Agricultural Economics III (Production Economics) Introduction: Production economics is the study of how resources are combined in a production process to produce goods and services in the most cost effective and profitable way possible.
Suggested Topic Activities
1.Students to prepare a partial budget of their agriculture project plot. The teacher to guide the student on how to prepare the budget.
2. The teacher to guide the student on how to draw production function curve using locally available data.-working in groups of three copy the data into your note books. Complete the following table.
Input (units of 50kgof fertilizer) Output (bags of maize) Average production (AP) Marginal production (mp)
(a) Complete the table.
(b) Use the data to plot a graph on production function.
(c) Determine the zones of production on the production function.
(d) From the graph determine the most productive zones.
(e) State the reasons for the answer above.
3. Working in groups,
(a). Discuss the law of substitution and its importance in agricultural economics.
(b) Identify joint products and competitive products found in your community. 4. Interview a reputable farmers near the school and ask what kind of risk and uncertainties t faced and how they can be overcomes them.
In book one you were introduced to the basic concepts of economics namely; scarcity and choice, preference and choice and opportunity cost. In this topic you will study how these principles are applied in production of agricultural goods and services.
Average cost.-This is the total costs divided by the number of units of output.
Average fixed cost-This is the total fixed costs divided by the total output.
Average total cost-This is the sum of average variable cost and average fixed costs.
Average variable cost-This is the total variable costs divided by the total output.
Cost - Price paid for goods and services rendered in a production process.
Credit - An arrangement to receive money or goods and pay for it later
Expenditure - money spent in the production process.
Firm - An organization through which production takes place.
Fixed cost- These are input cost which do not vary with the level of production.
Gross domestic product (GDP)- is the value of all goods and services produced by a country within a specific year.
Gross National product(GNP)- is the total output from resources owned by the nationals of a country wherever the resources happen to be in a country. Income ' money that one gets from working or from investing money.
Marginal cost-This is the extra cost incurred in the production of an additional unit of output.
Marginal Revenue-This is the extra income obtained from the sale of one additional unit of output.
National income- is the total value of all goods and services produced by a country in a given year.
Net Revenue-This is the difference between the total revenue and the total costs of production.
Production function- is the physical relationship between the inputs and the resultant product.
Profit - money that one makes after selling something or from doing business cost.
Rent - an amount of money paid regularly for using land, housing etc that that does not belong to you.
Revenue-Is the amount of money accruing from the sale of produce.
Risk -The difference between the expected and the actual outcome.
Total cost-This is the sum of all fixed and variable cost used in the production of a given quantity of a product
Total Revenue-This is the total physical product multiplied by the unit price of the product.
Uncertainty - The imperfect knowledge about the future events or outcome.
Variable cost-These are inputs that vary with the level of production.
By the end of the topic, you should be able to:
- explain various parameters of national development,
- relate national development to agricultural production,
- state the factors of production and explain how each affect production,
- describe how the law of diminishing returns relates to agricultural production,
- describe agricultural planning and budgeting In a farm business,
- state sources of agriculture support services,
- describe risks and uncertainties in farming,
- explain ways of adjusting to risks and uncertainties.
Agricultural Economics III (Production Economics)
Production economics is the study of how resources are combined in a production process to produce goods and services in the most cost effective and profitable way possible.
National income is the total value of all goods services produced by a country in a year in a given year.
House hold -firm relationship
A household is a unit comprising of the individual farmer and members of the family.
Relationship between household and a firm.
The firm sells goods and services to the house hold and earn income for example fertilizers, bread,sugar among others, while the house hold earn income by providing raw materials and labour to the firm.
Gross Domestic Product(GDP)
Gross domestic product is the sum total of goods and services produced by the residents of a country within one year.
Gross National Product (GNP)
Gross national product is the sum total of all goods and services produced by nationals of a given country within one year regardless of their country of operation.
Gross National Income(GNI) and per capita income.
When Gross National Product is expressed in monetary terms it is called Gross national income. Per capita income is the average income per head in a country in one year. it is arrived at by dividing Gross national income by the country's population.
Contribution of agriculture in national development Agriculture contributes to the national development in the following ways:- 1. Source of raw materials for industrial development. 2. Source of employment. 3. Source of foreign exchange. 4. Source of income. 5. Improvement of infrastructure. 6. Source of food.
Factors of production
Factors of production are resources required in the production process .The factors include;
Land is part of the earth where agricultural production takes place. it is also the space were farm buildings, agro-industries, and urban centres, infrastructure are constructed.
These are all manmade assets that are used in production. Capital may be in forms of liquid capital, working capital, and fixed capital. A farmer may acquire capital from personal savings, loans from credit institutions and free grants.
This is the process of planning and decision making in organizing the other factors of production. management aims to minimize the total cost of production and maximize the total revenue.
A farm manager plans for the farms activities, implements the plans, detects weaknesses in farm production processes, keep appropriate farm records, gather and analyzing market information.
