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1. CHAPTER ONE Basics of Farm Management Definition and Scope of Farm Management Farm Management comprises of two words i.e. Farm and Management Farm means a piece of land where crops and livestock enterprises are taken up and has specific boundaries Farm is a socio economic unit which not only provides income to a farmer but also a source of happiness to them

2. Cont.… Management is the art of getting work done out of others working in a group It is the process of designing and maintaining an environment in which individuals working together in group to accomplish a selected aims Therefore, by combining the two, Farm Management is the art of managing a Farm successfully Farm management is defined as the science of organization and management of farm enterprises for the purpose of securing the maximum and continuous profits

3. Cont.… It is a branch of agricultural economics which deals with wealth earning and spending activities of a farmer on individual farm unit It is generally considered to be Microeconomic in its scope It deals with the allocation of resources at the level of individual farm Nature and Characteristics of Farm Management Farm management has the following distinguishing characteristics from other fields of agricultural science I Practical science: it test the applicability of fact and findings and showing how to put these results to use on a given farm

4. Cont.. II Profit - oriented : the farm management specialist always considers with the profitability of the farm III Integrating science or interdisciplinary science: it related with others and involves different disciplines to decision IV Broader field: it uses more than one discipline to make decisions and gathers knowledge from many other sciences for making decision V Farm unit as a whole: in farm management analysis a farm as a whole is considered to be a unit for making decisions

5. Cont .. Objectives of farm management To study the existing resources – land, labor, capital and managerial skill-and the production pattern of the farm To explain the means and procedure of moving from the existing combination of resources to their optimum use for profit maximization To outline conditions that simultaneously obtain its objectives of profit maximization and maximization of family satisfaction

6. Cont.. F arm management problems in developing countries Farm management problems in developing countries may vary from place to place depend on the degree of agricultural development and the availability of resources Small size of farm business: The average land holding size or operational holding in developing countries is very small Inadequate capital: Capital shortage is the feature of farming in developing countries peasant agriculture which is mostly subsistence and labour intensive that characterized by serious deficiency of capital

7. Cont.. Under-employment of factors of production: It emanate from :- small size of the farms seasonal nature of production lack of supporting rural industries Slow adoption of innovations: Small farmers are usually conservative and their willingness and ability to use the new information and technology is slow Communication and markets: Lack of adequate communication and the regulated market organization is a major bottleneck in the way to introduce and sale their product

8. Cont.. Inadequacy of input supplies: Shortages of foreign exchange in developing countries seriously limit importation of needed supplies and materials Domestic industries generally lack raw materials, skills, capital or combination of these to manufacture the needed farm supplies or inputs

9. Characteristics of farming as a business Farming as a business has many distinguishing features from most other industries in its management methods and practices Primary forces of production: Agriculture is primarily biological in nature A slight change in the environment may cause serious difficulties Size of the production unit: Farming is a small-sized business There is little scope for division of labour

10. Cont.. Heavy dependence on climatic factors: Weather changes may involve readjustments management practices in farming must be much more flexible than in other industries Frequency and speed of decisions: Farming requires many and speedy decisions on the part of the farmer Changes in prices: Agricultural prices and production usually move in opposite directions

11. Cont.. Inelastic demand for farm products: Agriculture deals with production of food and raw materials As standard of living improve and income increases, the demand for agricultural products will increase less rapidly than that for industrial products

12. Cont.. Farm Decision Making Process farm management is concerned with the allocation of limited resources among a number of alternative uses which requires a manager to make decisions A manager must consider the resources available Decision made by farm manager can be classified in a number of ways

13. Cont.. One way of classification system may be decisions as either organizational or operational in nature Organizational decisions are decisions made in the general areas of developing plans for the business These are decisions about :- R egarding the size of farm and scale of farm operation H ow much capital to borrow C onstruction of buildings and irrigation facilities, etc.

