460F-1

BASIC ECONOMIC PRINCIPLES

AG 460 - F
UNIT OBJECTIVE
After completion of this unit, students should be able to describe the basic economic factors that affect farm
and agribusiness management decisions. Students should also be able to describe the role money and
prices have in regulating business. This knowledge will be demonstrated by completion of the assignment
sheet and unit test with a minimum of 85 percent accuracy.
SPECIFIC OBJECTIVES AND COMPETENCIES
After completion of this unit, the student should be able to:
1.

Match terms associated with basic economic principles to their correct definitions.

2.

Define economics.

3.

Select the basic beliefs of capitalism.

4.

Write the main characteristic of pure competition.

5.

List three functions of money.

6.

Name three ways the Federal Reserve System can increase the money supply.

7.

Name three ways the Federal Reserve System can decrease the money supply.

8.

Describe the role prices play in economics.

9.

Describe two reasons prices paid to the farmer do not tend to rise with inflation.

10.

Describe how supply and demand affect prices.

11.

List three factors that affect prices other than supply and demand.

12.

Describe the reasons price cycles occur.

13.

Distinguish among supplementary, complementary, competitive and independent

enterprises.

14.

List two advantages of diversification.

15.

List two advantages of specialization.

16.

Write and explain examples of the four types of enterprises.

460F-2

BASIC ECONOMIC PRINCIPLES

AG 460 - F
SUGGESTED ACTIVITIES
I.

II.

Suggested activities for instructor

A.

Make transparencies and necessary copies of materials.

B.

Provide students with objectives and discuss.

C.

Provide students with information and assignment sheets and discuss.

D.

Develop local examples using student projects if possible to demonstrate

economic concepts.

E.

Arrange a "bartering" activity to demonstrate how money represents actual

goods.

F.

Have students collect and report on news articles dealing with economic policy.

G.

Have students write up a hypothetical business including the different types of

enterprises they would include.

H.

Collect local livestock sales records to show the yearly trend in livestock prices.

I.

Develop a game with tokens and different products to demonstrate the concept
of supply and demand and also how price is involved in distribution of
resources. Some items should be in short supply while others are plentiful.

J.

Review and give test.

K.

Reteach and retest if necessary.

Instructional materials
A.

Objective sheet

B.

Suggested activities

C.

Information sheet

D.

Transparency masters

E.

1.

TM 1--The Federal Reserve

2.

TM 2--Types of Enterprises

Assignment sheet
1

AS 1--Write and Explain Examples of the Four Types of Enterprises

460F-3

III.

F.

Answers to assignment sheet

G.

Test

H.

Answers to test

Unit references
A.

Farm Management Guide, 17th edition, Doane Information Services, St. Louis,
Missouri, 1989.

B.

Herbst, J.H., Farm Management: Principles, Budgets, Plans, Stipes Publishing

Co., Champaign, Illinois, 1980.

C.

Luening, Robert A. and Mortenson, William P., The Farm Management

Handbook, The Interstate Printers and Publishers, Inc., Danville, Illinois, 1979.

D.

Osburn, Donald D. and Schneeberger, Kenneth C., Modern Agriculture

Management, Reston Publishing Company-Prentice Hall, Reston, Virginia,
1978.

E.

Roy, Ewell P., Corty, Floyd L., and Sullivan, Gene D., Economics:
Applications to Agricultureand Agribusiness, The Interstate Printers and
Publishers, Inc., Danville, Illinois, 1981.

F.

Steward, Jim and Jobes, Raleigh, Farm and Ranch Business Management, Deere
and Company Service Training Department, Moline, Illinois, 1987.

G.

Wood, Greg, Ag Executive Business Manager, Doane Information Services, St.

Louis, Missouri, 1988.

460F-4

BASIC ECONOMIC PRINCIPLES

AG 460 - F
INFORMATION SHEET
I.

Terms and definitions

A.

Management--Mental human energy used in production, primarily concerned

with decision making and evaluation of risks to accomplish predetermined goals

B.

Land--Natural wealth including soil, minerals, native vegetation and wild

animals

C.

