2) ie Sea ing is an important function in the Process of m; Pane some procedures and methods drs a ieconomics provides a decision Bae eiisreluseful when Preparing f pane |. principles guide the manager i Re cipleraniriresource allocation, Fesource substitution and combication act peve® Re ation. The knowledge of economic Principles improves the decision- Pe eerliyfendiinditate the dieconss which the manager should go to attain . ee of profit maximization and maximization of family satisfaction. the objects agement is the application of economic principles in the organization Meee ciltsrmibusinere. ‘The tenors economic principles applied to farm ent Dre ecteedineiow: anagement. To accor equired to guide "maker with a set ¢ farm plans to orga In setting the goal plish this the farmer-manager. A of principles for decision- nize a farm business. The Is and preparing plans on LAW OF DIMINISHING RETURNS (LDR) Jains ionshi product relationship) and i input-output relationship (known as factor-pr s pe the ee ure one of the operational management cans i. si = prodi i helps in the determination of optimum inpul t ae a oer This law is also known as the law of ae pie ee ih Senna among factors of production varies as a . ie es RS oT i ther factors of production constant. jae aa = Ee eeien production activity and hence can be regarded mental economi b as a law of life itself. ome ivati es in general less than i i ital and labour applied in the cultivation of dan cee Rat eye ee in the amount of produce raised, unless it happs Proportionate increase in een in the arts of agriculture ciate by equal increments with the usa it it ice is incret Seryicse Tak wn If the quantity of one proguctin, Be TY Foe petty in other resource services held ren. Heady). Be ee cr cuore fn ae & erate Po ible inputs are used in ean eee (Kay). i payee eo pei ent will eventually begin to inputs, the marginal phy228 explain that the application of ste, and more to the total Produce oi Ut SOF These definitions add less and les 88 tO the tt the mtg he totay Pein i actors, add more pee and thereafter MPP is maximum) ena; on ( Law of diminishing returns in general applies to the figgg! ouyet oo postponed under the following condition, of ag \ 8 ri operation can be 1) Improved Technol Technology components like high y jong integrated pest Management practicg."® \ wi ete, ti irrigation, fertilizers, Wott " HNN creasing the returns. 2) New as en virgin soils are brought under plough, they ee : Rive ty is higher. vield, as their productivi c 3) Scarcity of Capital: of capital limits the farmers jn 4 R quantities of variable resource leading to the prevalence ot inet! in ; ‘ASing », situation is found in stage L ng mith r \ Reasons for the Operation of the Law of Diminishing Return 8 in Agriculture 1) Excessive Dependence on Weather: A farmer, however good he is in 1 farm may not get the expected yields as he has little contro! over weane weather is just enough to make his expectation go topsy-turvy. ‘ther. a ur: There is no possibility of division of jy, of lab 2) Less Scope for Division of Labo farming as the farmer himself performs the role of labourer, manager ang o"* and capigh ict therefore the advantage of division of labour is not a possibility. There, law of diminishing returns sets in quickly in farming. Teorey 3) Less Scope for Mechanization: Though mechanization of the farms enhanc productivity, the small size of holdings stands against using the cachiaren Various farm operations. Under this limitation, the farmer fails to derive the a vantage of mechanization. a 4) Cultivation of Inferior Lands: To meet the food requirements of the teeming mili of population, even inferior lands are brought under plough, the productivity which in general is low. va 5) Continuous Cultivation: Continuous cultivation of land drains out the fertility st of the soil, thereby leading to low productivity. It is a fact that no naa afford to keep the land fallow for some period, to allow the land build up its fertility status. For details refer the topic on factor-product relationship in Section III. PRINCIPLE OF FACTOR SUBSTITUTION a, ‘ viz., ees eee iene fee peace) management decision the inati of production or technology Retiind Lp phere srscri a ae volves factor-factor relationship. The riate method of production or technol ‘manager in choosing the most oer dio ae Scar slcatle at t produces agiven Tevel of outpat choice of method of production depends on the avalabiity barn comnts, The is abundant, the producer undertakes extensive cultivation, og we eres yt ne land is scarce he adopts land saving technology Je, ntaeage, yen, Other hand tthe is scarce, labour saving technology contributes to the cultivation. If the labour Fann ant, labour saving technology or capital intensive engt S08t and if capital