, irrigation, soil conservation, selling of agricultural products, land
system and rent, agricultural finance and rate of interest, wages and employment,
prices, costs and profits, standard of living, national dividend, etc.“
 The discipline of agricultural economics adapts the principles of economics to
the problems of agriculture and people engaged in agriculture.
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18.  Summary
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19. 1.2. THE SPECIFIC FEATURE OF AGRICULTURE
 Here common characteristics of traditional agriculture will be
described.
 The particular role of livestock in traditional farming systems will
be identified.
 We will also identify factors that influence the agricultural system
found in a particular country at a point in time, and explore the
differences in farming systems found in various parts of the world.
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20. Cont……..
I. Characteristics of Traditional Agriculture
 The world food –income-population problem is serious, and the solution to this
problem depends in part on agricultural development. Before means for fostering
agricultural is discussed, the current condition of agriculture in developing
countries must be known.
 ‘Traditional’ obviously means to do things the way they have usually been done.
Because natural resources, culture, history, and other factors vary from place to
place, the way things have usually been done also differs greatly from one
location to another. Nevertheless, farms in traditional agricultural systems do
have several common characteristics.
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21. Cont……..
1) Intermixing of farm and family decision
 Small peasant farms predominate in most developing countries. Business
decisions on these farms are generally intermixed with family or household
decisions.
 The importance of the family and the close relationship between production and
consumption decisions occur because much of the labor, management and capital
come from the same household.
 A sizeable proportion of the production is consumed on the same farm or at least
in the same community where it is produced. This intermixing of production
and consumption decisions along with the low levels of income common
among peasant farms adds an element of conservation to family farming.
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22. Cont……..
 2.Plurality of products:-The intermixing of production & consumption
decisions along with the low levels of income of peasant households adds an
element of conservation to family farming.
 A farm disaster usually means a family disaster. Consequently traditional farms
often use crop varieties and breeds of livestock that have proven dependable
under adverse conditions, such as low levels of fertility or rough terrain, even if
yields or productivities are modest.
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 For example ENSET grows on relatively poor land, is drought resistant where is
used as staple food crop in central, south and south east of Ethiopia.
 Cassava grows slowly, but on relatively poor soils, and under a variety of
weather conditions. It is a root crop, widely grown in the south of Ethiopia, and
in many African countries, that can be pulled out of the ground at various times
of the year to meet calorie needs when other foods may be short.
 3.Limited integration to market:- Traditional farms are influenced by market
price relationships in their decisions to allocate family resources, since the
surplus they trade connects them to the local market. Yet, sometimes, traditional
farms are called subsistence farms as considerable proportion of their output is
non marketed.

24. 4. Labor and land use
 Traditional farms generally are very small, usually only 1 to 3 hectares. Labor
applied per hectare planted, however, tends to be high. In many areas, land is a
limiting factor and is becoming more limiting out time as population continues to
grow.
 Labor is often under employed during certain times of the year, while the capital
assets that do exist are fully exploited.
 Much sharing of work and income occurs on traditional farms so there is little
open unemployment during peak times. This sharing means that the individual’s
implicit wage, at times, may be determined, by the average rather than the
marginal productivity of labor.
 Traditional farms may hire some labor as well, at least during the busy times of the year.
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25. Cont..
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 Traditional farmers can hire labor or buy a small amount of leisure
and enhance their social status at relatively low cost.
5.Family labor:- Traditional farms use mostly family , rather than
hired, labour.Yet, they may hire some labor as well, at least during the
busy times of the year. Low wages caused by high underemployment
in peasant agriculture create incentives to hire laborers.

26. Cont…
6. Seasonality
 Labor use in traditional agriculture tends to exhibit marked seasonal
variation corresponding to agricultural cycles.
 During slack seasons, those immediately following planting or
preceding harvest, labor may abundant. However, during peak
seasons, especially during weeding and harvest, labor is in short
supply. Wages often exhibit similar seasonal fluctuations.
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27.  The seasonal nature of agricultural production also causes seasonal variation in
consumption and nutritional status.