Labor--Physical human energy used in production

D.

Capital--Man-made wealth used for production, such as machinery, buildings

and money
(Note: Money is technically not considered a capital good although it can be put
to work to produce more wealth.)

II.

E.

Corporation--Legal business entity made up of stockholders

F.

Discount rate--Rate of interest charged to member banks in the Federal Reserve

System

G.

Federal securities--Certificates issued by the Federal Government in return for

money loaned to it by individuals, to be repaid with interest

H.

Fiscal--Having to do with money

I.

GNP--Gross National Product or total value of all goods and services purchased
by the final customers of those products

J.

Enterprise--A specific economic project or activity such as raising wheat or

dairy cows

K.

Diversification--Branching out into several different types of enterprises

L.

Specialization--Concentrating on one particular enterprise

M.

Monopoly--A marketing situation in which a large company controls a certain

market because it is the only one to provide that service or product

N.

Oligopoly--A marketing situation in which a few large companies exert control

over a certain market

Economics--The science of using scarce resources in the best way possible to satisfy
human needs and wants
(Note: Scarce resources include land, labor, capital and management.)

460F-5

III.

Capitalism
A.

Ownership of resources is by private individuals or corporations

B.

Property owners hold the primary economic power

C.

Decisions of property owners are usually directed toward obtaining the greatest
amount of satisfaction and profit with the least effort

D.

Competition provides the balance between supply and demand and insures the
efficient utilization of resources
(Note: Sometimes long term use of resources is sacrificed for short term benefit,
however.)

IV.

Main characteristic of pure competition--No individual can affect the price of a product

V.

Functions of money

VI.

A.

Serves as a convenient medium of exchange

B.

Provides a measure of value

C.

Serves to store value for savings

Methods used by the Federal Reserve System to affect the money supply (Transparency 1)
(Note: The Federal Reserve System consists of a Board of Governors, 12 regional
Federal Reserve Banks and numerous member banks. The governors are appointed by
the President of the United States to 14-year terms. The Federal Reserve acts as a bank
for banks, supervises and regulates member banks, acts as the federal government's bank
and manages the nation's money supply.)
A.

Raise or lower the amount banks are required to have on reserve

Example:

B.

Raise or lower the "discount rate" or the interest charged to member banks for
the money they borrow
Example:

C.

If the reserve requirement is 20%, then a bank would have to

have 2 dollars on reserve for every 10 dollars in deposit
accounts at the bank. Reducing the reserve requirement would
make more money available to loan and thereby increase the
nation's money supply

Raising the discount rate would cause member banks to charge

more interest which would decrease borrowing and therefore
reduce the money supply

Buy or sell government securities

Example:

Selling securities would reduce the amount of money on

deposit and therefore reduce money supply

460F-6

VII.

Role of prices--Act as the guide for allocation of resources

Example:

VIII.

IX.

X.

A farmer might decide to put extra fertilizer on the wheat and less on
the hay if the profit from the increased wheat would be more than the
profit from the additional hay

Reasons prices to the farmer do not tend to rise with inflation

A.

Competition in agriculture is more intense than in many other industries

B.

Farmers cannot easily adjust supplies to market demand and over-supply drives
down the price

C.

Market for farmers' products does not change very much as price and income
levels change

D.

Farmers have high fixed costs and tend to produce the most they can to offset
these costs, therefore creating an over-supply

E.

Governmental policy has a major impact on commodity prices

Supply and demand

A.

When supply is high or demand is low, the price will decrease

B.

When supply is low or demand is high, the price will increase

Factors affecting prices other than supply and demand

A.

Labor unions forcing higher wages

B.

Government regulations creating artificial supply and/or demand levels or

controlling prices

C.

Oligopolies or monopolies
Example:

XI.

If one farm machinery company sets a certain price, others are

very likely to follow

Price cycles
A.

B.

Farmer response to prices

1.

When the price is high a farmer increases production

2.

Increased production tends to drive the price down

3.

Because of the delay between the movement in price and the response
of the farmer, a cycle is created

Technological developments
Example:

Poultry producers have introduced new methods of raising

poultry which have reduced the price over a 30-year period

460F-7

C.