Roles of a farm manager
A farm manager has many roles in managing the farm enterprises. He or she should plan for the farms activities, implementing the planning, detecting weaknesses in farm production processes, keep appropriate farm records, gather and analyzing market information. He or she heads the farm operations.
This is human force and skills employed to perform work in a production process. labour can be classified as family labour and hired labour. Hired labour is further classified as casual labour and permanent labour. The labour may be improved by Training, Giving incentives, Labour supervision and assigning task according to skills.People harvesting sugarcane.
Production function is the physical relationship between inputs and outputs.
Types of production functions
There are three type of production functions, namely
-increasing return production function -constant return production function -decreasing return production function.
Increasing returns production function
In increasing returns production function, each additional unit of input results to a larger increase in output than the preceding one.
Constant return production functions
In constant return production function the amount of product in the production function increases at the same rate [amount] for each additional unit of input. This type of production function is rare in agriculture but experienced in a factories.
Decreasing return production function
In decreasing returns production function, each additional unit of input results to a smaller increase in output than the preceding unit of input. This is the common production functions in agriculture
Economic laws help in to predict outcome of a given production process. They guide the manager in decision making. They are : i. Law of diminishing returns. ii. Law of substitution.
Law of Diminishing returns
Law of Diminishing returns states that if successive units of one input are added to fixed quantities of other inputs, a point is eventually reached when the additional product per additional unit of input will decline.
The law of substitution
The law state that as far as the output is constant, it is profitable to substitute an expensive input factor with a cheaper one.For example poultry manure can be substituted for CAN fertilizer. This law is based on the concepts of input-input relationship and product-product relationship.
Input-input relationship is the way the input factors are combined in the production process to maximize on the revenue or profits. Inputs may be combined in the following ways:- 1 fixed proportions 2 constant rate of substitution 3 Varying rate of substitution
In fixed proportions, both inputs must be present in the same proportion.eg in dilution of herbicides, pesticides and acaricides a given volume of the chemical is diluted using a fixed proportion of water volume.
Constant rate of substitution.
In constant rate of substitution, input factors substitute each other at a constant rate for each level of production eg maize and sorghum as livestock feeds.
Varying rate of substitution
In varying rate of substitution input factors substitute one another at varying rates.eg substituting use of concentrates with fodder
Economic principles help in to predict outcome of a given production process. They guide the manager in decision making. i. Principle of equi-marginal returns. ii. principle of profit maximization.
Principles of equi-marginal returns.
The law of equi-marginal returns states that limited resources should be allocated such that the marginal returns to these resources are the same in all alternative uses to which they might be put.
Principle of profit maximization.
The principle of profit maximization state that profit is maximum when marginal cost is equal or almost equal to the marginal revenue.
Farm planning is the organization of all necessary resources such as land, capital and labour so as to achieve the specific objective of the farm. Factors to consider in farm planning are:
- size of the farm.
- Environmental conditions.
- Government policy and regulation.
- Farmers objectives and preferences
- Transport and communication
- Security of the enterprise.
Steps in farm planning
Farm planning starts with determining the farm size and the environmental situation. The farmers objectives and preferences are then determined.
Sketch of a farm plan showing roads, riverbank, well maintained road, electricity lines, farm house[fenced]show the whole farm allocated to different enterprises
Steps in farm planningDetermine size of the land. -Determine environmental situation. -Determine farmers objective and preferences. -Develop tentative schedule -Establish technical feasibility of the plan. -Determine a budget. -Develop a financial flow. -Implement the plan. -Carry out evaluation of the plan.
A farm budget is an estimate of the future income and expenses of a proposed farm plan.
Types of farm budgets
There are two types of farm budgets that is. partial and complete budgets. A Partial budget represents financial effects of proposed minor changes in a farm organization and is guided by the four questions, namely:- 1.What extra costs are incurred? 2.What revenue is foregone? 3.What extra revenue is earned? 4.What costs are saved?
Complete budget are prepared for a new farm or when a major reorganization of the farm is to be undertaken.
Agricultural support services available to the farmers.
Agricultural support services available to the farmers include the following:- a. Extension and training b. Credit and banking. c. A.I. service and marketing d. Agriculture research. e. Farm inputs and marketing. f. tractor hire services.
Risks and uncertainties in farming
A risk is the difference between the expected and the actual outcome. Uncertainty is the imperfect knowledge about the future events or outcome.
Common risks and uncertainties in agriculture are:
- Out break of pests and diseases.
- Fluctuation of commodity prices.
- Ownership uncertainty.
- Sickness and injuries.
- Natural catastrophies
- Change in technology
Ways of adjusting to risks and uncertainties.
Ways of adjusting to risks and uncertainties include ;
- Adopting modern methods of efficient production.
- Flexibility in production methods.
- Input rationing.
- Taking insurance cover.
- Contracting production processes.
- Diversification of enterprises.
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