 Because storage facilities may be lacking and mechanisms for saving and
borrowing in frequent, consumption patterns tend to follow agricultural cycles.
 It is common to find “lean seasons” when consumption is low and short –run
malnutrition high, especially immediately prior to harvest.
 Seasonality induces migration as people search for employment opportunities
and food.
 Other seasonal causes of migration are trade and marketing, cultivation of
secondary land holding, and pasturing cattle.
Cont…
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28. Cont…
7. Productivity and efficiency
 Traditional farms are characterized by low use of purchased inputs other than
labor. Yields per hectare, production per person, and other measures of
productivity tend to be low. These factors do not mean, however that traditional
farms are inefficient.
 The crop varieties, power sources, methods for altering soil fertility, and certain
other factors available to traditional farms constrain productivity growth and
hence returns to labor and traditional types of capital.
 Efficiency, as measured by equating marginal returns to resources in alternative
uses, is high.
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29. Cont…
 A situation with low use of certain inputs, low productivity, but
high economic efficiency under static conditions has important
implications if productivity is to be increased.
 First, new technologies can help to change the production
possibilities available to farmers.
 Second, education may be needed to help farmers learn to adjust
resource use to changing conditions so as to maintain their high
levels of efficiency.
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30. 8. Rationality and risk
 Traditional farmers are economically rational. They are motivated to
raise their standard of living while, of necessity, they are cautions.
 Traditional farmers are not adverse to change, but proposed changes
must fit in to their current farming systems without altering too
abruptly the methods they have developed over time to reduce risk
and spread out the demand for labor.
 One mechanism by which traditional farmers in many countries
have spread risk is by exchanging labor and other resources through
point and extended families ( relatives and sometimes friends
beyond parents and children).
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31. Cont…
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 In many countries, there is a substantial degree of sharing, which
not only adds to social status but spreads risks. Some of these
sharing arrangements and ties that bind extended families together
may deteriorate as development proceeds, creating a need for new
institutional arrangements to spread risk and in some cases to
constrain anti social behavior.

32. B. The Role of Livestock
 Livestock play many vitally important roles in traditional farming systems. There
is little question that when crops and livestock directly compete for the same
resources, it is usually more efficient for humans to consume grain than it is to
feed the grain to livestock and consume that. However, in most traditional
farming systems, livestock consume little grain, and meat production is often one
of the least important roles of livestock. The more important roles of livestock
are:
1. Buffers and extenders of the food supply
 Farm animal provide a special protection to farm families, acting as a buffer
between the family and a precarious food supply. Animals are like savings banks,
which can be consumed or sold during crop failures.
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33. Cont…
 In most of traditional agriculture, livestock do not directly compete with crops
because they eat crop residues, feed off steep slopes and poor solid, and generally
consume materials, which “extend” the food supply.
 Many types of animals are ruminant (e.g. cattle, goats, sheep, buffalo) that eat
grass and other forages that humans cannot and can then convert the forages to
products for human consumptions.
 Livestock make an important contribution to extending the quality of the diet as
well, by providing meat, milk, and eggs.
 Small amount of these high protein foods can have a significant impact on human
health.
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34. 2. Fertilizer, fuel, hides and hair
 Animal manure is vitally important as a source of both fertilizer,
and fuel in several countries.
 Animal manure adds both fertility and organizes matter to the soil.
 In countries where wood is scarce, typical of north Shoa, Wollo,
and Tigrai, animal dung is dried and burned for fuel.
 In many countries, these two uses of animal manure compete.
 Dung that is burned cannot be used to increase soil fertility.
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35. Cont..
 Recently in Ethiopia as a result of promotion by rural technology
Establishment of Ministry of Agriculture of Ethiopia (Jimma, Bako, Assela,
Agarfa, Wolita, Nekemte, and several on Northern regions) perhaps since
1876 E.C. methane digesters have been developed and the gas produced is
used for working, and the residual nitrogen applied to crops.
 Few livestock products are wasted in traditional society. Clothing and blankets
are made from animal hides and hair not only cattle and sheep, but buffalo,
goats, and other livestock.