Seasonal changes that create seasonal cycles

Example:

XII.

Fruit is much more available and therefore cheaper in the

summer and fall than in the winter and spring

Enterprises within an agricultural business (Transparency 2)

A.

Supplementary--Additional enterprises that use resources such as land,

equipment and labor that would otherwise remain idle part of the time
Example:

B.

Complementary--Additional enterprises that improve the profitability of the

original enterprises
Example:

C.

A wheat farmer may raise cattle or sheep in the winter

A machinery dealer also providing a credit service; growing

legumes in rotation with non-legumes to improve the soil

Competitive--Additional enterprises that detract from the original one by using

resources needed by the original enterprise
Example:

An orchard owner starts a hog operation and the pigs start

farrowing right when the fruit needs picking

(Note: This enterprise could have started out as supplementary, but simply grew
too big or was poorly planned and therefore turned into a competitive one.)
D.

Independent--Enterprises that neither detract from nor help one another

Example:

XIII.

XIV.

A farmer could raise both wheat and corn

Advantages of diversification
A.

Provides an alternate source of income should one particular enterprise fail

B.

May provide a more continuous use of resources

Advantages of specialization
A.

Manager can concentrate on one enterprise and can become more

knowledgeable and efficient in its production

B.

May reduce overhead costs

Example:

A farmer who raises only wheat will need to buy additional

equipment (such as a swather, baler, etc.) if he decides to raise
hay also

460F-8

460F-9

TM 2

460F-10

BASIC ECONOMIC PRINCIPLES

AG 460 - F
ASSIGNMENT SHEET #1--WRITE AND EXPLAIN
EXAMPLES OF THE FOUR TYPES OF ENTERPRISES
Name_______________________________________

Score____________________________________

Choose one of the following agribusiness enterprises: cow-calf beef operation; dairy herd; raising corn or
wheat; machinery dealer or feed store. Then write at least one additional enterprise beside each of the types
of enterprises listed and describe why the enterprise you chose fits into that category.
Primary enterprise ________________________________________________________________________
Supplementary enterprise _________________________________________________________________
Why? _______________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
Complementary enterprise _________________________________________________________________
Why? _______________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
Competitive enterprise ____________________________________________________________________
Why? _______________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

460F-11

Independent enterprise ____________________________________________________________________

Why? _______________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

460F-12

460F-13

BASIC ECONOMIC PRINCIPLES

AG 460 - F
UNIT TEST
Name_______________________________________
1.

Score____________________________________

Match the terms on the right to their correct definitions. Write the correct numbers in the
blanks provided.
_____a.

Branching out into several different types of

enterprises

1.

Fiscal

_____b.

Concentrating on one particular enterprise

2.

Labor

_____c.

Rate of interest charged to member banks in the

Federal Reserve System

3.

Discount rate

4.

Land

_____d.

Legal business entity made up of stockholders

5.

Monopoly

_____e.

Physical human energy used in production

6.

Corporation

_____f.

A specific economic project or activity such as

raising wheat or dairy cows

7.

Management

8.

Federal securities

_____g.

Having to do with money

9.

Enterprise

_____h.

Natural wealth including soil, minerals, native

vegetation and wild animals

_____i.

10. Diversification

Mental human energy used in production, primarily

concerned with decision making and evaluation of
risks to accomplish predetermined goals

11. Specialization

_____j.

Total value of all goods and services purchased

by the final consumers of those products

13. GNP

_____k.

A marketing situation in which a few large

companies exert control over a certain market

_____l.

Man-made wealth used for production

12. Capital

14. Oligopoly

_____m. Certificates issued by the Federal Government in

return for money loaned to it by individuals, to be
repaid with interest
_____n.

A marketing situation in which a large company

controls a certain market because it is the only
one to provide that service or product

460F-14

2.

Define economics.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

3.

4.

Select the basic beliefs of capitalism from the ones listed. Write an "X" in the blank before each
correct answer.
_____a.

