Choosing

Production Levels
Basic Concepts In Farm Management. Production, Types Of
Resources, Choice Indicators, Costs, Revenue, Profit, Total,
Average & Marginal Concepts
 BASIC CONCEPTS
Farm-Firm:
◦ Farm means a piece of land where crop and livestock enterprises are taken
up under a common management. A farm is a firm which combines
resources in the production of agricultural products on the lines of a
business firm, i.e., with the objective of profit maximization.

Resources or Inputs or Factors of Production:

◦ Resources are those which get consumed or transformed into products in
the process of production. Services of resources are also used up in the
production process.
◦ All agricultural resources can be classified into two types.
◦ i) fixed resources
◦ ii) variable resources.
Fixed resources:
◦ Level of some resources like buildings, machinery, etc.is fixed over a production-
planning period irrespective of the level of enterprises taken up.
◦ These are called fixed farm resources,
◦ E.g. Land, building, machineries, etc.
◦ The quantum of fixed resources does not change with the level of production.
◦ Some of the resources, which are fixed during a short period, may become
variable during a long term.

Variable resources:
◦ Some resources like seed, fertilizer, labour, etc. vary with the level of output.
These are variable resources.

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Resources can also be classified into stock and flow resources as detailed
below:

a) Stock resources:
◦ They are resources which are used up entirely in the production process. Fertilizer,
seed, feed, etc., are such resources that can be stored up for using at later period.

b) Flow resources:
◦ Contrary to stock resources, there are factors of production which give only flow of
services in the production process.

◦ Hence, they are called the flow resources.

◦ If the services of this category of resources are not utilized, they go waste, as they
cannot be stored up for later use.

◦ For example, if the services of a farm building or machinery are not used in a
particular day, they go waste, as they cannot be stored up for future use.
Ways of Mobilizing Farm Resources:
Five types of farm resources and ways of mobilizing them by a farm manager
are discussed here.
1.Owning:
1. Resources like land, machinery, implements, tools, work bullocks, etc, can be
acquired by purchasing them.

Farmers can own these resources due to the following reasons:

a) The resources are to be continuously or more frequently used throughout the
year.
◦ The size of holding should be large enough to effectively use such assets.

b) If the farmer could not engage work, tractors/power tillers, power sprayers, in his
own farm economically,
◦ adequate demand should be there for hiring out these resources.

c) The farmer should have either adequate owned funds or borrowed funds to
acquire these resources.
◦ Owning of resources would be convenient to the farmer especially during peak season to carry out the
farm operation in time.
◦ However, during lean season, it may be uneconomical to maintain owned resources..
◦ Hiring would be cheaper than owning the resource especially, when the size of holding is too small.
2) Leasing:
The immovable resources like land and buildings can be acquired by leasing.
Rent must be paid based on the terms agreed by the lessees (tenants) to the
owner of such resources.
The land-owner may lease-out his lands to land less agricultural labourers or
to farmers who can cultivate larger area.
The land-owner leases out due to
◦ 1) his absenteeism at the village where his land is located,
◦ 2) inefficiency in running farm
◦ 3) running of other more profitable enterprise in the same village.

Sometimes, the widows and invalids may lease out due to their physical
inability.
Leasing-in helps lessees (tenants) to augment their farm returns.
3) Hiring:
The farmer can acquire human labour and bullock power through hiring.
The magnitude of employment of hired human labour and bullock power
depends upon:
◦ a) size of farm holding,
◦ b) number of family labourers available,
◦ c) availability of owned bullocks,
◦ d) resourcefulness of the farmer to replace labour with capital,
◦ e) diversification of crop activities practiced in the farm.

Hiring of human labour and bullock power is also difficult and costly during
peak season
◦ due to either costly human labour as a result of heavy demand for such labour or
difficulty in carrying the operations with human labour in time.
4) Joint ownership:
When the land, buildings and well are inherited by legal heirs, the land gets sub-divided and buildings and
wells are jointly owned among them.
Joint ownership is convenient and economical to those who have small and fragmented inherited land.
However, disputes arise due to lack of understanding among joint owners in sharing the services and also in
the maintenance of the jointly owned assets.