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36. 3. Power and transport
 In many countries livestock are the principal source of power. They plow the
fields, transport products to market, and carry out-processing tasks like grinding
sugar cane. In some remote areas, animals help to market crops by eating grain
and other plant products and then walking to market.
 On the steep slopes and rough terrain in parts of some developing countries,
including Ethiopia, it will be many years, if ever, before mechanical power
replaces animal power.
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37. 4 .social and cultural
 Livestock particularly cattle and goats are highly valued in some societies for
social and cultural reasons.
 A family’s social status may be measured by the number of animals it owns ,
cattle are given as gifts during ceremonial occasions.
 While livestock serve major economic functions, they also serve these other
social and cultural functions as well. Of course, it is possible that the social and
cultural values placed on livestock have evolved over the years because of their
importance as capital and income earning assets.
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38. 1.3 Main attributes of traditional agriculture
 Traditional Agriculture is Supposed to Possess Three Attributes:
1. Farming is a way of life based on long-established traditions.
Traditional agriculture is, therefore, cultural characterization of the
way people live.
2. Another attributes of traditional agriculture is the institutional setup
dealing with the ownership of land, legality of tenure ship and the
share of home consumption in agricultural production.
3. Another aspect is of technical property.
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39. 1.4. Agricultural systems
 Today, there are two divisions of agriculture, subsistence and commercial, which
roughly correspond to the less developed and more developed regions.
 One of the most significant divisions between more and less developed regions
is the way people obtain the food they need to survive.
 Most people in less developed countries are farmers, producing the food they
and their families need to survive.
 In contrast, fewer than 5 percent of the people in North America are farmers.
These farmers can produce enough to feed the remaining inhabitants of North
America and to produce a substantial surplus.
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40. 1.4.1. Low external input agriculture
 Subsistence agriculture:- is the production of food primarily for consumption
by the farmer and mostly found in less developed countries.
 In subsistence agriculture, small-scale farming is primarily grown for
consumption by the farmer and their family.
 Sometimes if there is a surplus of food, it might be sold, but that is not common.
 In commercial agriculture, the primary objective is to make a profit.
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41. Count…
 The most abundant type of agriculture practiced around the world
is intensive subsistence agriculture, which is highly dependent
on animal power, and is commonly practiced in the humid,
tropical regions of the world. This type of farming is evidenced
by significant efforts to adapt the landscape to increase food
production.
 As the word implies, this form of subsistence agriculture is highly
labor-intensive on the farmer using limited space and limited
waste.
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42. Cont..
 The most common form is wet rice fields, but could also include non-wet rice
fields like wheat and barley.
 In sunny locations and long growing seasons, farmers may be able to efficiently
get two harvests per year from a single field, a method called double cropping.
 Another form of subsistence agriculture is called shifting cultivation because the
farmers shift around to new locations every few years to farm new land.
 Farming a patch of land tends to deplete its fertility and land that is highly
productive after it is first cleared, loses its productivity throughout several
harvests.
 In the first agricultural revolution, shifting cultivation was a common method
of farming.
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43. Cont…
 There are two processes in shifting cultivation:
1. Farmers must remove and burn the earth in a manner called slash-and-burn
agriculture where slashing the land clears space, while burning the natural
vegetation fertilizes the soil, and
2. Farmers can only grow their crops on the cleared land for 2-3 years until the soil
is depleted of its nutrients then they must move on and remove a new area of the
earth; they may return to the previous location after 5-20 years after the natural
vegetation has regrown.
3. The most common crops grown in shifting cultivation are corn, millet, and
sugarcane. Another cultural trait of LDCs is that subsistence farmers do not own
the land; instead, the village chief or council controls the earth.
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44. Cont…..
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 Slash-and-burn agriculture has been a significant contributor to
deforestation around the world. To address deforestation and the
protection of species, humans need to address root issues such as
poverty and hunger.

45. Cont..
 Pastoral nomadism is similar to subsistence agriculture except that
the focus is on domesticated animals rather than crops.
 Most pastoral nomads exist in arid regions such as the Middle East
and Northern Africa because the climate is too dry for subsistence
agriculture.
