Application of Agricultural Economics

The application of economic principles in agriculture including marketing of agricultural products is intended for certain purposes relating to several aspects, including:
  1. Determination of prices: describe the factors that affect the price level and show how price differences can occur between time, between places and other dimensions.
  2. Explain the role of the marketing system: to find out the place of sale and marketing channels for agricultural products (crop and livestock products).
  3. Testing problems and weaknesses in the organization and how to market and show ways to fix them.
  4. Economic changes in agricultural production and farm management: show how land, labor, capital and risk can be combined in various proportions. It also shows how farmers choose the combination of products that provide the greatest benefits (Abbot and Makeham, 1979).

To be able to achieve the objectives of the application of economics to agriculture requires general approaches or approaches commonly used in economic theory. The following will explain some of the approaches commonly used to solve economic problems in agriculture and the organization and role of agriculture in economic development.

Approach to Economic Theory for Agriculture

Agricultural economics can be interpreted as the application of economic theory in agriculture or a theoretical approach to problems in agriculture (Ritson, 1977 in Peters, 1995). In principle, this quote provides an overview of how the agricultural economy is organized and taught in various universities throughout the world.

Although the pattern continues to change, agricultural economics study programs are often placed in the faculty of agriculture rather than in the faculty of economics. The implication, students are more focused on technical knowledge about agriculture and animal husbandry and basic theories in agriculture. Furthermore, the lecturers teach economics so that students can apply economic theory to agriculture. In a narrow sense, economics is considered relevant for the successful implementation of business in agriculture. Based on this view, students who are directed to work as experts in agriculture, managers in agriculture, agribusiness and agropolitists, need to understand economics to be applied more broadly in agriculture. In other words, students need to understand the "theoretical approach to the problems of agricultural economics".

A course is structured and taught based on the basic framework of knowledge that leads to theory. There are times when students learn pure theory (science) and at other times they learn theories that are applied to solve certain problems (applied science). In agricultural economics, economic concepts or theories must first be understood before using them to solve problems in agriculture. Please note that applied science has more limited uses than pure science.

Theory is a general knowledge framework that seeks to describe certain phenomena. Theory is built through observation (inductive approach) and logical thinking (deductive approach). Theory is an abstraction from the real world (facts). The truth of a theory is how the theory can describe facts properly and how the use of the theory in solving problems in the real world. The use of these two approaches in terms of scientifically correcting theories is presented in the following figure.

Figure Inductive Deductive Approach in Theoretical Framework
Figure Inductive Deductive Approach in Theoretical Framework

In trying to describe certain phenomena, there are limitations that may be caused by limitations inherent in the theory to be used as well as user limitations. The desire of students to understand human behavior individually in order to meet their needs is limited by students' own understanding of economics. Economists are also often limited by their ability to measure economic variables accurately. For example: how to measure satisfaction? Measuring these variables is not as easy as identifying and measuring variables in research conducted in a laboratory. Observations about human behavior will give results that are generally different from actual human behavior (tend to be biased). To minimize the bias that occurs and to facilitate the application of theory into complex real life, assumptions are needed.

To simplify complex situations and relationships, scientists often use assumptions. Physicists usually use the assumption of "vacuum" in their various research activities. Economists assume that the goal of a business is to maximize profits. The purpose of using assumptions is to reduce the number of variables studied so that it is easier to determine the relationship between the observed variables. Because social science experts rarely or almost never do research in the laboratory as is often done by physical sciences experts (for example physics and biology) where the observed variables are more measurable and can be conditioned, then social scientists make more assumptions than experts exact science.

In addition to the inductive and deductive approaches that are widely used in scientific disciplines in general, agricultural economics also uses the approaches commonly used in economics, namely:
  1. micro-macro as a major part of general economics,
  2. consumption-production which is the main activity carried out by two main actors in the simplest economy, and
  3. positive-normative as an approach commonly used in general economics.

The following will be explained about these approaches.

1. Micro-Macro Approach

The two main parts of economics are microeconomics and macroeconomics. In these two fields of economics, economists observe and study economic activities both individuals and groups. In microeconomics, studied the activities of consumers and producers individually and the market which is the interaction between consumers and producers. Whereas the macro economy considers the economic unit as a whole, which faces broader problems such as national income, employment opportunities, savings, investment and inflation. In general, agricultural economists study the organization of business in agriculture individually in the optimal use of resources. Consequently, the teaching of agricultural economics courses is more emphasized on the microeconomic approach, but in accordance with the development of science and technology as it is today, various economic sectors have close links so that macro issues such as employment opportunities, inflation and investment have a large impact on farmers and agribusiness actors. Therefore, it is important for students who study agricultural economics to understand not only how to organize a business to obtain optimum acceptance but also how the overall economic changes affect economic decisions in business in agriculture / agricultural.