5) Custom Services:
acquire custom services of machineries like tractor, power tillers, threshers, power sprayers, etc. by paying
custom hire charges.
Hiring of custom services of machineries depends upon
1) size of farm holding,
2) availability of alternatives such as human labour and bullock power,
3) hire charges for human labour and bullock power,
4) custom hire charges,
5) time of operation (peak or lean season),
6) availability of time to carry out the farm operation
7) quantum of work to be carried out.
Custom services would be more economical for small and marginal farms as they cannot afford to buy or
maintain costlier equipment and machineries.
Product or Output:
It is the result of the use of resources or services of
resources.
The resources get transformed into what is known as
output. E.g. Paddy, groundnut, sugarcane, milk, etc.
Production:
◦ It is a process of transformation of resources or inputs like
labour, seed, fertilizer, water, etc. into products like paddy,
wheat etc.
◦ vi) Transformation or Production Period:
◦ The time required for a resource to be completely
transformed into a product is called transformation or
production period. E.g. Paddy is harvested in 3½ to 6 months.
Production Economics:
◦ Farm production economics is a field of specialization within the subject
of agricultural economics.
◦ It is concerned with choosing of available alternatives or their
combinations in order to maximize the returns or to minimize the costs.
◦ Agricultural production economics is an applied field of science, wherein
the principles of choice are applied to the use of land, labour, capital and
management in farming.
◦ The subject matter of production economics explains the conditions
under which the profit, output, etc. that can be maximized and the cost,
use of physical inputs, etc. that can be minimized.
The Main Objectives Of Production Economics are:
◦ to determine and define the conditions which provide for optimum use of
resources;
◦ to determine the extent to which the current use of resources deviates
from the optimum use;
◦ to analyze the factors which influence the existing production patterns
and resources use;
◦ to identify the means and methods for optimal use of resources.

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 The Main Objectives Of Production
Economics are:
a) to determine and define the conditions which provide for optimum
use of resources

b) to determine the extent to which the current use of resources

deviates from the optimum use

c) to analyze the factors which influence the existing production

patterns and resources use

d) to identify the means and methods for optimal use of resources.

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The principles that help attain these objectives are the same
on a micro as on a regional or national level.
On micro level where intra-farm resource allocation and
production pattern are involved, it is the subject matter of farm
management.
When choice principles involve a broader field on a macro-
level, the subject is known as production economics.
The economist who focuses his attention on individual farm
cannot make rational recommendations unless he considers
the aggregate or overall aspect of production.
Similarly, government programmes and policies affect the
decisions on the individual farms.
Agric economist, therefore, must be able to integrate both
individual and aggregate aspects of agricultural resource use
and levels and patterns of production.
Production Function:
Production function refers to input-output relationship in the
production process.
Production function is a technical and mathematical relationship
describing the manner and extent to which a particular product
depends upon the quantities of inputs or services of inputs used
in the production process.
It describes the rate at which resources are transformed into
products.
•There are numerous input-output relationships in agriculture
because the rates at which inputs are transformed into outputs
will vary among soil types, animals, technologies, rainfall, etc.
Any given input-output relationship specifies the quantities and
qualities of resources needed to produce a particular product.
a) Types of Production Function:
There are different types of production functions, viz.,
◦ 1) continuous function
◦ 2) discontinuous function.

1) Continuous function:
 The doses or levels of input and output can be split up into small units.
◦ E.g. Fertilizers or seed can be applied to a hectare of land in quantities ranging
from a fraction of a kilogram up to hundreds of kilogram

2) Discontinuous or Discrete function:

 Such a function is obtained for input or factors or work units which are used or
done in whole numbers such as one ploughing or a number of ploughings.
 The difference between discrete data and continuous data isin the divisibility of the
inputs or outputs.
◦ An example of a discrete input is a cow. A dairy herd may be composed of two, three, or most cows.
However, one and a half, three and a quarter, etc, will not be found in a dairy herd.
 Fertilizer on the other hand is an example of a continuous input. Fertilizer can be
divided into any size unit and for each size unit, there is a resulting yield.
Total Physical Product (TPP):
◦ TPP is the quantum of output (Y) produced by a given level of input (X).

