Study Notes

Agriculture Production
Economics
Agriculture Production Economics

Agricultural Economics

• Agricultural economics may be defined as the application of principles and methods of

economics to study the problems of agriculture to get maximum output and profits from
the use of resources that are limited for the well-being of the society in general and
farming industry in particular

What is Production Economics?

• Application of the principles of microeconomics in production

• Principles: Cost concepts, Output, input and enterprise relationships, Cost minimization,
Profit maximization etc.,
• It is concerned with choosing of available alternatives or their combinations in order to
maximize the returns or to minimize the costs.

• Production economics, thus provides a framework for decision making at the level of a
firm for increasing efficiency and profits.

What is Agricultural Production Economics?

• A sub-discipline within the broad subject of agricultural economics

• “An applied field of science wherein principles of economic choice are applied to the use
of resources of land, labor, capital and management in the farming industry”
• The subject matter of production economics explains the conditions under which the profit,
output, etc. that can be maximized and the cost, use of physical inputs, etc.
• It may be defined as an applied field of science wherein principles of economic choice are
applied to the use of resources of land, labour, capital and management in the farming
industry.

Why Agricultural Production Economics?

• What is efficient production?

• How is most profitable amount of inputs determined?
• How the production will respond to a change in the price of output?
• What enterprise combinations will maximize profits?
• What should a manager do when he is uncertain about yield response?
• How will technical change affect output?

Basic Production Problems

• What to produce? – Output relationships

• How to produce? - Capital intensive or labour intensive; Enterprise combination; Input
relationships
• How much to produce? – resource use efficiency

• When to buy and sell? – seasonality, product markets

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Agriculture Production Economics

• Where to buy and sell?

Objectives

• To determine and outline the conditions which provide for optimum use of resources
• To determine the extent to which the existing use of resource deviate from the optimum
use
• To analyze the forces which condition production pattern and resource use
• To explain the means and methods for the changing existing use of resources to the
optimum level

Concerns of Production Economics

• Goals and Objectives of farm manager: Profit maximization or maximizing revenue subject
to constraints imposed by the availability of resources
• Choice of outputs to be produced
• Allocation of resource among output
• Assumption of risk and uncertainty
• The competitive environment in which the firm operates

Goals of Production Economics

The following are the goals of agricultural production economics:

• Assist farm managers in determining the best use of resources, given the changing
needs, values and goals of the society.
• Assist policy makers in determining the consequences of alternative public policies on
output, profits and resource use on farms.
• Evaluate the uses of theory of firm for improving farm management and understanding
the behaviour of the farm as a profit maximizing entity.
• Evaluate the effects of technical and institutional changes on agricultural production and
resource use.
• Determine individual farm and aggregated regional farm adjustments in output supply and
resource use to changes in economic variables in the economy.

Agricultural Production Economics:

Basic Concepts

1. Production: The process through which some goods and services called inputs are
transformed into other goods called products or output.

2. Production function: A systematic and mathematical expression of the relationship among

various quantities of inputs or input services used in the production of a commodity and the
corresponding quantities of output is called a production function.

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Agriculture Production Economics

3. Continuous production function: This function arises for those inputs which can be divided
into smaller doses. Continuous variables can be known from measurement, for example,
seeds and fertilizers, etc.

4. Discontinuous or discrete production function: This function arises for those inputs or
work units which cannot be divided into smaller units and hence are used in whole numbers.
For example, number of ploughings, weedings and harvestings, etc.

5. Short run production period: The planning period during which one or more of the resources
are fixed while others are variable resources. The output can be varied only by intensive use
of fixed resources. It is written as Y=f (X1, X2 / X3…..Xn) where Y is output, X1, X2 are
variable inputs and X3…..Xn are fixed inputs.

6. Long run production period: The planning period during which all the resources can be
varied. It is written as Y=f (X1, X2 ,…..Xn)

7. Technical coefficient: The amount of input per unit of output is called technical coefficient.

8. Resources: Anything that aids in production is called a resource. The resources physically
enter the production process.

9. Resource services: The work done by a person, machine or livestock is called a resource
service. Resources do not enter the production process physically.

10. Fixed resources: The resources that remain unchanged irrespective of the level of
production are called fixed resources. For example, land , building, machinery. These
resources exist only in short run. The costs associated with these resources are called fixed
costs.

11. Variable resources: The resources that vary with the level of production are called variable
resources. These resources exist both in short run and long run. For example, seeds,
fertilizers, chemicals, etc. The costs associated with these resources are called variable costs.

12. Flow resources: The resources that cannot be stored and should be used as and when these
are available. For example, services of a labourer on a particular day.

13. Stock resources: The resources that can be stored for use later on. For example, seeds.
Defining an input as a flow or stock depends on the length of time under consideration. For
example, tractor with 10 years life is a stock resources if we take the services of tractor for its
entire useful life of 10 years. But it also provides its service every day, therefore it is a flow
resources.

14. Production period: It is the time period required for the transformation of resources or inputs
into products.

15. Farm entrepreneur: Farm entrepreneur is the person who organizes and operates the farm
business and bears the responsibility of the outcome of the business.

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Agriculture Production Economics

16. Farm business manager: Person appointed by the entrepreneur to manage and supervise
the farm business and is paid for the services rendered. He/she carries out the instructions of
the entrepreneur.

17. Productivity: Output per unit of inputs is called the productivity.

18. Technical efficiency: It is the ratio of the physical output to inputs used. It implies the using
of resources as effectively as possible without any wastages.

19. Economic efficiency: It is the expression of technical efficiency in monetary terms through
the prices. In other words, the ratio of value of output to value of inputs is termed as economic
efficiency. It implies maximization of profits per unit of input.

20. Allocative efficiency: It occurs when no possible reorganization of resources/production can

make any combination higher yielding without making other combination less yielding. It refers
to resource use efficiency.

21. Optimality: It is an ideal condition or situation in which costs are minimum and/or profits
maximum.

22. Cost of cultivation: The expenditure incurred on all inputs and input services in raising a
crop on a unit area is called cost of cultivation. It is expressed as rupees per hectare or rupees
per acre.

23. Cost of production: The expenditure incurred in producing a unit quantity of output is known
as cost of production, for example, Rs./kg of Rs./quintal.

24. Independent variable: Variable whose value does not depend on other variables and which
influences the dependent variable, is termed as independent variable, for example, land,
labour and capital.

25. Dependent variable: Variable whose value depends on other variables is termed as
dependent variable, for example, crop output.

26. Slope of a line: It represents the rate of change in one variable that occurs when another
variable changes. Slope varies at different points on a curve but remains same on all points
on a given line. It is the rate of change in the variable on vertical axis per unit change in the
variable on horizontal axis and is expressed as a number.

27. Total physical product: Total amount of output obtained by using different units of inputs
measured in physical units, for example, kg, tonnes, etc.

28. Average physical product (APP): Output per unit of input on an average is termed as APP
and is given by Y/X.

29. Marginal physical product: Addition to total output obtained by using the marginal unit of
input and is measured as ΔY/ΔX