 The primary purpose of raising animals is to provide milk, clothing,
and tents. What is interesting with pastoral nomads is that most do
not slaughter their herds for meat; most eat grains by trading milk
and clothing for grain with local farmers.
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46. Cont…
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 The type of animals chosen by nomads is highly dependent on the
culture of the region, the prestige of animals, and the climate.
 Camels can carry heavy cargo and travel great distances with very
little water; a significant benefit in arid regions. Goats require
more water, but can eat a wider variety of food than the camel.

47. Cont…
 Most probably believe that nomads wander randomly throughout the
area in search of water, but this is far from the truth.
 Instead, pastoral nomads are very aware of their territory. Each
group controls a specific area and will rarely invade another area.
 Each area tends to be large enough to contain enough water and
foliage for survival.
 Some nomad groups migrate seasonally between mountainous and
low-lying regions; a process called transhumance.
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48.  Peasant agriculture
 One characteristic of undeveloped peasant agriculture is its self-sufficiency.
 Farm families in those circumstances consume a substantial part of what they
produce. While some of their output may be sold in the market, their total
production is generally not much larger than what is needed for the
maintenance of the family. Not only is productivity per worker low under those
conditions, but yields per unit of land are also low.
 Even where the land was originally fertile, the fertility is likely to have been
depleted by decades of continuous cropping. The available manures are not
sufficient, and the farmers cannot afford to purchase them elsewhere.
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49. Cont..
 Peasant agriculture is often said to be characterized by inertia. The peasant
farmer is likely to be illiterate, suspicious of outsiders, and reluctant to try new
methods; food patterns remain unchanged for decades or even centuries.
Evidence, however, suggests that the apparent inertia may be simply the result of
a lack of alternatives.
 If there is nothing better to change to, there is little point in changing. Moreover,
the self-sufficient farmer is bound to want to minimize risks; since a crop failure
can mean starvation in many parts of the world, farmers have been reluctant to
adopt new methods if doing so would expose them to greater risks of failure.
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50. 1.4.2. High external input Agriculture (the case of Industrial & green
revolution agriculture)
 The second agricultural revolution coincided with the Industrial Revolution;
it was a revolution that would move agriculture beyond subsistence to generate
the kinds of surpluses needed to feed thousands of people working in factories
instead of in agricultural fields.
 Innovations in farming techniques and machinery that occurred in the late
1800s and early 1900s led to better diets, longer life expectancy, and helped
sustain the second agricultural revolution.
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51. Cont..
 Commercial agriculture
 More developed nations tend to have commercial agriculture with a goal to
produce food for sale in the global marketplace called agribusiness.
 The food in commercial agriculture is also rarely sold directly to the consumer;
rather, it is sold to a food-processing company where it is processed into a
product. This includes produce and food products.
 An interesting difference between developing countries and most developed
countries (MDC) regarding agriculture is the percent of the workforce that farm.
In developing countries, it is not uncommon that over half of the workforce are
subsistence farmers.
 In MDCs like the United States, the workforce that is farmers are far fewer than
half. In the United States alone, less than 2 % t of the workforce are farmers, yet
have the knowledge, skills, and technology to feed the entire nation.
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52. Cont….
 One of the reasons why only 2% of the United States workforce can feed the
entire nation has to do with machinery, which can harvest crops at a large scale
and very quickly.
 MDCs also have access to transportation networks to provide perishable foods
like dairy long distances in a short amount of time.
 Commercial farmers rely on the latest scientific improvements to generate
higher yields, including crop rotation, herbicides and fertilizers, and hybrid
plants and animal breeds.
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53. Cont…
 Another form of commercial agriculture found in warm, tropical climates, are
plantations.
 A plantation is a large-scale farm that usually focuses on the production of a
single crop such as tobacco, coffee, tea, sugar cane, rubber, and cotton, to name
a few. These forms of farming are commonly found in LDCs but often owned
by corporations in MDCs. Plantations also tend to import workers and provide
food, water, and shelter necessities for workers to live there year-round.
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