2. Consumption-Production Approach

In economics, there are two very important aspects relating to the principal economic activity actors, namely consumers and producers. Both have an inseparable and interdependent relationship with each other. Manufacturers produce goods and services to meet consumer needs. Consumers depend on producers of goods and services to satisfy their needs and desires. These two aspects are important in economics because their behavior will determine the characteristics of the market through demand by consumers and supply by producers. For agricultural experts who put more emphasis on the economics of agricultural production (the production side agricultural) will have difficulty explaining how farmers or agribusiness practitioners understand the desires or preferences of consumers for agricultural products that they will produce. The simple interactions of these two main actors in the economy are presented in the following figure.
Image of Consumer and Producer Interaction
Image of Consumer and Producer Interaction

3. Positive-Normative Approach

According to the positive economic approach, economists report on what they find without making an assessment of whether the findings are good or bad. In this approach economists only determine alternatives to solving problems without trying to identify which alternatives are best. Thus a positive economic approach avoids valuation. According to the normative economic approach, economists can make judgments about observed economic facts.

Observations that show that farm income is lower than non-farm income is a positive economy. The conclusion of the research is that farm income is based on observations lower than farm income which is supposed to be a normative economy.

The Organization and Role of Agriculture in Development

The agricultural system in a country's economy which is classified as a developed country is very complex. The system can be formed by a variety of companies ranging from small to large, with different organizational forms such as private-owned companies, family-owned companies, state-owned or private legal entities, farmer cooperatives and consumption cooperatives .

Marketing channels established in the context of allocating inputs or agricultural production facilities from suppliers (resource owners) to farmers or ranchers, and in the context of allocating agricultural products from farmers or ranchers to retailers or consumers, will vary both for the same agricultural products and different agricultural products. Agricultural inputs such as fertilizers, seeds and agricultural machinery can be purchased by farmers or ranchers through individual companies or large companies (dealers) that represent supplier companies to the agricultural sector (farm supply firm). Food products sold at the retail level can reduce the two marketing functions that are usually carried out by companies. If the company at the retail level produces the bread itself, the purchase of flour will be made directly to the flour milling company. Whereas other retailers can obtain these items by buying them directly to a bread company that processes wheat into bread and other cakes.

The agriculture and animal husbandry sector with its complex organizations ranging from input suppliers (farmers) - farmers / ranchers - consumers in various forms have an important role in development. There are many alternative development pathways or strategies. The strategies used by each country are determined by the ownership of the resources and the level of development of the countries concerned. Some countries with very high oil and mineral resource ownership can form capital for development through the export of these resources. Some other countries emphasize exports of trade crops such as coffee, chocolate and tea. While other countries again focus on the export of industrial products and while others emphasize increasing production of staple foods. Optimal development paths vary from country to country. Mistakes in choosing development paths with certain resources and levels of development can lead to long-term economic stagnation.

The following are some examples of countries that have chosen the wrong path of development. Argentina, a country that has fertile land resources, in the 1940s and 1950s chose a development path that emphasized industrialization that ignored the agricultural sector. As a result, agricultural exports that were previously an important component of economic growth stagnated in the 1950s, and reduced foreign exchange prevented Argentina from importing capital goods needed in industrialization. As a result of economic growth declined sharply. India is also another example of a potential country for the agricultural sector, its economic growth has also declined due to its emphasis on disproportionate industrialization in the 1950s and 1960s.

Agriculture in most low-income countries is very unproductive. Initially in the development process many people worked in the agricultural sector, and a percentage of national income came from that sector. During development, population growth and income per capita increased. As income grows, more food will be demanded or in other words agricultural production and imports will certainly increase. Because agriculture mobilizes a lot of resources in most low-income countries, some funds are needed to finance food imports unless agricultural output (products) develop rapidly.

The capacity of the agricultural sector to employ a larger workforce is very limited. As income continues to increase, demand for non-agricultural commodities also increases. Therefore, economic development requires economic or structural transformation that involves the development of the non-agricultural sector. In addition to contributing to the agricultural sector in the development of food, labor and capital, it also provides a market for non-agricultural goods. Thus it can be said that the initial value and low agricultural productivity in most developing countries provide opportunities for efforts to increase national income through agricultural development. Because of this initial value and low per capita income in the agricultural sector, there is a real opportunity to improve the distribution of income and improve the welfare of the majority of the population through agricultural development.


Application of agricultural economic principles.

The application of economic principles in agriculture requires several approaches, including the deductive-inductive, micromacro, consumption-production, positive-normative approaches.

Agricultural organization

Organizations in agriculture ranging from small-scale companies to large-scale companies can have diverse forms such as private and family-owned private companies, government-owned companies and private-owned legal entities, farmers-owned cooperatives and consumer-owned cooperatives. The allocation of inputs needed by the agricultural sector and agricultural output (products) needed by consumers can be through agricultural organizations that form marketing channels for the relevant agricultural products. Marketing channels can be different for the same product or for different products.

The Role of Agricultural Economics

Agriculture plays an important role in the development of the agricultural sector and the non-agricultural sector. The economic development of countries based on agriculture but ignoring the agricultural sector in the development process will experience economic stagnation. Because in addition to contributing to the development of food, labor and capital in its own sector, the agricultural sector also provides a market for goods and services produced by the non-agricultural sector.