Competition provides the balance between supply and demand and insures the efficient
utilization of resources

_____b.

Decisions of property owners are usually directed toward obtaining the greatest amount
of satisfaction and profit with the least effort

_____c.

Property is privately owned but rigidly controlled by the government

_____d.

Property owners hold the primary economic power

_____e.

The state has ownership over all goods

_____f.

Overall economic planning is central to the working of capitalism

_____g.

The individual is considered a servant of the state

_____h.

Ownership of resources is by private individuals or corporations

_____i.

Profit making is a secondary consideration

_____j.

Economic controls are maintained democratically by the people and economic benefits
are distributed fairly equally

Write the main characteristic of pure competition.

________________________________________________________________________________
________________________________________________________________________________

5.

List three functions of money.

a. ______________________________________________________________________________
b.______________________________________________________________________________
c. ______________________________________________________________________________

460F-15

6.

Name three ways the Federal Reserve System can increase the money supply.
a.______________________________________________________________________________
b.______________________________________________________________________________
c.______________________________________________________________________________

7.

Name three ways the Federal Reserve System can decrease the money supply.
a.______________________________________________________________________________
b.______________________________________________________________________________
c.______________________________________________________________________________

8.

Describe the role prices play in economics.

________________________________________________________________________________
________________________________________________________________________________

9.

Describe two reasons prices paid to the farmer do not tend to rise with inflation.
a. ______________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
b. ______________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

10.

Describe how supply and demand affect prices.

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

11.

List three factors that affect prices other than supply and demand.
a.______________________________________________________________________________
b.______________________________________________________________________________
c.______________________________________________________________________________

460F-16

12.

Describe the reasons price cycles occur.

a. ______________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
b. ______________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
c. ______________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

13.

14.

Distinguish among supplementary (S), complementary (CY), competitive (CE) and independent
(I) enterprises by writing the appropriate abbreviation in front of the descriptions.
_____a.

Detracts from original enterprise

_____b.

Uses resources during a time they would otherwise be idle

_____c.

Improves profitability of the original enterprise

_____d.

Does not add to or detract from the original enterprise

List two advantages of diversification.

a. ______________________________________________________________________________
________________________________________________________________________________
b. ______________________________________________________________________________
________________________________________________________________________________

15.

List two advantages of specialization.

a. ______________________________________________________________________________
________________________________________________________________________________
b. ______________________________________________________________________________
________________________________________________________________________________

460F-17

BASIC ECONOMIC PRINCIPLES

AG 460 - F
ANSWERS TO TEST
1.

a.
b.
c.
d.

10
11
3
6

2.

The science of using scarce resources in the best way possible to satisfy human needs and wants

3.

a, b, d, h

4.

No individual can affect the price of a product

5.

Serves as a convenient medium of exchange; Provides a measure of value; Serves to store value
for savings

6.

Reduce reserve requirement; Lower discount rate; Buy back government securities

7.

Raise reserve requirement; Raise discount rate; Sell government securities

8.

Act as the guide for allocation of resources

9.

Answer should include two of the following:

Competition in agriculture is more intense than in many other industries; Farmers cannot easily
adjust supplies to market demand and over-supply drives down the price; Market for farmers'
products does not change very much as price and income levels change; Farmers have high fixed
costs and tend to produce the most they can to offset these costs creating an over-supply;
Governmental policy has a major impact on commodity prices

10.

When supply is high or demand is low the price will decrease; When supply is low or demand is
high the price will increase

11.

Labor unions forcing high wages; Government regulations creating artificial supply and/or
demand levels or controlling prices; Oligopolies or monopolies

12.

Farmers respond to high prices by increasing production. This production increase is delayed
because of the time it takes to produce a product. These products then come on the market and the
price goes down causing the farmer to decrease production; Technological developments; Seasonal
changes

13.

a.

14.

Provides an alternate source of income should one particular enterprise fail; May provide a more
continuous use of resources

15.

Manager can concentrate on one enterprise and can become more knowledgeable and efficient in
its production; May reduce overhead costs

CE

e.
f.
g.
h.

b.

2
9
1
4

i.
j.
k.

c.

7
13
14

CY

l. 12
m. 8
n. 5

d.