AGRICULTURAL
ECONOMICS
Economics
is the study of how limited or scarce resources are used to produce
various goods and services for consumption.
Basic
economic Principles
Scarcity
Economic
scarcity means resources are limited in supply relative to demand.
This
principle implies that there is no time that man can have enough
resources to
satisfy
all his need or desires
Choice/Preference
Human
wants are many and varied and means of satisfying them are limited.
Therefore,
man has to make a choice among the alternatives in order to use the
resources
available.
Man
does this by satisfying the most pressing needs first.
This
is called scale of preference.
Opportunity
Cost
Opportunity
cost is the revenue forgone from the best alternative.
It
exists only where there are alternatives.
Where
there are no alternatives the opportunity cost is equal to zero.
Opportunity
cost helps in decision making.
PRODUCTION
Production
is a process in which resources are transformed into products usable
by a consumer.
Producers
use or hire inputs and change them to useful goods and and services,
which are sold to consumers.
FACTORS
OF PRODUCTION
These
are resources or inputs required in the production process of a
certain good or commodity. They include land, labour, capital and
management (entrepreneurship).
Land
Land
is a gift of nature. Land refers to soil, water, mineral resources,
air, light heat and other natural features that are found in a
place.
Land
is not homogeneous, it is immobile and it supply is fixed. However,
it quality can be increased by use of fertilizers and by
reclamation. Payment/ reward for use of land is called rent.
Labour
labour
is the human effort directed towards the process of production. It
can be skilled, semi skilled or unskilled, physical or mental.
The
reward or payment for labour used in production is called wages.
Labour
force is the number of people or workers at given time who are paid
wages or salaries or remuneration.
Factors
that determine labour supply
The
scale of salary or wage paid. The higher the wage rates, the more
attractive the jobs and the more willing people will be to offer
their labour.
Level
of education or skill required for the work. For jobs that require
high skill levels, labour supply is limited than where the jobs
require little skill.
Condition
at the place of work. Where the working conditions are ideal, more
people will be attracted into labour force.
Size
of the population. The larger the total population, the greater the
availability of labour.
Age
of people, that is productive age. The larger the percentage of the
population in the working age bracket, the greater the availability
of labour.
Health
status of the workers. The healthier the labour force, the more
amount of labour they can provide.
Number
of hours worked per day. Where people are required to work for long
hours on a single task, there will be less labour in circulation
than when the people can work for shorter hours.
Allowance
or motivation available.
Mobility
of labour; Where people can easily move from one job to another or
from one place to another, labour supply is greater than when the
people are less mobile.
Political
stability. Areas that are free of insurgency attract more labour
than those embroiled in conflicts.
Factor
determining the efficiency of labour
Climate;
good weather makes workers or people to work well.
Health
of the workers; healthy people work well and become more efficient.
Social
environment; good relations and motivation influence the quality of
work.
Peace
of mind, workers with peace of mind tend to work well.
Good
and prompt payment tend to improve on efficiency of labour.
Education
or training acquired; skilled manpower produce good quality work.
Degree
of specialization; workers become more efficient when they
specialize in particular sectors.
Capital
This
refers to all assets that are used to produce goods and services
Types
of capital
Fixed/durable;These
are resources which are long term and once acquired they cannot be
reduced or got rid of within a short period of time due to changes
in production. Capital
for example machinery,buildings, permanent improvements on land like
fences,roads,irrigation facilities, water supply system.
Working
capital
or circulating capital. This includes cash available (at hand or in
bank) to cater for daily expenses it
include consumer goods such as;fertilizers,livestock feeds,fuel in
store,pesticides.
Liquid
capital;This is capital in form of cash for example; ready
money,bank deposits, shares in financial institutions.
NB.
the reward or payment for use of capital is interest.
Entrepreneurship
management: An entrepreneur is someone who runs the business to make
profits.
Roles
/ functions of entrepreneur/ manager at the farm.
To
purchase inputs for the farm business e.g fertilizers, drugs, tools,
machines etc
Risk
bearing (takes the responsibility of profits and loss)
To
be the innovator and so invest in new, cheaper and most efficient
production techniques.
Combines
the other factors of production to produce certain goods or
commodity.
To
mobilize finances and other resources needed to facilitate the
production process through saving, borrowing etc.
Is
the overall supervisor of the production process.
To
bear all the risks and uncertainties of success or failure of the
enterprise.
To
reward the other factors of production, e.g, labour (earns wages),
capital (earns interest) and land (earns rent).
To
be the controller and last decision maker on how to use the factors
of production
To
keep records of performance of the enterprise.