14. Cont.. It is related to planning and organization of the farm that tend to be long run decisions It is not modified or re-evaluated more than once a year Operational decisions are made more frequently than the organizational decisions M ade on a daily, weekly or monthly basis It involve relatively lower investment and their effect is short lived

15. Cont.. These decisions is about :- Selecting fertilizer and seeding rates for a given field Making changes in livestock feed ration Selecting planting and harvesting dates Marketing decisions (buying and selling) and daily work schedules Economic questions

16. Cont.. Functions of Farm Manager Based on the problems or decisions faced in Farm Management, the farm manager must be prepared to carry out the following functions Forecasting the manager expect the quantities to produce, the price to set, the costs of farm inputs and the likely profits Planning the manager sets goal how much to make, at what price to sell, what profits are expected, the obligations to workers and consumers

17. Cont.. Organizing responsibilities are defined and lines of authority are laid down Involves delegating authority and holding specific people responsible for specific things to do Co-ordinating the manager Co-ordinate farm business since it is segmented into various enterprises each doing its own activity Staffing It involves decision on job content, qualification required, training on the job and evaluation of performance

18. Cont.. Communication involves passing information from the farm manager to the farm workers and the general public Instructions must be clearly given and feedback collected Control and Supervision keeping production control, inventory control, cost control, budgetary control and personnel control It involves comparing plan with achievements

19. Cont.. Steps in farm decision making process 1 Identify and define the problem know what the problem is and it should be concisely defined Definition of the problem involves locating the root cause of the problem identified 2 Collecting relevant data and information gathering data, information and facts, and make observations necessary to the specific problem

20. Cont.. 3 Identifying and analysing alternatives Once the relevant information is available , next the manager list alternatives which are potential solutions to the problem 4 Making decision decide what the best solution is and go back to redefine the problem if the alternatives nothing do 5 Implementing decision check the alternative solution through practice 6 Evaluation comparing the result or performance of farming business before and after the implementation of the solution

21. Chapter Two Production Resources And Management Farm Resources Productive resource is any goods or services used in the production process to create another goods or services In the production process, firms use factors of production which are often classified into four categories land, labour, capital and entrepreneurship Land Resource : It consists of those gifts of nature which are not the result of human effort

22. Cont.. It includes land, water, sunshine, natural forests, minerals and wild animals It is often made productive as a result of human effort The specific characteristics of land include :- Area, space and location of land are immobile land can not move to combined with other resources but others move to it Each farm or specific parcel of land is unique : each parcel of land have distinct feature like soil types, topography, climatic factors and the existence of natural hazards

23. Cont.. Land is fixed and limited in quantity ( Supply) at country level cannot be increased or decreased but for an individual farmer, it can be increased or decreased Land doesn’t depreciate or wear out its value does not decrease through time Labour : The term labour describes the effort of human beings that include hired labour or family labour It can be more productive as a result of time and effort devoted to training

24. Cont.. The most important characteristics of labour Labour is flow resource that it cannot be stored like seed It is the service that is hired or purchased Labour is a lumpy or indivisible input Capital : is the combined physical assets and investments that a farm uses to meet its daily operating goals It presents all resources which are the result of past human effort

25. Cont.. Which means it consists of all manmade goods which are used in the production of other goods Capital should not be confused with money since money itself is not a productive resource Because money only becomes productive when it is used to buy physical items or hires services

26. Cont.. Capital can be classified in various ways Long-term capital is embodied in improvements in land, machinery, equipment, basic infrastructure and other long-lived forms of capital operating capital exists in the form of seeds, fertilizers, fuel and other raw materials which are used up annually in the production process capital may also be classified according to whether it is owned publicly or privately (ownership)

27. Cont.. Private capital is managed by the individual entrepreneur examples are long-term and operating capital Public capital , on the other hand, is the society’s investment in infrastructure, such as roads, schools, hospitals, national defense and various government establishments Management (Entrepreneurship): it involves organizing and coordinating the different farm resources to get the maximum output and profit

28. Cont.. Rewards of using farm resources The reward for using land is rent . Rent can be paid in cash or in kind by using farm produce It can be paid annually, seasonally, etc. based on the terms of agreement The reward for using management/entrepreneur is profit Because the ultimate aim of any producer is to maximize profit

29. Cont.. The principle of “carrot and stick” holds If a manager performs well, he is given a carrot in the form of a pat on the back for a job well done or an award If he fails by recording a loss or poor performance, he is given a “Stick” in form of warning The reward for using capital is interest The rate of interest charged depends on the source of the capital The reward for using labour is either salary or wage

30. Cont.. Farm resources valuations Valuation is the practice of attaching prices to a given asset at the end of an accounting period or at the time of sale for a particular farm organization Valuation process involves getting a realistic measure of the current value of the assets The first step in asset valuation is list the resources available in physical terms and the second step is placing values on the assets

