EVALUATION OF FARM MANGMENT

THROUGH ECONOMIC PRINICIPLES APPLIED

IN FARM MANAGMENT
the top four economic principles applied to farm
management. The economic principles are: 1. The
Law of Diminishing Marginal Returns 2. The Law
of Equi-Marginal Returns 3. Law of Opportunity
Cost 4. Law of Comparative Advantage.
Economic Principle # 1. The Law of Diminishing
Marginal Returns:
Since agriculture is a productive activity we should be
well versed with the process of production.
Production is defined as transformation of two or
more inputs (resources) into one or more products.
The farm resources are land, labour, capital,
organization (management), enterprise.
 The total product is the amount of product which is the result
of different amounts of variable inputs used.
 Average product is the result of total product at a particular
level of input used divided by the level of input used.
 Marginal product is the quantity which is produced by the last
unit of the variable input used.
 Expressed symbolically:
 Y = total product;
 X = input;
 T/Y = Average product;
 ∆Y/∆X = Marginal product;
 ∆ = the change in Y and X.
There is the definite releationship between total,average and marginal
products in the production.
(a) When TP is maximum, MP is zero.
(b) When TP is zero, AP is zero.
(c) If AP is maximum, the ratio of output to input is maximum = MP = AP.
(d) When MP is at its maximum, TP is at the point of inflection.
(e) When AP is increasing, MP > AP.
(f) When AP is decreasing, MP < AP.
There is the algebraic proof of the relationship between TP, AP and MP:
TP = Y; Input X; AP = Y/X; MP = dY/dX
(a) For rising AP:dY/dX or, MP > AP
(b) For the maximum AP: dY/dX= Y/X or, MP = AP.
(c) For decreasing AP: dY/dX = Y/X or, MP <AP
(d) TP is maximum when, dTP/dX1 = 0 (Zero)
That is, MP = 0, when TP is maximum
or, dY/dX = 0 or, Mp = 0 =0 or, MP = 0
MP is at the maximum, when TP is at the point of inflection.
The significance of MP (Marginal product):
MP, Where, X1, is an input.
(a) When MP is increasing, TP increases at an increasing
rate.
(b) When MP is decreasing, but is more than zero. TP
increases at a decreasing rate.
(c) When MP is zero, TP is at its maximum.
(d) When MP is greater than AP, AP is increasing.
(e) When MP is less than AP, AP is decreasing.
(f) When MP is equal to AP, AP is at its maximum.’
Principles of Diminishing Returns:
 “an increase in capital and labour employed in the
cultivation of land causes, in general, a less than
proportionate increase in the amount of produce raised
unless it happens to coincide with an improvement in the art
of agriculture.”
This is the definition given by Alfred Marshall. This law
establishes an input- output relationship, which applies very fast
in agriculture. This is a case of physical input-output relationship.
This relationship is also called FACTOR-PRODUCT relation­ship
and technically known as “PRODUCTION
FUNCTION” which means that the output is a function of input.
(a) Stage I:
It extends from the point of origin (The juncture of OX and OY
axis’s) where AP is maximized and MP = AP. At this point MP curve
crosses AP curve demarcating the stage I from II.
Stage III:
This point starts from where MP is zero, after this MP is less
than zero and TP decrease. It is a stage of negative MP.
Stage I and III are called irrational stages, because in stage I,
AP and MP are increasing and MP is always greater than AP
therefore if more inputs are used it will add output in greater
proportion.
In stage m since MP is less than zero the additional input
will give less and less output. The total profit starts
diminishing.
Elasticity of Production, (Ep):
Economic Principle # 2. The Law of Equi-Marginal
Returns:
As we know that the farm managers work under two
situations as regards the capital viz., either under unlimited
resources or under limited resources. The law of equi-
marginal returns works or is applicable under limited
resources. Under the capital constraints the farmer, for
instances, Rs. 5,000 to use for two enterprises Y1 and Y2. He
has the option of using a doze of Rs. 1,000 for both the
enterprises.
the profits are maximized by using the resource in such a
way that the marginal returns from the resources are
equal in all cases.”
Practical Utility of the Law of Equi-marginal Returns:
1. Planning of the farmer’s budget.
2. Determining enterprise relationship as complementary, or
competitive.
3. Guidance for diversification or specialization in farming.
Economic Principle # 3. Law of Opportunity Cost:
The opportunity cost is a concept wherein earning from the
next best alternative is not availed. An example will make it
clear, in the Rabi season wheat and potato could be raised on
one hectare of land available with the farmer.
Opportunity cost are calculated by two methods:
(a) On gross income basis-when cost of production are equal.
(b) On net income basis-when cost of production are not equal.
Economic Principle # 4. Law of Comparative
Advantage:
In the wake of globalization and open economy and
encouragement to agricultural sector to enter into the arena
of international trade. We are making efforts to export the
agricultural commodities to the nation outside India.
Specialization depends on the type of farming which is
related to climate, natural resources, geographical situation
and the efficiency of labour. The trade will take place only
when one region or country produces the commodity at a
lower cost for which the other region or country has
disadvantage.
Principles of Combining Enterprises:
In the process of production under all the three situations, viz.,
factor-product, factor-factor, and product-product relationship
we see the production function curve : in the case of factor-
product relationship, iso-cost curve in case of factor-factor
relationship, and iso-product curve in. case of product-product
relationship.
The elasticity is defined as “the percentage change in the
quantity of output per unit of input (F/P relationship),
quantity change in input replaced by one unit of input
substitute (F/F relationship) and quantity of output changed
by the substitution of one unit of the other product,” (P/P
relationship).
There are two extremes of elasticity:
(a) Point elasticity;
(b) Arc elasticity.
In the case of F/P relationship we have already discussed
the elasticity of

The elasticity of substitution will depend on the slope of

the curve.
In order to get to the optimum level of the combination of
the two inputs we will have to calculate the MRS.
When MRS of products will be equal to the price ratio of
the two products then optimum combination of the two
products will be achieved.
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