is technology is adopted. Li.yolume of production oF the sire of f 2 aguction technology. Lange acne Inrcinece ster determines the atoF gon of Prology. Small-scale farming is more AME OY KeMeEAD requires capital enter ate gencive use of labour. Having said thie —— artented business reqniit ing oy the selection of the appropriate coulanabans not ignere the prices of Hh wet ance generally aims at chosing the met eff tachi se pe pene ‘ ve of production is efficient, when it produces a method of prostuction. My exet, to achieve this the producer substitutes ew level of output wit ir means the use of more quantity of less cganive reseed pet a0 on ie expensive resource. Substitution is economical as a acumen softs is ess than the cost of another resource uit: rinciple of factor substitution says that it is economical ' petetute one ure (added resource) to another resource (replaced resource} “. og as the increase in cost Quantity of replaced resource Quantity of added resource multiplied by price per > multiplied by price per unit of replaced resource unit of added resource ie, Price per unit of added _resource_ Quantity of replaced_resource re Price per unit of replaced resource ‘Quantity of added resoune MRTS > PR In the process of substitution, we shift from one input combination t another input combination, as 2 result of which there is an increase in the use of one TeSOUTee ani decrease in the use of another resource (Table 24.1). As we move on from combination A to combination B, the quantity of grain (X,) is increased by SO units, ‘while the quantity of hay (X,) is reduced by 125 units. Given the prices of X; at BS. + Ration for Producing 25 kg Body Weight Price of (X) = Rs. L9WKE. MRIS of Price Ratio: TABLE 24.1 Selecting Least Cost Feed Grain (X,) = Rs. 4/Kg; Price of Hay Feed Grain Hay ( combinations (X,) aX mH) Nhe A 500. 50 2,190 125 2.50 me B 550 50 2005 2 re 600 50° ims 8 D 650 50 1,825 no E 700 50 Pp 750" 50 G 800, 50 a 850 50 1 900 50 J 950, 50 x 1,000 * Least cost combination of inputs:m 230 per nit and X; at Rs. 1.90 per unit, the amount saved from » Xj is Rs. 237.50 and the increase in the cost of X, dure a Rs, 200. The saving thus arrived at exceeds the increased mn OF 59 4123 ality of substituting X for X,. The process of substitericn iia continues tll the saving in the amount from hay is equal ge" O%) grain. In other words, substitution of X, for X, is economics) reas i Price ratio. Least cost combination is found at the feed compa tll Mig | of X, and 1610 units of X;. iMation ‘pp eg red Uctioy to incre, mt Profit Rules If, MRTS > price ratio, costs can be reduced by using more of add le d EAL nue Mor CORN INT ath oe er v Hf X, is substituted for x, (RTS...) ax Py AX ” Dy, ’ Use More of X, if X, is substituted for x, (RTS...) If MRTS < price ratio, costs can be reduced by using more of replaced reo nue, Ae . Py AX, ~ Py,’ TSE Mote Of Xo, if X; is substituted for X, (MRTSy,.,) 4%. Py AX © Fx, / Use more of X, if X; is substituted for X, (MRTSy.x,) Least cost combination is at the point where MRTS = PR Fos el eect veel AX Px, OF AX, Py, PRINCIPLE OF PRODUCT SUBSTITUTION Agricultural production is characterized by risks and uncertainties. To fight risks and uncertainties, the farmers produce several crop and livestock enterprises on their farms. This opportunity of choosing among different alternative enterprises poses an important management problem viz., what to produce, This involves product-product relationship and is explained by the principle of product substitution. This principle guides the producer in the determination of optimum combination of enterprises that maximizes profits. To apply this principle there is a need to understand the following product relationships. Complementary Enterprises: Two products are complementary, when increase in output of one also results in an increase in the output of the other, with resources held constant. Supplementary Enterprises: Two products are supplementary, when an increase oF asaeeeein Hedi ‘of one product does not affect the output of the other product.za se Enterprises: Two products are comy " ? petitive, if c cont ly through a sacrifice in the output aT Te Witton a hing tobe conaldered { LHeAnlar Me ORRIN eerie ans imum co on ¢ ral rate Of UPS on between products, price ratio and th Est tlre naBirt of cultival ion of the two products is same, the first t Monee Ritee 7th of the most profitable combination ee 4 ple of product substitution s { re P™ says that if th mr e inputs are constant, it is 1 to substitute one product for the othe sore than that of i soe In the process of pir emer ean ‘i Fa aa a ination o a s to a the output of one product seases y hile as caer decrease eee ey Ve ea are ie We OO TEE TOE na ut decreases, there is a decrease in returns. On the other i ‘tf