31. Cont.. Valuation at cost: This method involves entering the actual amount invested on the asset when it was originally acquired It have their own limitation after the business has been in operation for some time, the original cost is not of much value Valuation at market price : The market price of an asset at the time of consideration can be taken as its value This method may, however, over or under-estimate the value depending on the states of affairs in the economy e.g. land

32. Cont.. Valuation at net selling price (P NS ) : is valuation of an asset at market price (P m ) less the cost of selling (CS) is taken as a price of asset at a particular point in time since selling of an asset consist different costs Valuation by reproductive value : An asset can be valued at what it would cost to produce it at present prices and under present methods of production This method is more useful for long-term assets

33. Cont.. Valuation by Contribution to Production the value of a resource depend on its contribution to society It is determined by supply and demand in the market place The value of an input depends on the value of output The marginal physical product of X1, (MPP X1 ) is the change in output (Y) resulting from a unit increase in variable input (X 1 ). The marginal value product (MVP) is the value added to the total output due to an additional unit of input MVP 1 is equal to the marginal physical product of X 1 multiplied by the output price (P )

34. Cont.. Valuation by Capitalization of Earnings This method is more suitable for durable capital such as land, which contributes to several production periods It can be used as long as farmers have access to the expected yearly returns If the market price is greater than the expected returns he should not purchase the piece of land If a piece of land has an annual return R at a going rate of interest ( i ) the present value of the land V is given by: V =  

35. Cont.. Capital may be obtained from savings or borrowed funds When the fund is borrowed t he borrower decide whether or not to purchase an asset using borrowed funds by comparing the marginal productivity of capital with the interest rate If the interest rate is higher than the marginal productivity of capital it is not worth purchasing The series of returns can also be discounted to present value using the formula PV= +  

36. Cont.. If the cost price of the capital item is greater than the PV, it is not worth buying Cost less accumulated depreciation: This method is appropriate only for depreciable assets like machinery and buildings Value of the asset is set equal to the ‘book value ’ It is computed as the difference between the initial cost and depreciation of the asset from acquisition to the time of valuation

37. Cont.. There is no single valuation method that is applicable in all cases For an asset which can be sold as a product or converted into money the direct valuation based on market price less cost of marketing can be used For assets which yield a continuous income over a period of time the capitalization of earnings method is more suitable

38. Depreciation Depreciation is the loss in value of capital asset overtime due to age, obsolescence and wear and tear Different assets loss values at different rates; hence different methods of depreciation have been developed These methods of depreciation are Annual Revaluation Method it is based on the resale value of the asset in the market Depreciation (D) = Original Price – Resale Price of the asset

39. Cont.. The problem with this method is that it may not be easy in an economy with run-away inflation because there is appreciation rather than depreciation of assets in inflation Straight Line Depreciation Method it assumes that an asset depreciates at a constant rate over its economic life It is useful for assets that loss value constantly over their entire life

40. Cont.. Depreciation (D) by this method is the difference between the purchase price (P) and the salvage value (SV) divided by the use full life of the asset in years (n) Salvage value is the value of an asset at the end of its economic life P-purchase price Sv-salvage value n-number of years (economic life of asset)  

41. Cont.. Declining Balance Method assumes a fixed rate of depreciation every year T he value of the asset is greater at the beginning since there is no depreciation first and the amount of depreciation is also greater at the beginning and less at the end The salvage value is not subtracted from the initial cost It is useful for asset which loss value fast at beginning of its economic life the rate is applied to each successive remaining balance untill the salvage value of an asset is reached

42. Cont.. Sum-Of-Years Digit Method (SOYD) a nnual depreciation is given by multiplying cost less salvage value by the fraction of remaining useful life (RL) to sum-of-years digit (SOYD ) The sum-of-years-digit (SOYD) is obtained by summing up the digits 1 to n for an asset with a useful life of n years o r use simple formula  

43. Farm Resource Management The Reason To Manage Labour S ince labour constitutes a major input to both small and large scale farms On small farms there is little attention to labour management because the bulk of it comes from family sources T he farmer does not incur any direct cash expense L abour has value even if no direct money is paid for it

44. Cont.. Objectives in labour management are similar to both small and large-scale farmers’ . These are:- To obtain the best combination of labour and capital To increase output per unit of labour input To release labour for other farm activities The farm manager must always bear in mind that: Labour like other farm inputs is a farm expense Hired labours like other people have different attitudes and abilities to work