Average Physical Product (APP):

◦ APP is the quantity of output produced per unit of input

◦ i.e., ratio of the total product to the quantity of input used in producing that amount of
product.
APP = Number of Units of Output Y ÷ Number of Units of Input X

Marginal Physical Product (MPP):

◦ The term marginal refers to an additional unit.

◦ If we use A (delta) to mean “change in “, then AY and AX represent change in Y

(output) and change in X (input) respectively.
◦ Marginal physical product, therefore, refers to the change in output, which results from
applying an additional unit of input.
◦ Marginal Physical Product (MPP) = Change in Output [AY] ÷ Change in Input [A X]
Farm Management
ECONOMIC PRINCIPLES
CHOOSING PRODUCTION LEVELS
Outline
1. Marginalism
2. The Production Function
3. How Much Input to Use
4. How Much Output to Produce
5. Applying the Marginal Principles
6. Equal Marginal Principle

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 Chapter Objectives
1. To explain the concept of marginalism
2. To show the relation between a variable input and an output by use of a
production function
3. To describe the calculation of average and marginal physical products
4. To illustrate the law of diminishing returns
5. To find the profit-maximizing point using the concepts of marginal value
product and marginal input cost
6. To find the profit-maximizing point using the concepts of marginal
revenue and marginal cost
7. To explain the use of the equal marginal principal

18
 Marginalism
• The term marginal refers to incremental
changes, either increases or decreases, that
occur at the edge or at the “margin.”

• It may help to mentally substitute “extra” or

“additional” whenever the word marginally is
used.
• But keep in mind that the “extra” can be
negative.

19
The Production Function
• The production function is a systematic way of
showing the relation between different amounts of
a resource or input that can be used to produce a
product and the corresponding output.

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Table 1
Production Function in Tabular Form

Total Average Marginal

physical physical physical
Input product product product
level (TPP) (APP) (MPP)
0 0
1 12 12.0 12.0
2 30 15.0 18.0
3 44 14.7 14.0
4 54 13.5 10.0
5 62 12.4 8.0
6 68 11.3 6.0
7 72 10.3 4.0
8 74 9.3 2.0
9 72 8.0 -2.0
10 68 6.8 -4.0

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 Total Physical Product
• Total physical product (TPP) is the amount of
production expected from using each input
level.
• Output or yield is often called total physical
product.

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Average Physical Product
Average physical product (APP) is the
average amount of output produced
per unit of input used.

APP =

TPP

input level

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Marginal Physical Product
Marginal physical product (MPP) is the
additional TPP produced by using an
additional unit of input.

MPP =

TPP

 input level

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Figure -1
Graphical illustration of a production
function

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 Stages of Production
Stage I:
• APP increasing,
• MPP>APP,
• TPP increasing
Stage II:
 APP decreasing,
 MPP<APP,
 TPP increasing
Stage III:
 TPP decreasing,
 MPP<0
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 Law of Diminishing Marginal Returns

 As additional units of a variable input are used

in combination with one or more fixed inputs,
marginal physical product will eventually begin
to decline.

 Diminishing returns may start with the first unit

of input used or may start later after a period of
increasing returns.

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 How Much Input to Use?
•Do not produce in Stage III, because more output can
be produced with less input.

•Do not normally produce in Stage I because the

average productivity of the inputs continues to rise in
this stage.

•Stage II is the “rational stage” of production.

