TOPIC 4

ECONOMIC PRINCIPLES IN FARM

MANAGEMENT
 Farm Enterprise

• Animal based
 Farm Enterprise

• Plant based
 Farm Enterprise

• Service based
 Farm Enterprise

• Adding value
Production cycle
 Different production cycle

risk

Short.. (month) long.. (years)

 Input & Output
OUTPUT:
INPUT:
Transformation -milk
process -meat
-raw -income
material -
-Etc.
Farm Management : commodity/
Combining farm product
resources -etc.
 Crop Enterprise

Input: Process:
Output:
Fertilizer Ploughing
Capital Sowing Fruits
Farming tools Irrigating Vegetables
Labour Fertilizing Other process food
Pesticides Harvesting
Herbicides
soil

• Output determine whether the farmer gain the profit or loss the profit!
 Aims in Farm Enterprise

• Low Input High Output

 Production Function

• It refer to time period involved in the production process.

• Production of a commodity depends on certain specific inputs.

• It represents the quantitative relationship between inputs and outputs.

• The time period involved to convert input into output is known as production function.

• Relationship between inputs and outputs determines what the

farmer produces.
 Short run & long run
• Short run production function
• Long run production function

Short-run Long-run
All variable inputs are change All variable input are change
(elastic) (elastic)

All fixed inputs are unchanged All fixed input are change
(inelastic) (elastic)
 Fix Input

Fixed input/ fixed cost are those that do not change with the level of
farming activity, such as land rent, tax, interest, insurance premiums,
depreciation on fixed asset, salaries of manager & workers,office

A fixed input is a factor that remains constant for a certain level of output.

In short run production, the fixed input is inelastic

In long run production, the fixed input elastic

 Variable Input
Variable input/ variable costs are those varying with the level of
production, such as feeds, fertilizer, no. of labour, pesticides, fuel,
electricity and water

The changes of Variable input can change the level of output

In short run/ long run production, all variable input is elastic.

A variable input is change with the change in output.

• As a farm manager, he need to be able to categorize the farm
decisions into short-run decisions & long-run decisions

• What the farm should do next week?

• Short run lens is best---- increase variable input

• What the farm should do after 1 year?

• Long-run lens--- increase fixed input

Hall & Leiberman; Economics:

22
Principles And Applications, 2004
• When farm enterprise make
short-run decisions, there is
nothing they can do about
their fixed inputs!

• The quantity of fixed inputs

remain constant, regardless of
how much output is produced

Hall & Leiberman; Economics: Principles And

Applications, 2004 23
 Types of product:

• Total product (TP) is the maximum quantity of output that can

be produced from a given combination of inputs.

• Average product (AV) is the amount of output produced per

unit of input at each input level

• Marginal product (MP) is the change in output that results

from a small change in an input (holding the level of all other
inputs constant)

24
Total product (TP)

Any changes in
variable input
(e.g. Labour) will
change the
number of output
(TP)
Land area Labor (unit) Total product
(Hectare) (TP) (Kg)
3 0 0
3 1 6
3 2 14
3 3 25
3 4 35
3 5 42.5
3 6 46
3 7 46
3 8 43
Q1: Determine total product (TP) from the table below and plot a graph Input
level versus TP
Input Level Nitrogen applied Yield Total product
(kg) (kg) (TP) (kg)

0 0 130
1 25 148
2 50 162
3 75 170
4 100 177
5 125 180
6 150 182
7 175 183
8 200 183
 Average Product (AP)

• Average amount of output produced per

unit of input at each input level

• AP= Total Product (TP) /Input level (IL)

Q2: Determine average product (AP) from the table below and plot a graph
Input level versus TP & AP

Week Input level (labor) Total Product (TP) Average Product (AP)

1 1 30

2 2 90

3 3 130

4 4 161

5 5 184

6 6 196
 Marginal Product (MP)=keluaran sut

• The change in output that results from a small change in an input

(holding the level of all other inputs constant)

• MP= Total Product (TP) / Input level (IL)

• MP tells us that the rise in output
produced when one more worker
is hired (input level), leaving all
other inputs unchanged

• Tambahan output bagi setiap

pertambahan input
IL
Units of Output

196 Total Product

184
161
DTR from hiring fourth worker
130
DTP from hiring third worker
90

DTR from hiring second worker

30
DTR from hiring first worker

1 2 3 4 5 6 Number of Workers
increasing diminishing marginal
marginal returns returns
Hall & Leiberman; Economics:
33
Principles And Applications, 2004
Why Marginal Product is important in Farm Enterprise?

