Principle of agricultural economics notes for olevel


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).
  1. 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.
  1. 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
  1. 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.
  2. 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.
  3. Condition at the place of work. Where the working conditions are ideal, more people will be attracted into labour force.
  4. Size of the population. The larger the total population, the greater the availability of labour.
  5. 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.
  6. Health status of the workers. The healthier the labour force, the more amount of labour they can provide.
  7. 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.
  8. Allowance or motivation available.
  9. 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.
  10. Political stability. Areas that are free of insurgency attract more labour than those embroiled in conflicts.

Factor determining the efficiency of labour
  1. Climate; good weather makes workers or people to work well.
  2. Health of the workers; healthy people work well and become more efficient.
  3. Social environment; good relations and motivation influence the quality of work.
  4. Peace of mind, workers with peace of mind tend to work well.
  5. Good and prompt payment tend to improve on efficiency of labour.
  6. Education or training acquired; skilled manpower produce good quality work.
  7. Degree of specialization; workers become more efficient when they specialize in particular sectors.

  1. Capital
This refers to all assets that are used to produce goods and services
Types of capital
  1. 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.
  2. 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.
  3. 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.

  1. Entrepreneurship management: An entrepreneur is someone who runs the business to make profits.
Roles / functions of entrepreneur/ manager at the farm.
  1. To purchase inputs for the farm business e.g fertilizers, drugs, tools, machines etc
  2. Risk bearing (takes the responsibility of profits and loss)
  3. To be the innovator and so invest in new, cheaper and most efficient production techniques.
  4. Combines the other factors of production to produce certain goods or commodity.
  5. To mobilize finances and other resources needed to facilitate the production process through saving, borrowing etc.
  6. Is the overall supervisor of the production process.
  7. To bear all the risks and uncertainties of success or failure of the enterprise.
  8. To reward the other factors of production, e.g, labour (earns wages), capital (earns interest) and land (earns rent).
  9. To be the controller and last decision maker on how to use the factors of production
  10. To keep records of performance of the enterprise.

Good qualities or skills of a good manager
  1. Should be knowledgeable in the farming practice.
  2. Should be hard working.
  3. Should be responsible.
  4. Should be dynamic.
  5. should be prudent.
  6. Should consistent.
  7. Should be ambitious
  8. 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;

  1. Yield uncertainty; failure or rain or outbreak of pests and disease may lower the yield.
  2. Change in government policies; Government may change the tax regime, remove subsides or ban a product.
  3. Change in technology. Advancement in technology can make a machine or a method of production outdated.
  4. Breach of contract. Sometime agreement made between farmers and suppliers of inputs or buyers of products can change their minds.
  5. Transport reliability. Transport may be unavailable when needed.
  6. Labour supply. Labour may not be available when it is most needed.
  7. Unavailability of inputs at the time when they are required by the farmer.
  8. Unexpected changes in prices. Prices may rise or fall erratically making planing by the farmer difficult.
  9. 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

  1. Diversification; farmers should run more than one enterprise to avoid total failure because not all can fail at the sometime.
  2. Insurance; farmers pay small insurance premium to an insurance company that will bear the risk of failure.
  3. Liquidity, maintain assets that can easily be converted to cash to take care of any changes.
  4. Contract farming; producing a guaranteed quantity of the commodity for a customer to be bought at fixed guaranteed price.
  5. 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.
  6. Ability to secure loans or credit, this will enable the farmer to continue in the event of failure.
  7. Building owner equity or personal saving to counteract any failure so that the farmer can continue farming.
  8. 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
  1. 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.
  2. 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.
  3. 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.
  4. 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

  1. The period / time the enterprise will take to mature
  2. Availability of market for the produce
  3. The size of land available for the enterprise
  4. The current government policy relating to the enterprise
  5. The common pest / parasites and diseases that may hinder the enterprise implementation
  6. Technical skills required to manage the enterprise / availability
  7. Profit margin in relation to the price fluctuation at different times of the season / year
  8. Availability of infrastructure to allow good communication
  9. Availability of proper security for the enterprise
  10. Availability of enough capital / money
  11. Availability of inputs
  12. Suitability of soil to the enterprise
  13. Land tenure system
  14. Social cultural factors / religious beliefs and customs
  15. Land topography / drainage
  16. 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.
  1. To identify the weakness and strength
  2. 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
  1. 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.

  1. 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
  1. Practice improved farming methods such as good agronomic practices like pest and diseases control, good feeding and housing for live stock etc.
  2. Mechanization. Use of machines brings about large output and good quality products.
  3. Good management. This brings about good decision making that leads to better production
  4. 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
  1. Farmers can master production methods due to the frequent repetition of tasks
  2. It is easier to market one product
  3. Maximum returns are possible due efficient use of resources
  4. wastage of resources reduces since they are put to their best use by an efficient worker
  5. It encourages exchange of goods and hence promotes foreign trade.
  6. Specialization makes a farmer more competent and this lead to greater labour efficiency.
Disadvantages of specialization
  1. Greater losses can be made due to natural disasters or price fluctuation.
  2. Income is not likely to be constant throughout lthe year.
  3. Creates monopoly of work, that is some workers become dull and bored.
  4. Creativity and craftmanship can be lost due to specialization in one enterprise.
  5. It limits the range of commodities available in a locality.
  6. There is much dependency on the specialized workers leading to a graeter risk of a standstiil in production in the absence of some workers.
  7. 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
  1. There is efficient use of labour throughout the year.
  2. The farmer is able to get some income throughout the year from crops and livestock products.
  3. 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.
  4. There is better utlisation of land and equipment throughout the year.
  5. The farmer gets a balanced diet.
  6. Total loss of entire enterprise is minimized incase of mixed fariming
disadvantages of diversification
  1. Alot of labour is required to manage the various enterprises
  2. It require a multi-skilled labour force to manage the diversified enterprises
  3. pests and diseases may spread from one enterprise to another.
  4. Cost of production is likely to be high
  5. it is difficult to organize markerting of several farm products.
  6. It is more difficult to select and manage and select combination of crops and livestock.

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