365 new Lect No 2 Economic principles.ppt365 new Lect No 2 Economic principles.ppt

365 new Lect No 2 Economic principles.ppt

1. LectureNo2
Economic Principles applied to the
organization of farm business
1.Serveasaguidelineforcollectingand
usingrequisiteinformationforrational
decisionmakingoffarmbusiness.
2.Provideasetoftoolsforthepreparation
offarmbudgets&productionprogrammes

2. 3.Provideanswerstovariousfarmproblems
andsavetimeandenergyotherwiselostin
trialanderrorstoarriveatappropriate
decisions.
4.Enhancesfarmentrepreneurs’senseof
judgment,apre-requisiteformeetingthe
demandsofabusiness,especiallyunder
oddsituationsrequiringaspecialintellect.

3. Basic principles involved in making
rational farm management decisions
1.LawsofReturns
2.PrincipleofSubstitution
3.LawofEqui-marginalReturns
4.LawofOpportunityCost
5.LawofComparativeAdvantage
6.PrincipleofCombiningEnterprises
7.CostConceptsandPrinciples

4. 1.Lawsofreturns(Principleofvariableproportions)
Ithasthreephases:(a)Diminishingreturns
(b)Constantreturns
(c)Increasingreturns
(a)Diminishingreturns:-
Thislawdescribetherelationshipbetweenoutputanda
variableinputwhereotherinputsareheldconstant.
Thelawcanbestatedasfollows:
“Ifincreasingamountsofoneinputareaddedtothe
productionprocesswhileallotherinputsareheld
constant,theamountofoutputaddedperunitof
variableinputwilleventuallystartdecreasing.”

5. b)Constantreturns:-
Itmeanseachmarginalunitofvariableresourceadds
sameamountofoutputtototalproduction.
Forexample,anotheracremaybeasproductiveasthe
firstwithsameinputs.
Ifoneacreofwheatrequires20man-hoursoflabour,
30Kgs.ofseedand13inchesofirrigationwaterand
yields10quintalsofwheat,
Secondacrewillrequireadditionalsameinputs&
resultsinsameoutput

6. (c)Increasingreturns:
Increasingproductivitymeansaddedresources
giveincreasingreturns.
Forexample,acattleshedconstructedfor30
cowsmaycostmorepercowthanifoneis
constructedfor60cows.
Useofaddedresourcesthus,willgiveincreasing
returnsinsuchcases.

7. 2.PRINCIPLEOFFACTOR-SUBSTITUTION
(Least-costCombination)
Inagriculture,variousinputscanbesubstitutedin
varyingdegreesforproducingagivenoutput.
Aproducerhastochooseaparticularcombinationof
inputswhichwouldbemostprofitable.
Atagivenlevelofoutput,hehastodecideuponleast
cost-combinationofpracticesorinputs.
Therearelargenumberofalternatives

8. A few of such alternatives can be
(1)Use of bullocks v.s. tractor for a given size of
a farm
(2) Harvesting of crops by machines v.s. by
manual labour
(3) Milking machines v.s. hand milking for a
given herd of cows
(4) Wheat bhusa, green fodder and grains-mix in
dairy feeds
(5) Combinations of potash, phosphate and
nitrogen in fertilizers for crops.

9. 3.LAWOFEQUI-MARGINALRETURNS
LawOfEqui-marginalReturnsisconcernedwith
allocationofsameamountofalimitedresourcesamong
differententerprises.
Lawstatesthatprofitsaremaximizedbyusinga
resourceinsuchawaythatmarginalreturnsfromthat
resourceareequalinallcases.
Example-
AfarmerhasRs.3000andwantstogrowsugarcane,wheat
&cottonthataresuitableforhisfarmsituation.
Whatamountshouldbespentoneachenterprisetoobtain
highestprofit?

10. Addition of income from marginal amount Rs.500
Amount spentSugarcane Wheat Cotton
500 800 750 650
1000 700 650
560
1500 650
580 550
2000 640 540 510
2500 630 520 505
3000 605 510 500
Total Returns 4025 3550 3275
Net profit 1025 550 275
Return/ Rupee 1.34 1.18 1.09

11. Total Product & Marginal Product
Units of N
Unit of 40 kg
Total Product Marginal Product
Y
1Q/haY
2Q/haY
1Q/haY
2Q/ha
0 20 21
1 40 44 20 23
2 50 56
10
12
3 59 66 9
10
4 63 70 4 4
5 60 68 -3 -2

12. 4.OPPORTUNITY COSTPRINCIPLE
Theopportunitycostisthevalueofthenextbest
alternativeforegone.
opportunitycostistheearningfromthenextbest
alternativeforegone.
Thevalueofoneenterprisesacrificedisthecostof
producinganotherenterprise.
Example-IfapairofbullocksearnsRs.20/dayon
ploughingbutitcanalsoearnRs.25/dayinalternate
employmentofcarting.
OpportunitycostofploughingisRs.25/day.i.e.valueof
bullocklabourinitsbestalternativeuse

