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Centre for Development, Environment and Policy (CeDEP)

Economic Principles

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Agricultural and environmental issues continue to dominate the many challenges facing society today. This module provides an appreciation of how economics can be used to understand and analyse some of the many issues affecting agriculture, the environment and renewable natural resources in general. It focuses on the study of microeconomics, which means the economics of an individual market (industry or sector). (This contrasts with the study of a number of markets interrelated nationally or internationally, which is known as macroeconomics.) Concentrating on studying one market at a time enables us to isolate and analyse in detail the forces at work within it. We do this by determining how individual economic actors or agents (eg individuals (consumers and producers), firms and governments) make consumption and production decisions, given that resources are limited. An understanding of how economic actors respond to changes in market conditions allows us to understand how individual markets work and how changes in market conditions might subsequently impact consumers, producers, firms etc operating in that market.

In this module we focus primarily on neoclassical economic theory to explain the principles of economics that are relevant to understanding how economic actors make decisions about consumption and production activities. This will provide students with the necessary theoretical skills for solving economic problems, generic to the fields of agricultural, environmental and natural resource economics. However, this does not mean that the module is entirely theoretical; it maintains a focus on the application of economic theory rather than abstract analysis. The module contains a stream of questions and exercises designed both to help your study of the theory, and to consider how it might be applied practically by analysts.

Objectives and learning outcomes of the course

By the end of this module, students should be able to:

  • critically discuss the importance of economic theory in the allocation of scarce natural resources, in identifying the underlying failures that give rise to agricultural and environmental problems, and possible solutions to these problems
  • explain and critically interpret how neoclassical economics and other economic theories can be used to understand how economic actors make decisions about consumption and production activities
  • describe and critically assess the range of economic principles and theory used by economists to solve economic problems generic to the fields of agricultural, environmental and natural resource economics
  • critically apply appropriate economic principles and theory to solve relevant analytical problems concerning agricultural, environmental and natural resource issues.

Scope and syllabus

The module is divided into three parts.

Part I of the module begins with an Introduction (Unit 1) to some of the many methods and techniques of economic analysis that are commonly used by agricultural, environmental and natural resource economists alike. It primarily focuses on the use of the neoclassical 'positive' economic theory of perfect competition in analysing how economic actors make consumption and production decisions. The remaining nine units are grouped into four further parts:

Part II of the module is on Consumer Choice (Units 2–4) and looks at the economics of demand and the fundamental relationship between the individual demand of a consumer and the overall demand of the market. Given that individuals and their decisions are basic to any economic system, it seems sensible to start our analysis with an investigation into how individuals make their economic decisions concerning consumption (given that they have limited resources). From this analysis of consumer choice (ie demand economics), we develop the theory of demand.

Part III of the module is on Production Economics (Units 5–7) and examines the fundamental relationship between the level of resources used in the production process and the level of output itself. In analysing how an individual producer or firm makes its economic decision concerning 'what to produce', 'how to produce it', 'how much to produce' and thus 'how much of each input to use' (given that its resources are limited), we generally assume that its objective is to maximise profit. From this analysis of production economics, we develop the theory of supply.

Part IV of the module is on Perfect Competition and Welfare Economics (Units 8–9). In Unit 8 we combine the theory of demand developed in Part I with the theory of supply developed in Part II, to examine how the interaction of supply and demand in perfectly competitive markets results in a single unique (market equilibrium) price.

We continue Part IV with an introduction to the 'normative' theory of welfare economics in Unit 9, acknowledging that the 'positive' neoclassical assumption of perfect competition and the efficient allocation of resources is unlikely to be found in reality. Using welfare economics, we analyse the 'normative' economic issue of what is in the 'best interests' of society as a whole and develop criteria for use when evaluating and making policy decisions to correct for market failure. Methods of measuring welfare change are introduced, which are important in helping us to better inform such policy decisions.

Part V of the module is on Imperfect Competition (Unit 10) and examines the consequences of relaxing the assumption that markets are perfectly competitive. It builds on our understanding of welfare economics and the effects of market failure to examine the types of market structure that exist under imperfect competition (and that one is likely to find in real life). Using neoclassical analysis, policy and regulatory aspects of addressing market failure in imperfectly competitive markets is explored.

A point worth emphasising in a ‘principles’ or foundation module like this one, is that there is a trade-off between theoretical simplicity and the complex reality of the world around us. For example, we often analyse the environment and its resources as if they were one homogeneous commodity, ignoring the diversity of resources involved as well as the complexity of the interrelationships involved. Similarly, we often analyse the outputs of agriculture as if they were one homogeneous item called ‘food’, ignoring the diversity of foodstuffs (and other agricultural goods) and of the methods of production actually found in agriculture. Likewise, in microeconomics we leave aside the rich complexity of interrelated markets. The justification of this approach is the need, first of all, to develop an understanding of the underlying principles of economics, and the analytical arguments that use them, before applying them by successive steps to analyse and solve the complex agricultural and environmental issues that continue to dominate the many challenges facing society today. This will enable you to confront such issues from a solid basis of theoretical knowledge. Remember that economics, as we view it, begins and ends with the market.

Module sample

P542 module uses a core text which is specially written and will take you through your self-directed study. Exercises, assignments and other activities, such as self-assessment questions, film clips and animations are included to help you with learning. Most module study guides are now provided in electronic format on a USB flash memory stick, but can also be downloaded from the online learning environment. Click the linked image below to view a sample of our e-study guide:

Suggested reading

  • Snyder C, Nicholson W (2012) Microeconomic Theory: Basic Principles and Extensions, 11th International Edition. South-Western CENGAGE Learning.
  • Johansson P (1991) An Introduction to Modern Welfare Economics. Cambridge University Press.