ede: sagt whose evel of output increases, there is an increase encase ae Ect of returns See compared using the principle of product substitution which says that we should go on increasing the level of output of a product so lon; E decrease 37 the returns from the product being replaced is less fee the added sie a from the product being added. Thus if Y, is being increased and Y, is being meied. fom ze the production of Y, so long as Decrease in returns < Increase in returns je, Quantity of output being lost aetna t med at it gained multiplied by price per is ees ty re et unit of replaced product unit of replacing product Quantity of output lost__ Price per unit of replacing product Quantity of output gained ~ Price per unit of replaced product MRPS < PR ae Pa a Py Determination of Optimum Product Combination Y, and Y, are the two products, whose prices are Rs. 4.20 per unit and Rs. 6 per unit respectively. There are seven combination of Y, and Y, products that could be produced with given amount of resources (Table 24.2). As we shift from combination i to combination B, the output of Y, is increased by 20 units, while that of Y, reduced by 4 units. Given the prices, there is an increase in the return of Y, to the tune of Rs. 84 and decrease in the return of Y, by Rs. Ou The increase in the return of Rs. 84 due to the increase in the output of Y; is mor’ than the decrease in the returns of Rs. 24 due to reduction in the production of Y, indicating the rationality of substituting Y, for Y. a ntinues till the increase in the returns from 5 i Yin other'words substitution of Y, for ¥ dae to dears is equal t0 Pri ‘ado. The optimum combination of products fe cad oo combination FF Tqp units of Y, and 16 units of Yo- Profit Rules 1. IF MRS < PR, profits ca pe increased by producing more of added product ==.JUNE Fete retentions WF APTN MOMUEE E aintigs nating Ne Me day, y Yo waite Vy tt \ \\ lactone Her eae Ky Ww Wi tote it ctiienu Yt Me fi \ 0 ww ® x w “ ‘ m 4 a \ ” ny 4) 6 “ i 1m 9 » w “ “ ‘ 4 M tae \ w " NY it mn 0 om % rw Ww ” iW “ 4 om om 6 of 0 " In “4 % 0 om Sys EAANBNALION OF ptontitete Na. No AY, > Dy, Metene Vy Hf Y, be mubatitinted for Y, (MES, Ne Na . Aneroane Yy HEY, le ntibatituted for ¥, (MRSy,y,) Ys Mt 2 W MRS» PR. profits can be inerwaned by producing more of replaced product AY. A , Mi AYE” Ae teeane Yo HEY, he wubatituted for ¥y (MRSy,y,) AY, > Na vey. Ave, terete Yyr HE Ys i subatituted for Y, (MRSy,y,) 3. Profit maximizing combination of enterprises will be where, MRS = PR ay? : Ay, P , seen UEMRS\yy9_ (or) RR if MRSypy, PRINCIPLE OF EQUIMARGINAL RETURNS Under the conditions of unlimited resources, the law of diminishing returns helps in determining the most profitable level of resource use, In reality, most of the resources like land, irrigation, capital, etc, with most of the farmers are limited. When the farmers are constrained by the resources, they must prudently decide as to how the available resources should be allocated among alternative uses to gain maximum income. The principle of equimarginal returns provides guidelines and ensures that allocation of a limited input is done in such a way that profit is maximized from each unit of input, The principle is stated as follows, The limited resources should be allocated among alternative uses in such a ory that the marginal value product of the last unit of the resource is equal in all uses, How the limited inputs should be allocated among the enterprises is shown through the following example presented in Table 24.3. Any limited input should be allocated in that use where it brings in the greatest MVP. The limited availability of capital (here 5 units of liquid capital) must be allocated among the three crops v/z., sugarcane, cotton and paddy in the following manner ee| | PARLE 24.8 Principte of Hquimargioat Returns a capital Marginal value products per init of 000Rs < . ae Vadldy Sugarcane Cotton ww Bs) nt : 2000 (8) 4.200 (1) 2.200 (4) : 1.400 000 (2) 1,800 . 1.200 2,500 (3) L400 1.100) 1,600 1,000 : 1.000 1,200 800 The first dose of Rs. 1,000 has the potential of yielding MVP (added W) and Rs, 2,200 from paddy, sugarcane and cotton +. first dose of capital is invested on sugarcane, which brought in the among the alternatives. To apply the second dose of capital, the three first dose to paddy (Rs. 2,000), second dose to sugarcane (Rs. 3,000) first dose to cotton (Rs. 2.200), Among the three opportunities for the second dose arses. 