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Marginal Value Product
 total value product
MVP =
 input level

TVP = TPP × product selling price

If output price is constant:

MVP = MPP × product selling price

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Marginal Input Cost
 total input costs
MIC =
 input level

TIC = amount of input × input price

If input price is constant:

MIC = input selling price

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Table -2
Marginal Value Product, Marginal Input
Cost and the Optimum Input Level
Total Marginal Total Marginal Marginal
physical physical value value input
Input product product product product cost
level (TPP) (MPP) (TVP) $ (MVP) $ (MIC) $
0 0 0
1 12 12.0 24 24 12
2 30 18.0 60 36 12
3 44 14.0 88 28 12
4 54 10.0 108 20 12
5 62 8.0 124 16 12
6 68 6.0 136 12 12
7 72 4.0 144 8 12
8 74 2.0 148 4 12
9 72 -2.0 144 -4 12
10 68 -4.0 136 -8 12

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input price = $12; output price = 31
 The Decision Rule
MVP = MIC

If MVP > MIC, additional profit can be made by using more

input.
If MIC > MVP, less input should be used.

…. When MVP = MIC

means that when the additional cost is equal the additional benefit .

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How Much Output to
Produce?

An alternative way to find the profit-

maximizing point is to find directly
the amount of output that maximizes
profit.

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Marginal Revenue
 total revenue
MR =
 total physical product

Total revenue = Total value product

-If output price is constant:

MR = output selling price

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Marginal Cost
 total input cost
MC =
 total physical product

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 The Decision Rule
MR = MC

The decision rule, MR=MC, leads to

the same point as the decision rule
MVP=MIC.

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Table -3
Marginal Revenue, Marginal Cost and the
Optimum Output Level
Total Marginal Total
physical physical Total input Marginal Marginal
Input product product revenue cost revenue cost
level (TPP) (MPP) (TR) $ (TIC) $ (MR) $ (MC) $
0 0 0 0
1 12 12.0 24 12 2.00 1
2 30 18.0 60 24 2.00 0.67
3 44 14.0 88 36 2.00 0.86
4 54 10.0 108 48 2.00 1.20
5 62 8.0 124 60 2.00 1.50
6 68 6.0 136 72 2.00 2.00
7 72 4.0 144 84 2.00 3.00
8 74 2.0 148 96 2.00 6.00
9 72 -2.0 144 108 2.00
10 68 -4.0 136 120 2.00

input price = $12; output price = $2

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 Applying the Marginal
Principles
• Given prices for irrigation water and for corn, the principles from the last two

sections can be used to determine the amount of water and the corresponding

amount of corn that will maximize profit.

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Table -4
Determining the Profit-Maximizing Irrigation
Level for Corn Production
Marginal Margianl Marginal
Irrigation Corn yield physical value input Marginal Marginal
water per acre product product cost revenue cost
(acre-inch) (bu) (MPP) (MVP) (MIC) (MR) (MC)
10 104.0
12 116.8 6.4 16.00 3.00 2.50 0.47
14 128.6 5.9 14.75 3.00 2.50 0.51
16 138.2 4.8 12.00 3.00 2.50 0.63
18 144.8 3.3 8.25 3.00 2.50 0.91
20 149.0 2.1 5.25 3.00 2.50 1.43
22 151.8 1.4 3.50 3.00 2.50 2.14
24 153.6 0.9 2.25 3.00 2.50 3.33
26 154.2 0.3 0.75 3.00 2.50 10.00

water at $3.00/acre-inch, corn at $2.50/bu

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 Equal Marginal Principal
• In some situations an input may be limited so that
the profit-maximizing point cannot be reached for
all possible uses.

• A limited input should be allocated among competing

uses in such a way that the marginal value products of the
last unit used on each alternative are equal.

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 Table -5
Application of the Equal Marginal Principle
to the Allocation of Irrigation Water
Marginal value products ($)
Irrigation Grain
water Wheat Sorghum Cotton
(acre-inch) (100 acres) (100 acres) (100 acres)
0
4 1,200 1,600 1,800
8 800 1,200 1,500
12 600 800 1,200
16 300 500 800
20 50 200 400
Each application of 4 acre-inches on a crop is a total use
of 400 acre-inches (4 acre-inches times 100 acres)

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Figure -2
Illustration of the equal marginal system

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• Economic principles using the concept of marginality
provide useful guidelines for decision making.
• MVP and MIC are equated to find the profit-
maximizing input level.
• MR and MC are equated to find the profit-
maximizing output level.
• The equal marginal principle is used when a limited
input must be allocated among competing uses.

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