Farm Management - Product-Product Relationship

This document includes appropriate description of about Product-Product Relationship Management, MRPS, Types of Products, PPC etc.

1. Chaudhary Charan Singh Haryana Agricultural
University, Hisar

College of Agriculture

Farm Business Management
(ABM – 521)

ASSIGNMENT ON
Principles of Combining Enterprises












Submitted By:-
Dhiraj Anant Kadam
(2016A91MBA)
Kumar N
(2016A92MBA)

Submitted To :-
Dr. S.K.Goyal
The Course Teacher
Dept. of Business Mgt.

2. Principle of Combing Enterprise
This principle is very important as it describes the Product - Product relationship. Here, instead
of considering the allocation of inputs among enterprises, we discuss enterprise combination
or product mix involving product relationship.
Algebraically the relationship can be written as,
Y1 = f (Y2) or Y1 = f (Y 2, Y3 ....,Yn)

Relationships that can exist between enterprises or products :-
1) Joint product:
Two or more than two products are produced in the same production process. No substitution
among products is possible since joint products are produced in a fixed proportion.
E.g. Production of Cotton crop gives us Cotton Lint and Cotton Seed.
2) Complementary Production:
Two products (or enterprises) are complementary if an increase in output of one product (Y1)
also causes an increase in the output other product (Y2) also, for the same level of inputs.
PPC for complementary products have positive slope.
E.g. Rotation of complimentary crop in cropping pattern. The by-products of one
complementary enterprise (Y1) will serve as input for production of the other product (Y2).

3) Supplementary Production:
In this case one product does not depend up on another. They are independent and one product
can be increased without increasing or decreasing the other product. These two enterprises are not
interlinked.
E.g. Crop production and dairy enterprise,

4) Competitive Relationship:
Two products (or enterprises) are competitive when the output of one product can be increased only
by reducing the output of the other product. Outputs are competitive because they require the same
inputs at the same time.
E.g. If a farmer has a given level of water for irrigating Bhendi and Brinjal, he can either allocate

3. equal share of water to both or more of water to Bhendi and less to Brinjal. Hence, these two products
become competitive.

Most of the decisions regarding the choice of products are needed to be taken when these
products are having competitive relationship. When two products are competitive they may
substitute at constant rate, increasing rate or decreasing rate.

Determination of optimum production combination:
Optimum combination of two products can be obtained by following Algebraic and Graphic
method

1) Algebraic Method: Algebrical1y, the combination can be determined by calculating
MRPS and Price ratio.
MRPS: It is marginal rate of product substitution. MRPS is the rate of change in quantity
of output of one enterprise (Y1) as a result of unit increase in the output of the other enterprise
(Y2), for a given level of input (X). It is also known as Marginal Rate of Product
Transformation (MRPT). So it is the slope of the PPC.
MRPS = ∆Y1/∆Y2

Units of replaced products
Hence, MRPS = -------------------------------------
Units of added products

Py1
Price ratio (inverse) = -------------
Py2
Therefore, optimum combination of two Products for a given level of input can he obtained
by equating MRPS with inverse price ratio.
i.e. MRPS = Price ratio = Py1/Py2

4. 2) Graphic Method: For obtaining optimum combination of two competitive products, we
have to depict two curves by taking added quantities (y1) on horizontal axis and replaced
quantities (y2) on vertical axis
Production Possibility curve: It is a locus of all possible combinations of two products
which can be obtained from a given amount of input.
Production possibility curve are sometimes called as Iso-resource curve or opportunity curve
because,
i) Each output combination on this curve has the same resource requirement and
ii) It represents all possible production opportunities.
The shape of the production possibility curve (PPC) depends up on the types of product
relationship involved-
A. The PP curve is straight line when two outputs substitute at a constant rate.
B. The curve is convex to the origin when two products substitute at decreasing rate.
C. The curve is concave to the origin when two products substitute at increasing rate. It
implies that more of one product is increased; the sacrificed of the other product becomes
larger & larger.
D. The slope of PP curve represents MRPS.

Iso-revenue Curve: It is the line which indicates the different combinations of two products
which gives the same amount of revenue or income.

Properties of Iso-revenue line:
1. It is always straight line because the output prices do not change with the quantity
sold.
2. The position of Iso revenue line shows the magnitude of the total revenue. As total
revenue increases, the line moves away from the origin and vis-a-visa.
3. The slope of Iso-revenue curve represents the price ratio of two competing products.

5. Determination of optimum product combination:
The criteria for determining the optimum combination of two products is,
MRPS = Inverse Price ratio
Since the slope of PPC represents MRPS and the slope of Iso-revenue line represents price
ratio, the optimum combination of two products will be at the point where slopes of PPC and
Iso-revenue line are equal. Hence optimum combination of two products can he obtained
where those two curves tangent each other. From the tangency point perpendiculars are taken
on both axis, it will give the quantities of y2 and y1 which will be optimum one.