45. Cont.. Factors affecting labour efficiency in Agriculture: How crop and livestock are combined Planning of farm workers Utilization of machinery and equipment’s by the labour Management and supervision of labour

46. The Basis For Farm Labour Management Efficiency through Productivity and Cost Reduction A. Enterprise Combination Farm managers face fluctuating labour requirements in any farm due to the seasonality of farm production In areas where irrigation facilities are available, doubled cropping is possible. Another way of small farmers use available family labour is by intercropping Farm managers should ensure that in selecting enterprises, labour requirements and use are taken into consideration

47. Cont.. B. Work simplification It involves C areful study of a job to be performed Identifying the important parts of jobs A llocating available resources by adequate farm layout C lose and central location of farm buildings Poor farm layout in terms of irregular shapes of fields can result less efficient use of labour and other resources especially machinery

48. Cont.. C. Efficiency through an Operations Calendar L abour use must be planned well in advance A farm manager can draw up a calendar of operations to show:- E ach enterprise and the operations to be performed on farm The dates of operations The amount of labour required for each operation

49. Cont.. D. Labour efficiency through capital/labour substitution Substituting capital for labour increase labour use efficiency Capital may be in form of farm machinery or other labour-saving technologies such as herbicides 2. Increasing Labour Productivity through better morale of workers L abour can work poorly or efficiently depending on their attitudes to a particular work and how management can influence their morale

50. Cont.. A. Supervision The manager must see that assigned work is performed according to instructions given A good manager must know the best way of doing work to increase productivity If workers properly managed, their morale would inspire and perform an activity efficiently

51. Cont.. B. Favourable working conditions It is related to adequate wages, Incentive plans and working hours Wages paid on a farm should be comparable with other employers Some managers use piecework rate especially during harvest Good working conditions include enough break time, reasonable hours of work, pay for overtime, medical facilities etc.

52. Cont.. C. Cordial employee Relations It is between a manager and workers and can increase efficiency and production To achieve this, the manager should develop:- M utual respect and trust B e patient with employees when they make mistakes praises employee which done work well

53. Management of land Land acquisition is the most important decisions made by a farmer The importance of the decision does not end with the initial purchase The farmer may add land to his farm business several times during his farming operation The characteristics of the land and the way of acquiring it will shape farming decision

54. Ways of acquiring farm land in Nigeria Inheritance Upon the death of the head of family and sometime even before death, land is divided among the sons and sometimes daughters Allocation The village head may allocate an abandoned farm to a local inhabitant who requires more farmland Gift The land holder may give a piece of land to relatives or close friends

55. Cont.. Pledge The right to use land is passed to another individual in return for a money loan In such cases the amount paid is usually less than the land’s value T he creditor will farm the land until the loan is repaid Loan or Lease When a farmer has more land than he can farm or requires, he may temporarily entrust it to another person Trust This is land held on trust pending the return of the owner who has emigrated from the community

56. Cont.. This form of transfer is probably rooted in the practice of labour migration from rural areas If labour migrants do not return before the farming season, the land does not revert to the community, but is allocated by the village head to a trustee

57. Cont.. Factors affect productivity of a particular piece of land The climatic condition of each area especially rainfall distribution The nature of the fertility of the soil The topography of the area The quantity and quality of the resources applied The position of the area in relation to the market for the product

58. Land Management Practices Two major steps are usually taken to maintain the productivity of land :- Physical Measures: These consist of construction of ridges and planting of crops or trees on these ridges Cultural Measures : These measures include the avoidance of vulnerable areas like steep slopes and apply planting of shade trees, application of fertilizers etc.