• Economic & manager are often interest in what changes may happen if changes of
one / more factor under their control

For example:
• How banana yield changes from using additional 50 kg of fertilizer?
• How additional of 2 kg of grain in daily feed ration affect milk production?

• Small change?...Bigger change?...OR …No effect?

• Remember=the purpose is to increase the yield!

Q3:
• Pak Ali involved in chili sauce production for almost 1 year. He started
with small capital and did it manually. At first week, he just hired 1
worker and able to produce 30 bottles of chili sauce. At second week,
he hired one more worker and able to produce 90 bottles of chili
sauce. At third week, he hired one more worker and able to produce
130 bottles of chili sauce. At fourth week, he hired one more worker
and able to produce 161 bottles of chili sauce. At fifth week, he hired
one more worker and able to produce 184 bottles of chili sauce. At
sixth week, he hired one more worker and able to produce 196
bottles of chili sauce. Then Pak Ali realized that he need to spend a lot
of money for the salary of his workers. Help him to evaluate either he
need a lot of workers or not.
Find out the main point:
Week Input level (labor) Production (Total Product)

1 1 30

2 2 90

3 3 130

4 4 161

5 5 184

6 6 196
Find out the main point:
Week Input level Production ∆ IL ∆TP MP
(labor) (Total Product)
1 1 30

2 2 90

3 3 130

4 4 161

5 5 184

6 6 196
 3 stages of production
No. of Total product Average product Marginal Stage of production
workers product (MERUJUK KEPADA MP)
(Input level)

1 24 24 24 I- INCREASING RETURNS
2 72 36 48 (PULANGAN MENINGKAT)
3 138 46 66
4 216 54 78
5 300 60 84
6 384 64 84
7 462 66 78 II-DIMINISHING RETURNS
8 528 66 66 (PULANGAN BERKURANG)
9 576 64 48
10 600 60 24
11 594 54 -6 III-NEGATIVE RETURNS
12 552 46 -42 (PULANGAN NEGATIVE)
Pattern is believed to be typical at many types of enterprise.
 The law of diminishing return (Hukum Pulangan Berkurang)

• Focus on variable input.

• The law of diminishing returns states that when more units of a

variable input are applied to a given quantity of fixed inputs, the total
output may initially increase at an increasing rate and then at a
constant rate but it will eventually decrease at diminishing rates
 Diminishing Returns To Labor

• At first, Output rises when another worker is added so marginal product is

positive

• But then, the rise in output is smaller and smaller with each successive
worker

• Later, there will be diminishing marginal returns to the labor. Adding more
labor will cause decline in marginal production and total production

Hall & Leiberman; Economics:

41
Principles And Applications, 2004
• The law cannot be applied universally.

• It may operate quickly in some and slow in others and there may be
cases where this may not appear at all.

• It has been found to operate in agriculture more than in industries.

• The graph can help in identifying the rational and irrational stages of
operations.
INCREASING RETURN:

-The sales increase NEGATIVE RETURN:

-Many customer like it
DIMINISHING RETURN: -The sales decrease
-Easy to eat
-Most of customer did not
-The sales increase (slow) like it
-The cost of meat increase -So messy
-Not all customer like it -Difficult to eat
-Difficult to eat
Q4:
Uncle Hua has 3 acres of land. He used all the area to plant pineapple
of MD2. He added one worker every year to help him harvest the
pineapples.

a) Based on the table, help him to determine the best number of

workers.
b) Determine the average product (AP)
c) Make a conclusion based on the MP values
Q4:
Land area Labor (unit) Total product Average Marginal
(Hectare) (TP) product (AP) product (MP)
3 0 0
3 1 6
3 2 14
3 3 25
3 4 35
3 5 42.5
3 6 46
3 7 46
3 8 43
Conclusion:

Total Production

Average Production

Marginal Product (MP)

 Q5: Homework from class activity. Send the answer through the link at e-learning

Input Level Nitrogen Yield Total product Average Marginal

applied (kg) (kg) (TP) (kg) product (AP) product
(kg) (MP) (kg)
0 0 130
1 25 148
2 50 162
3 75 170
4 100 177
5 125 180
6 150 182
7 175 183
8 200 183
Q5:
(a) Plot a graph on:
• Total production against input level
• Average production against input level
• Marginal production against input level

(b) Make a conclusion on TP,AP and MP