1.000, sugarcane is yielding highest MVP In the same manner third dose for of Rreane, fourth for cotton and fifth for paddy are allocated, Rtulowing the principle of equimarginal returns, three units of money should be garcane and one unit each to cotton and paddy. Diagrammatic re- APN VP fanirnan MVE artunities are allocated to s ° , presentation ‘of the principle is presented in Fi 1, Any other allocation of capital Prong the crop enterprises other than the above will not help the farmer to obtain maximum returns. yi y y ‘Sugarcane Cotton Paddy @ Input Ky yi Input x oO Input x Figure 24.1. Equimarginal returns. OPPORTUNITY COST PRINCIPLE If an input is used in a particular production process, it has no alternative use at that cular point of time. This means that the input will bbe loosing income from the Piemative use and this income foregone by this input from its alternative use is called op} ty cost. By definition, opportunity cost is the income that could have been ived, if the input had been used in its most profitable alternative use, Alternatively, it is the value of product not produced because the input was used for another purpose. The concept of opportunity cost has a bearing on the decision-making process of the Coceel iy in decisions related to input use. The opportunity cost is referred farmer, Peal cost of an input. Real cost of an input is not the purchase price of theWPL Ty ty VEOH TE hip UN hie dip Wine g HOMEY the input in its alternative Use, wh Hii Hon the current use of the inp Veh i MIE ATE legs "the, i Ht ta be changed mnt wy PNAMBI, If A farmer has Re at his dispos inveatire unt ‘THe haw Ra, 1,000 at his lisposal, he has tlite an HAHAH, OF cotton oF paddy, As given in Table 24.3 HY Saray a x. \MWNAEANE Which te HIVIN © MVP of Rs. 3,200, The farmer ig fore May ¢ iv SEMEN HY spending on Mugarcane. Between the two, cotton seins the : VUNAN paddy. The former is sacrificing Rs, 2,200 from cotton, whe ow “alternative to wuparcane, which ts the opportunity cost W thet " MINIMA IM LOSS PRINCIPLE WAY Bitininn activity, the details of costs and returns Provide an idea Of prog ‘W\ Cont af production refers to the expenses incurred in producing a uny ob Che product in a particular time period. The costs in farming in the shor rh be divided into two Categories viz, fixed costs and variable costs, Fixed oan \howe costa, which do not vary with the level of output. Fixed bs $ are incurred w, WW the absence of Production, These are the costs, which arise on the inves already made in the fixed Tesources, Fixed costs include depreciation, interest Xe capital, rent, land revenue, insurance premium, wages of attached (permangs Setvants, family labour wages, etc, Variable costs on the other hand are those cos which vary with the level of output. There are no variable costs, when there ism Production. Variable costs include cost of seeds, feeds, manure: fertilizers, Wages of casual labourers, electricity charges, customs hiring, etc. Variable costs are importan in the decision-making in the short-run as the objective of the farmer is to recon, these costs. Though the expenditure on items like seeds, fertilizers, pesticides, FYy, etc., fall under variable costs, they tend to become fixed once they are used in the Production process. Those items of expenditure, which are yet to be incurred only become variable. For instance, expenditure on land Preparation, seed, fertilizer Pesticides, efc., which are working costs in the production of an enterprise, become fixed once they are used as they cannot be recovered in the middle of the crop period Analogously, tractor, which is being designated as a fixed resource, is in fact a variable cost before it is purchased by the farmer. Another fixed resource, land is also a variable resource before it is purchased by the farmer. In the long run, the distinction between working and fixed costs ceases to exist because all the resources are variable. The point of optimality is obtained by the equality of MR and MC, which is the profit maximizing condition. But in reality, the farmers incur lows instead of profit because MR (selling price) may not cover cost per unit of Output. Then the farmers continue the farming with an objective of minimizing losses, The minimum loss principle explains, as to how, the producer minimizes losses under adverse price environment, If selling price is more than ATC, profits are expected by the producer anid the ubjective is oh areca do this the producer has to produce till Mit = MC. If aelling price is less ce arora rlieh ha” AVG, loss is expected. The aljoctive here is to minimize fe Maen eee the task he has to continue the avautuetian tll MR ®e MC, In this si oaeeattan anne fixed costs. If selling price a lens ah AVE aad teeter selling price te eanZee BY stopping the foal tonnporarily, In the long, Price is less than ATC, continuous isnon ave ncurtost tn this situation, the producer shouted ston ay Production perma- fentlya 235 site is explained further with the help of hy in ne pte costs pera are RS. 4700; total fithlivenan Ins d costs ate Ra, 2700 ome ai costs stood at Rs. 7,400, The output obtained is 9.5 rot 2,700 