59. Management of farm capital Capital includes supplies and materials such as seeds, fertilizers, buildings, machinery etc. Investment refers to the production or acquisition of capital assets T hree methods of investment for agricultural production Through saving of product for future use :- e.g. the storage of cereals, legumes etc. Either for seed or future consumption Through their own physical efforts By planting trees, constructing dam or cattle ranching

60. Cont.. Through purchase The method operates in an exchange economy where produce not only for consumption but exchange by barter Capital assets are often classified according to the length Long-term capital assets are that are productive for many years and may virtually remain permanent M edium-term Capital life span of just a few years include work-stock such as bullocks, breeding or milking stock Short-term capital normally used up within a year

61. Cont.. Two type of investment Gross investment is the total investment made over a given period Net investment is gross investment less depreciation or replacement cost over the same period

62. Capital Requirements The amount of capital required on the farm is related to the type of enterprises being executed Information required to assess capital requirement Costing of Supplies and Materials for Enterprises: The farmer should list all enterprises in terms of size Costing Farm Machinery Estimate cost of machinery and equipment as well as running costs Land Improvements You should cost all land improvements taken during the year Farm Buildings you should also cost all new buildings to be built as well as any improvements planned on existing buildings

63. Ways to avoid Losses Storage and Care: inputs should be properly stored Early Preparation for Work: All needed inputs should be ready before the farming season begin Farm managers should include repairs in their calendar of operations Supervision: Each class of working capital should be properly supervised A farm manager be alert and correct mistakes as soon as they are detected

64. PRODUCTION RELATIONSHIPS Production function is a technical relationship between inputs and output It indicates the maximum output produced using combined inputs under a given state of technology It can be expressed in three forms :- Tabular Graphic A lgebraic

65. Cont.. Types of Production Functions Continuous Production Function: it is applicable for inputs which can be split up in to smaller units D iscrete Production Function: is obtained for resources which are used in whole numbers inputs cannot be broken in to smaller units Short Run Production Function: at least one input is fixed in production Long Run Production Function: permits variability in all factors of production

66. Cont.. Factor-Product Relations It deal with the rate at which the factors are transformed in to products Its goal is optimization of production It helps the producer to decide the optimum level of input to use and optimum level of output to be produced It guides the producer in making the decision on “how much to produce?” The decision is made by using price ratio as the choice indicator

67. Cont.. It is directly related to the operation of law of diminishing returns This law states that an increase in input applied in productivity causes general less than proportionate increase in the amount of product raised e.g. cultivation of land Why the law of diminishing returns operates in agriculture? Excessive dependence on weather Limited scope for mechanization Limited scope for division of labour Soil gets exhausted due to continuous cultivation

68. Relationship between ( TP) and (MP) When TP is increasing, the MP is positive When TP remains constant, the MP is zero When TP decreases, MP is negative As long as MP increases, TP increases at increasing rate When the MP remains constant, TP increases at constant rate When the MP declines, TP increases at decreasing rate When MP is zero, TP is maximum When MP is negative, TP declines at increasing rate

69. Relationship between MP and AP When MP is more than AP, AP increases When MP is equal with the AP, AP is Maximum When MP is less than AP, AP decreases

70. Three Regions of Production Function First Stage The first stage of production starts from the origin MP is more than AP and hence AP increases in this zone MP is increasing up to the point of inflection and then declines Since TP increases at increasing rate up to the point of inflection and increase at decreasing rate on it After the point of inflection, TP increases at decreasing rate

71. Cont.. Elasticity of production is more than unity up to maximum AP Elasticity of production is one at the end of the zone (MP = AP ) Marginal revenue is more than marginal cost (MR > MC ) This is irrational zone of production This zone ends at the point where MP=AP or where AP is Maximum

72. Second Stage The second zone starts from AP is Maximum ( MP=AP) In this zone MP is less than AP Therefore, AP decreases throughout this zone MP is decreasing throughout this zone and zero at the end As the MP declines, TP increases but at decreasing rate Elasticity of production is less than one between maximum AP and maximum TP Elasticity of production is zero at the end of this zone

73. Cont.. Marginal Revenue is equal to Marginal Cost (MR= MC) This is rational zone of production in which the producer should operate to attain his objective of profit maximization This zone ends at the point where TP is maximum or MP is zero

74. Third Stage This zone starts from TP is Maximum or MP is zero AP is declining but remains positive MP becomes negative The TP declines at faster rate since MP is negative Elasticity of production is less than zero (Ep < 0) Marginal Revenue is less than Marginal Cost ( MR < MC ) This zone is irrational zone Producer should never operate in this zone even if the resources are available at free of cost

75. Factor-Factor Relationship This relationship deals with the resource combination and resource substitution Cost minimization is the goal of this relationship Under factor-factor relationship, output is kept constant, input is varied in quantity This relationship guides the producer in deciding ‘How to produce’ This relationship is explained by the principle of factor substitution It is concerned with the determination of least cost combination of resources The choice indicators are substitution ratio and price ratio