Good
qualities or skills of a good manager
Should
be knowledgeable in the farming practice.
Should
be hard working.
Should
be responsible.
Should
be dynamic.
should
be prudent.
Should
consistent.
Should
be ambitious
Should
be flexible
PRODUCTION
FUNCTION.
Production
function. This is the physical relationship between inputs
(resources) and outputs (products). It indicates how the quantity of
a particular product (output) varies with a particular input or
inputs.
It
can also be defined as quantity of a particular output produced as a
result of using particular quantities of inputs. For example, bean
yield produced due to use of a number of labourers, certain
quantities of fertilizers, etc.
Production
function can be mathematically expressed as
Y=
f(I1,
I2,
I3,.....In)
where Y= output or yield, f= function of, I1,
I2,
I3,.....In
=
various inputs used to produce Y. for example capital, land,
labour, fertilizers etc.
Types
of inputs.
1.
Fixed inputs. These are inputs whose quantities do not vary during
the production process. For example, size of land
2.
Variable inputs. These are inputs whose level or quantities can be
adjusted depending on the level of production. They include
fertilizers, seeds for planting, drugs, livestock feeds.
Types
of the production functions
1.
Constant Returns to added inputs
The
amount of the product increases by the same amount for each
additional input;
that
is constant returns to input factor.
Again
here resources are under utilized.
2.
Increasing Returns
In
this type, each additional unit of input results in a larger increase
in output than
the
preceding unit.
This
shows that resources are under utilized
3.
Diminishing (Decreasing) Returns
Here,
each additional unit of input results in a smaller increase in output
than the
preceding
unit.
Resource
use is stretched to the maximum.
It
is the most commonly encountered form in agricultural enterprises;
It
gives rise to the law of Diminishing Returns.
The
Law of Diminishing Returns
The
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 where additional product (output) per additional unit of
input
declines.’’
This
law is encountered practically in all forms of agricultural
production.
It
is useful in determining the most rational and profitable level of
production.
Definition
of common terms
1.
Fixed inputs. These are inputs which cannot be varied easily within
the production cycle. e.g land
2.
Variable inputs. These are inputs whose quantity can be varied/
changed easily within the production cycle. e.g. labour, fertilizers
and capital.
3.
Total physical product. This is the total amount of products got from
an activity.
4.
Average product(AP): This refer to the total physical product divided
by the total quantity of inputs used.
Average
product= Total
output (y)
Total
input (x)
5.
Marginal product(MP). This extra product obtained from an extra unit
of input used.
Marginal
product = Change
in output ( ∆y)
Change in input (∆x)
6.
Marginal cost(MC). This is the cost of producing each additional unit
of output.
7.
Marginal revenue(MR). This income got from selling marginal products.
8.
Total revenue. This is total income received from selling all the
products of the activity.
Production
function and its three stages
Zone
I:
This
is called the zone of increasing returns or irrational zone.
Total
physical product (TPP) is increasing at an increasing rate. Average
physical product is also increasing but it is less than marginal
physical product.
This
is an irrational zone because using more units of the variable inputs
results in increased average physical product (APP). Thus, it pays to
use of more units of the variable input to the point where APP is
maximum.
When
APP is maximum , it is equal to Marginal physical products. In this
zone makes factor is under utilized. A farmer operating in zone
makes more profits as the units of inputs are increased.
Zone
II.
This
is called the zone of diminishing returns or rational zone.
It
begins from where marginal physical product (MPP) is equal to average
physical product and end where total physical product (TPP) is at
maximum and MPP is zero.
TPP
is increasing at decreasing rate until it reaches the maximum.
In
this zone MPP and APP are deceasing but both remain positive.
MPP
is lower Than APP (APP>MPP).
At
the point where TPP is at maximum, the producer maximizes TPP, and
makes maximum use of variable input. Beyond this point additional
unit of the variable input results in less TPP.
This
is the rational region of production since the producer exhaust all
the returns he/she can obtain by applying input.
Zone
III
This
is called the zone of negative returns or irrational zone. It is the
most unproductive zone in the production process a farm as it results
in reduced TPP, MPP and APP. MPP becomes negative, reflect losses. It
is irrational because the use of so much amount of variable input
reduces the TPP. In this zone the fixed factor is over utilized or
wasted. No farmer is encouraged to operate in this zone.
Example:
A
farmer has one acre of and ( fixed input) and employs different
quantities of labour( variable factor) to grow maize. The results is
shown below.