ane ap toto Rs. 2.700 and the a" nel wn peing RS. 1,180 per quintal, gross income amounted to Rages per ha. With pense he surplus over total costs, came to Rs, 3525, In this situ 5. Net income, in sunflower cultivation situation the farmer ve to obtain profits et wMaming that the price has fallen down 5 i hip ioe pwn to Rs. 750, the gross i Aegis Rs 7125, 8 ee is less than the total costs of Rs. 7400 Hines the pa Ea corae he variable costs of Rs 4700 netting the farmer with an amou tof Re se, the farmer decides against cultivation of sunflower, as he . i b sno In 2425 plus over total costs, h ing STP al costs, he would be incurring | gore ing the fined costs. As against this i he goes sae tei des Gainer ion of eunlowe the loss would be to the extent of Rs. 275 only, which is the minimum | s , loss. cote and returns in sunflower cultivation per hectare qwe Rs. 4,700 TRC Rs. 2,700 TC Rs. 7,400 Output 9.5 quintals/ha Price per quintal Rs. 1,150 Gross income Rs. 10,925 Net income Rs. 10,925 ~ 7,400 Rs. 3525 If price falls down to Rs. 750, then Gross income = Rs. 7,125 Net income = Rs, 7,125-7,400 = Rs.-275 AVC = 4700/95 = Rs. 494.74 AFC = 2700/95 = Rs. 284.21 AC = Rs. 778.95 PRINCIPLE OF COMPARATIVE ADVANTAGE It is true that many crop and livestock enterprises can be raised over diversified soil types and climatic conditions, but with differences in yields, costs and returns. This Gitference in yields, costs and retums leads to specialization in the production of farm commodities by individual farmers or regions. We observe that ‘wheat farming is predominant in Uttar Pradesh, Punjab and Haryana, rice farming in Andhra Pradesh, West Bengal, Tamil Nadu, and Assam, cotton farming in Maharashtra and Tamil Nadu, seneulture in Kamataka, apple cultivation in Himachal Pradesh, sheep farm- ing in Rajasthan, poultry farming in Andhra Pradesh and Tamil Nadu and fresh water prawn culture in Andhra Pradesh and Orissa, Thus, regional specialization in the production of crops and livestock enterprises is better explained by the principle tive advantage. The relative yields, costs and returns are to be considered ‘a for explaining the principle.2225 236 farm commodities there are two kinds on of f Of eco, In the production © and (2) Relative advantage or compa Mom, e advantage Tative aq dy, (1) Absolute Na margin between costs and returns from USING the prakahtag The li absolute advantage. If this margin is larger for ong fag resents the abs in rept one region co in producing » another, we say that the first region has mpared to another, Om, that commodity. This is illustrated with an exa aN absolute rep ple in Tabi TABLE 24.4 Absolute Advanta A Particulars Groundnut Sunflower Gross income (Rs./acre) 5,000 5,010 Total costs (Rs,/acte) 4,700 4,320 Net income (Rs./acre) 300 690 Retums per rupee of investment 1.06 1.16 suppose farmers in region re producing two farm groundnut and sunflower. The gross income per acre of is Rs. 5,00, while costs are Rs. 4,700 In region‘ the gross income from thf of groundnut per acre is Rs. 7,300 and expenses aze RS. 6 500. The net incomes for groundnut is Rs. 300 in region ‘A’ and RS, 800 in region“, with aero 106 in region ‘A’ and Rs. 1.12 in region ‘B’ per rupee of investment Onan, hand sunflower could eam a gross income of Rs. 5,010 in region ‘A’ with soo cultivation of Rs, 4320. The net income and retums per rupee of investnese sunflower in region ‘A’ are Rs, 690 and Rs. 1.16 respectively. In region Ba income from sunflower per acre is Rs. 2500, while the cost of cultivation ice fos The net income per acre is Rs. 50 and the return per rupee of investment i Ref Region ‘A’ has an absolute advantage in sunflower because the size of the va: between costs and returns is greater than that for region ‘B’ Region ‘B’ has sn abnten advantage in groundnut production for the same Teason. To explain the relative or comparative advantage, let us compare region ‘B’ wit region ‘C’. In both the regions, farmers are growing redgram and growndnut comm; Sroundnut in region TABLE 24.5 Relative Advantage. Region B Region C Particulars es ee Redgram Groundnut Redgram Groundnut Gross income (Rs. acre) 5,600 7,300 2300 3300 Total costs (Rs./acre) 5,200 6,500 2,000 3,100 Net income (Rs. acre) ‘400 800 300 200 Returns per rupee of investment 1,08 112 115 1.06 From the figures furnished in Table 24.5 it is seen that region ‘B’ has a greatet absolute advantage in growing both redgram and groundnut than region ‘C’ because, the net incomes per acre are Rs. 400 and Rs. 800 respectively. In other words respective incomes are 108 per cent and 112 per cent higher than the costs. Farmers in region ‘B’ can earn profits by growing both the crops. But inorder to earn maximum profits, farmers in region ‘B’ should allocate larger acreage under groundnut alone hs it ig