13. Ifacultivatorforexample,hasRs.8000/-for
investmentinhisfarmbusiness,hewillmakea
choicefromvariousalternativeusestowhichthis
moneycouldbeput.
Hemighthavethefollowingalternatives:
(i)PurchaseofabuffalogivingnetreturnsRs.800/-,i.e.,
10%returnsonthefundsinvested
(ii)Purchaseofawaterlifton5-acresfarm;netreturn
Rs.960/.(12%returnsofinvestment.)
(iii)Investonabullockcartfortransportinghis
producetothemarket,netreturnofRs.600/-(7.5%
returns).
Insimpletermsitisthecostequivalenttothereturns
fromnextbestalternativeforegone.

14. 5.LawofComparativeAdvantage
LawofComparativeAdvantagedirectsafarmer
inselectionofthoseenterprisesinproductionof
whichavailableresourceshavegreatestrelative
orcomparativeadvantageandnotjustabsolute
advantage.
Thisleadstotheestablishmentofdifferent
typesoffarmingexistinginaparticularareai.e.
specializedordiversifiedfarminglargelydepend
onthisprinciple.

15. Absolute & Comparative advantage
Crop accountRegion A Region B Region C
WheatGr’nutWheatS’caneGr’nutWheat
Income 1300013000900020000115008000
Expenditure8000700060001200070006000
Net income500060003000800045002000
Return / Rupee1.631.861.501.671.641.33
% return 163 186 150 167 164 133

16. 6.PrincipleofCombiningEnterprises
This principle requires a prior study of nature of
relationship between enterprises
If relationship is complementary, efforts should
be made to arrange resources for increasing
complementarity.
If enterprises are competitive, their combination
depend on factors like
1.Priceratioofproducts,
2.Substitutionratioofproducts
3.Perunitcostofproduction

17. Types of Product Relationships
1. Independent enterprises
2. Joint entreprises
3.Competitive entreprises
4. Supplementary enterprises
5. Complementary enterprises

18. 7.CostconceptandPrinciples:
Itgenerallyrefertotheexpensesincurredin
producingaunitofaproductinaparticular
timeperiod.
Sevencosts-
1.Fixedcost
2.Variablecost
3.Totalcost
4.AverageTotalcost
5.AverageFixedcost
6.Averagevariablecost
7.Marginalcost

19. Costper Unit
1.Fixed cost-
Itreferstovalueofservicesfromfixed
resources&calledoverheadcost.
Theyarenotfunctionofoutput-sameatall
levelsofoutput.
Rent,interest,depreciation,taxes&wagesof
permanentlabourconstitutefixedcost

20. Cost per Unit
1.Variable cost-
Thesecostsarerelatedtooutlayon
variableresourcesthatareusedup
duringproductionprocess.
Theyarefunctionofoutput-varywith
levelsofoutput.
Expensesonseed,manure,fertilizer,
irrigationwater,pesticides,hiredlabour
etc.,

21. Cost per Unit
1.Total cost-
Thesecostsaresumoftotalfixedcosts&
totalvariablecosts.
Thesecostsstandsevenwhenproduction
iszero.

22. Cost per unit of output
4.AverageTotalcost
Average of all costs per unit of output
Total cost
Average Total cost = --------------------
output
5. Average Fixed cost
Total Fixed costs per unit of output
Total Fixed cost
Average Fixed cost = --------------------
output
6. Average variable cost
Total Variable costs per unit of output
Total Variable cost
Average Variable cost = --------------------------
output

23. Cost per unit of output
7.Marginalcost
Itischangeincostassociatedwithanincreaseof
oneunitofoutput
Change inVariable cost
Marginal cost = ---------------------------------
Change inoutput
Relatedtocostsofproducingadditionalunitsof
output.Affectedbyvariablecostsnotbyfixed
costs.
Determineshowfarproductionshouldbepushed
&howmuchinputstobeused.

24. Data showing costs relationship
OutputFCVCTCACMCAFCAVC
0 125 0 125 - - - 0
1 12530 155155.030125.030.0
2 12545 17085.01562.522.5
3 12556 18160.31141.718.7
4 12558 18345.8 2 31.314.5
5 12562 18737.4 4 25.012.4
6 12570 19532.5 8 20.811.7
7 12590 21530.72017.812.8
8 12513125632.04115.616.4
9 12520332836.47213.922.5
10 12533546046.013212.533.5

25. Seven cost curves
Cost
Total cost
Variable cost
Fixed cost
Av.variable cost
Marginal cost Average cost
Average fixed cost
Output