Land
(acres)
|
No
Of men
|
Total
Product
|
Average
product
|
Marginal
product
|
1
|
1
|
08
|
08
|
|
1
|
2
|
20
|
10
|
12
|
1
|
3
|
36
|
12
|
16
|
1
|
4
|
48
|
12
|
12
|
1
|
5
|
55
|
11
|
7
|
1
|
6
|
60
|
10
|
5
|
1
|
7
|
60
|
8.6
|
0
|
1
|
8
|
56
|
09
|
-4
|
Using
the information given in the table above , plot three curves showing:
1.
Total physical product
2.
Average physical product
3.
Marginal physical product.
Costs
of production
Types
of costs incurred in agricultural production
1.
Explicit costs. These are costs that are easy to recognize and
quantify such as cost of fertilizers, feeds and hired labour.
2.
Implicit costs. These are costs that are not easily recognizable are
often forgotten in farm accounting. They include farmer's own labour,
family labour, interest on the farmer's own capital, and rent of
farmer's own land.
3.
Fixed costs/ over head costs. These are cost that do not change with
the level of production, the costs persists irrespective of the level
at which the farmer is producing. They include salary of permanent
workers, maintenance cost farm buildings, depreciation on machinery
and equipment.
4.
Variable cost. These are cost which change with the level of
production. For example, amount of feeds change with number of layer
kept.
5.
Total cost. This is the sum of variable and fixed costs.
Risks
and uncertainties
These
are unpredictable and unavoidable situations or hazards which are
faced by farmers.
Risks
Risks
are hazards, whose probability of occurrence can be estimated based
on past experiences and therefore can be insured against.
Risks
include;
1.
Theft of crop produce or animals.
2.
Fire outbreak which can destroy the farm.
3.
Pests and diseases which can destroy the crops.
4.
Adverse weather changes such as drought, storm or hailstone.
5.
Accident involving the employee and employers which may interfere
with labour availability to the farm.
6.
Health of the farmer and the family members. Farmers or the members
of their families may fall sick at a time when demand for labour is
very high.
Uncertainties
These
are hazards whose occurrence cannot be predicted by probability
estimates and therefore cannot be insured against. Uncertainty is the
state of imperfect knowledge.
Uncertainties
include;
Yield
uncertainty; failure or rain or outbreak of pests and disease may
lower the yield.
Change
in government policies; Government may change the tax regime, remove
subsides or ban a product.
Change
in technology. Advancement in technology can make a machine or a
method of production outdated.
Breach
of contract. Sometime agreement made between farmers and suppliers
of inputs or buyers of products can change their minds.
Transport
reliability. Transport may be unavailable when needed.
Labour
supply. Labour may not be available when it is most needed.
Unavailability
of inputs at the time when they are required by the farmer.
Unexpected
changes in prices. Prices may rise or fall erratically making
planing by the farmer difficult.
Change
in demand and supply forces; The farmer cannot certainly tell the
demand and supply of his product in the future
Measure
a farmer may take to guard against risks and uncertainties
Diversification;
farmers should run more than one enterprise to avoid total failure
because not all can fail at the sometime.
Insurance;
farmers pay small insurance premium to an insurance company that
will bear the risk of failure.
Liquidity,
maintain assets that can easily be converted to cash to take care of
any changes.
Contract
farming; producing a guaranteed quantity of the commodity for a
customer to be bought at fixed guaranteed price.
Input
rationing: Farmers should ration inputs such that all are not used
at a go. This means that even if there is a problem in one season ,
the farmer can continue producing because he/ she will have some
inputs in stock.
Ability
to secure loans or credit, this will enable the farmer to continue
in the event of failure.
Building
owner equity or personal saving to counteract any failure so that
the farmer can continue farming.
Flexibility:
A farmer designs the farm structure in such away that can easily be
converted and used for a different kind of enterprise. This enable
the farmers to change from loss making enterprise to a more
profitable one.
Product
combinations
Ways
in which product combine
complementary
products. These are products in which the transfer of resources from
one product to another results in increased output of both products.
An example of complementary relationship is the growing of legumes
in a crop rotation. The legumes add nitrogen to the soil, which
increase the yield of the subsequent grain crop.
Joint
products. These are products produced by a single production process
on the farm . For example, beef and hide, wool and mutton, eggs and
chicken.
Competitive
products. These are products that use the same resources and if the
farmer transferred resources to increase the production of one, the
other product will reduce. For example, crops and livestock using
same land.
Supplementary
products. These are products where by as the farmer transfers
resources to increase the production of one product, the other
product is not affected because they do not use the same resources
or they use the same resources at different times . For example,
keeping few chicken on the dairy farm.