76. Isoquant curve It represents all possible combinations of two resources to producing the same quantity of output Characteristics of Isoquants Slope downwards from left to right or negatively sloped Convex to the origin Nonintersecting Isoquants lying above and to the right of another represents higher level of output The slope of isoquant denotes the marginal rate of technical substitution (MRTS )

77. Types of factor substitution Fixed Proportion combination of inputs To produce a given level of output, inputs are combined together in fixed proportion Isoquants are ‘L’ shaped e.g. tractor and driver Constant rate of Substitution For each one unit gain in one factor, a constant quantity of another factor must be sacrificed When factors substitute at constant rate, isoquants are linear, negatively sloped E.g. family labour and hired labour

78. Cont.. Decreasing Rate of substitution E ach one unit increase in one factor requires smaller and smaller sacrifice in another factor Isoquants are convex to the origin when inputs substitute at decreasing rate E.g . Capital and labour , organic and inorganic fertilizers etc.

79. Isocost Line or budget line It is all possible combinations of two resources (X1 and X2) which can be purchased with a given outlay of funds Characteristics of Isocost line As the total outlay increases, the isocost line moves farther away from the origin Isocost line is a straight line because input prices do not change with the quantity purchased The slope of isocost line indicates the ratio of factor prices

80. Least Cost Combination of inputs There are many possible combinations of factors used to produce a particular level of output The problem is to find out a combination of inputs which should cost the least There are three methods to find out the least cost combination of inputs. They are;- Simple Arithmetical method Algebraic method Graphical Method

81. Product-Product Relationship It deals with the resource allocation among competing enterprises The goal of this relationship is profit maximization Under this relationship , inputs are constant while products are varied This relationship guides the producer in deciding ‘What to produce’ This relationship is explained by the principle of product substitution This relationship is concerned with the determination of optimum combination of products The choice indicators are substitution ratio and price ratio

82. Production Possibility Curve (PPC ) It is a Curve that represents all possible combinations of two products that could be produced with given amounts of inputs It is also called Transformation curve as it indicates the rate of transformation of one product into another E.g. The allocation of land resource between cotton and maize products and the output from different doses of land input are presented below

83. Cont.. Allocation of land in hectar Output in quintals   Y 1 Y 2 Y 1 Y 2 5 60 1 4 8 48 2 3 15 36 3 2 21 24 4 1 26 12 5 30

84. Types of Product-Product Relationships Farm commodities bear several physical relationships to one another These basic product relationships are:- Joint Products: These are produced through single production process Production of main - product without by - product is not possible Complementary enterprises: It exists when with a change in the level of production of one, the other changes in the same direction increase in output of one product, with resources held constant , also results in an increase in the output of the other product

85. Cont.. Supplementary enterprises: It exists between enterprises when increase or decrease in the output of one product does not affect the production of the other Competitive enterprises: This relationship exists when increase or decrease in the production of one product affect the other inversely

86. Marginal rate of product substitution It refers to the absolute change in one product associated with a change of one unit in competing product Types of Product Substitution When two products are competitive, they substitute either at constant rate, or increasing rate or at decreasing rate Constant rate of Substitution: For each one unit gain in one product, a constant quantity of another product must be sacrificed PPC is linear negatively sloped when products substitute at constant rate

87. Cont.. MRS is constant throughout production ∆ 1 Y 2 /∆ 1 Y 1 = ∆ 2 Y 2 /∆ 2 Y 1 = ……. = ∆ n Y 2 / ∆ n Y 1 Increasing rate of product substitution: Each unit increase in the output of one product is accompanied by larger and larger sacrifice in the production of other product PPC is concave to the origin when product substitutes at increasing rate MRS is increasing throughout production ∆ 1 Y 2 / ∆ 1 Y 1 < ∆ 2 Y 2 / ∆ 2 Y 1 < ……. < ∆ n Y 2 / ∆ n Y 1

88. Cont.. Decreasing rate of Product Substitution: Each unit increase in the output of one product is accompanied with lesser and lesser sacrifice in the production of other product Production Possibility Curve is convex to the origin when products substitute at decreasing rate MRS is decreasing throughout p roduction ∆ 1 Y 2 /∆ 1 Y 1 >∆ 2 Y 2 /∆ 2 Y 1 >……. > ∆ n Y 2 / ∆ n Y 1