Enterprise
selection and combination
Explain
the factors that should be considered when selecting a farm
enterprise
The
period / time the enterprise will take to mature
Availability
of market for the produce
The
size of land available for the enterprise
The
current government policy relating to the enterprise
The
common pest / parasites and diseases that may hinder the enterprise
implementation
Technical
skills required to manage the enterprise / availability
Profit
margin in relation to the price fluctuation at different times of
the season / year
Availability
of infrastructure to allow good communication
Availability
of proper security for the enterprise
Availability
of enough capital / money
Availability
of inputs
Suitability
of soil to the enterprise
Land
tenure system
Social
cultural factors / religious beliefs and customs
Land
topography / drainage
Taste
and preferences of the farmer
Efficiency
standard
These
are guidelines which measure the total physical and financial
performance of a farm. The performance of an enterprise on the farm
is compared with a similar measure of an enterprise of the same type
and size in the same area.
Why
is it necessary to measure the efficiency of the entire farm.
To
identify the weakness and strength
Areas
of poor performance can be recognized and the necessary improvement
can be made by the farmer
Technical
and economic efficiency
The
farm's performance can be measured by considering the output of
products (technical efficiency) or financial gains from the products
when sold ( economic efficiency)
Technical
efficiency is the measure of physical output per unit of input.
Suppose two farmers used similar quantities of inputs and
environmental conditions to produce beans. The farmer who obtains the
highest output will be taken to be more technically efficient.
Economic
efficiency is the measure of profitability of an enterprise. Suppose
two farmers produced the same quantities of beans per hectare, from
which they obtained the same amount of money. The economic efficiency
will be higher for the farmer who spent less to produce beans.
Types
of efficiency standards
Partial
efficiency standard
These
are concerned with assessment of the performance of a particular farm
enterprise. Yield index and system index are assessed in this case.
Yield
index is the actual out put or yield divided by expected yield times
a hundred
A
yield index of less than 100% calls for improvement in performance.
In
system index, the yield of particular enterprise is compared with
another on a similar farm
System
index= output
from an enterprise on a farm X100
output
from similar enterprise on another farm.
Overall
efficiency standards.
All
farm enterprises are valued as one unit, the profits from different
enterprises are summed up and the average profit per hectare is
obtained. Then the profit is compared with the capital used
Overall
efficiency = profit x100
capital
Ways
in a farmer can increase efficiency at the farm
Practice
improved farming methods such as good agronomic practices like pest
and diseases control, good feeding and housing for live stock etc.
Mechanization.
Use of machines brings about large output and good quality products.
Good
management. This brings about good decision making that leads to
better production
Good
record keeping. This ensures good future planning and ability to
make good decisions
Specialization
and diversification
Specialization
Specialization
is where resources are concentrated in the production of one or
relatively few commodities.
Advantages
of specialization
Farmers
can master production methods due to the frequent repetition of
tasks
It
is easier to market one product
Maximum
returns are possible due efficient use of resources
wastage
of resources reduces since they are put to their best use by an
efficient worker
It
encourages exchange of goods and hence promotes foreign trade.
Specialization
makes a farmer more competent and this lead to greater labour
efficiency.
Disadvantages
of specialization
Greater
losses can be made due to natural disasters or price fluctuation.
Income
is not likely to be constant throughout lthe year.
Creates
monopoly of work, that is some workers become dull and bored.
Creativity
and craftmanship can be lost due to specialization in one
enterprise.
It
limits the range of commodities available in a locality.
There
is much dependency on the specialized workers leading to a graeter
risk of a standstiil in production in the absence of some workers.
Specialization
in cash crops can lead to food shortage.
Diversification
This
refers to the production of several items on a farm or dealing with
several enterprises at the same time on the farm.
Examples
of farming practices which demonstrate diversification include mixed
fariming, mixed cropping or intercropping and agroforestry.
Advantages
of diversification
There
is efficient use of labour throughout the year.
The
farmer is able to get some income throughout the year from crops and
livestock products.
There
is proper integration of farm by-products e.g. crop residues may be
used for livestock feeds whereas poultry litter may be used to
improve soil fertility.
There
is better utlisation of land and equipment throughout the year.
The
farmer gets a balanced diet.
Total
loss of entire enterprise is minimized incase of mixed fariming
disadvantages
of diversification
Alot
of labour is required to manage the various enterprises
It
require a multi-skilled labour force to manage the diversified
enterprises
pests
and diseases may spread from one enterprise to another.
Cost
of production is likely to be high
it
is difficult to organize markerting of several farm products.
It
is more difficult to select and manage and select combination of
crops and livestock.
