“Agricultural Sciences”

Farm
management,Production&Resource
Economics
(AGS 338)
Submitted by: Amanpreet Kaur
Regd.no.: 11701518
Roll no.:E104A09
Submitted to:Dr Ram Avtar

Product-Product relationship

INTRODUCTION
Economics is the science that deals with production, exchange and
consumption of various commodities in economic systems. It shows how
scarce resources can be used to increase wealth and human welfare. The
central focus of economics is on scarcity of resources and choices among their
alternative uses. The resources or inputs available to produce goods are
limited or scarce. This scarcity induces people to make choices among
alternatives, and the knowledge of economics is used to compare the
alternatives for choosing the best among them. For example, a farmer can
grow paddy, sugarcane, banana, cotton etc. in his garden land. But he has to
choose a crop depending upon the availability of irrigation water.
Two major factors are responsible for the emergence of economic problems.
They are:
i)The existence of unlimited human wants and
ii) the scarcity of available resources.
The numerous human wants are to be satisfied through the scarce resources
available in nature. Economics deals with how the numerous human wants are
to be satisfied with limited resources. Thus, the science of economics centres
on want - effort - satisfaction.
Economics not only covers the decision making behaviour of individuals but
also the macro variables of economies like national income, public finance,
international trade and so on.
A. DEFINITIONS OF ECONOMICS
Several economists have defined economics taking different aspects into
account. The word ‘Economics’ was derived from two Greek words, oikos (a
house) and nemein (to manage) which would mean ‘managing an household’
using the limited funds available, in the most satisfactory manner possible.
Adam smith (1723 - 1790), in his book “An Inquiry into Nature and Causes of
Wealth of Nations” (1776) defined economics as the science of wealth. He
explained how a nation’s wealth is created. He considered that the individual
in the society wants to promote only his own gain and in this, he is led by an
“invisible hand” to promote the interests of the society though he has no real
intention to promote the society’s interests
Elaboration:-
Agricultural economics, study of the allocation, distribution, and utilization of
the resources used, along with the commodities produced, by farming.
Agricultural economics plays a role in the economics of development, for a
continuous level of farm surplus is one of the wellsprings of technological and
commercial growth.
In general, one can say that when a large fraction of a country’s population
depends on agriculture for its livelihood, average incomes are low. That does
not mean that a country is poor because most of its population is engaged in
agriculture; it is closer to the truth to say that because a country is poor, most
of its people must rely upon agriculture for a living.

Agriculture And Economic Development

As a country develops economically, the relative importance of agriculture

declines. The primary reason for that was shown by the 19th-century German
statistician Ernst Engel, who discovered that as incomes increase, the
proportion of income spent on food declines. For example, if a family’s income
were to increase by 100 percent, the amount it would spend on food might
increase by 60 percent; if formerly its expenditures on food had been 50
percent of its budget, after the increase they would amount to only 40 percent
of its budget. It follows that as incomes increase, a smaller fraction of the total
resources of society is required to produce the amount of food demanded by
the population.

Progress in farming

That fact would have surprised most economists of the early 19th century,
who feared that the limited supply of land in the populated areas of Europe
would determine the continent’s ability to feed its growing population. Their
fear was based on the so-called law of diminishing returns: that under given
conditions an increase in the amount of labour and capital applied to a fixed
amount of land results in a less-than-proportional increase in the output of
food. That principle is a valid one, but what the classical economists could not
foresee was the extent to which the state of the arts and the methods of
production would change. Some of the changes occurred in agriculture; others
occurred in other sectors of the economy but had a major effect on the supply
of food.

Economic development also requires a growing labour force. In an agricultural

country most of the workers needed must come from the rural population.
Thus agriculture must not only supply a surplus of food for the towns, but it
must also be able to produce the increased amount of food with a relatively
smaller labour force. It may do so by substituting animal power for human
power or by gradually introducing labour-saving machinery.

Agriculture may also be a source of the capital needed for industrial

development to the extent that it provides a surplus that may be converted
into the funds needed to purchase industrial equipment or to build roads and
provide public services.

The labour force

As economic development proceeds, a large proportion of the farm labour

force must shift from agriculture into other pursuits. That fundamental shift in
the labour force is made possible, of course, by an enormous increase in
output per worker as agriculture becomes modernized. That increase in output
stems from various factors. Where land is plentiful, the output per worker is
likely to be higher because it is possible to employ more fertilizer and
machinery per worker.

Land, Output, And Yields

Only a small fraction of the world’s land area—about one-tenth—may be

considered arable, if arable land is defined as land planted to crops. Less than
one-fourth of the world’s land area is in permanent meadows and pastures.
The remainder is either in forests or is not being used for agricultural purposes.

There are great differences in the amount of arable land per person in the
various regions of the world. The greatest amount of arable land per capita is
in Oceania; the least is in China. No direct relationship exists between the
amount of arable land per capita and the level of income.

The relationship between land, population, and farm production is a complex

one. In traditional agriculture, where methods of production have changed
little over a long period of time, production is largely determined by the quality
and quantity of land available and the number of people working on the land.
Until the early years of the 20th century, most of the world’s increase in crop
production came either from an increase in land under cultivation or from an
increase in the amount of labour used per unit of land. That generally involved
a shift to crops that would yield more per unit of land and required more
labour for their cultivation. Wheat, rye, and millet require less labour per unit
of land and per unit of food output than do rice, potatoes, or corn (maize), but
generally the latter yield more food per unit of land. Thus, as population
density increased, the latter groups of crops tended to be substituted for the
former. That did not hold true in Europe, where wheat, rye, and millet
expanded at the expense of pasture land, but those crops yielded more food
per acre than did the livestock that they displaced.

Efforts To Control Prices And Production

In the second half of the 20th century, governments undertook to control both
prices and output in the agricultural sector, largely in response to the
pressures of the farmers themselves. In the absence of such control, farm
prices tend to fluctuate more than do most other prices, and the incomes of
farmers fluctuate to an even greater degree. Not only are incomes in
agriculture unstable, but they also tend to be lower than incomes in other
economic sectors.
The problem

Instability of prices

The instability of farm prices results from several factors. One is the relative
slowness with which farmers are able to respond to changes in the demand for
their product. Farmers generally must produce on the basis of expectations,
and if their expectations turn out to be wrong, the resulting surplus or
shortage cannot be corrected until the beginning of the next production cycle.
Once a crop is planted, very little can be done to increase or decrease
production in response to market prices. As long as prices cover current
operating costs, such as the cost of harvesting, it pays farmers to carry through
their production plans even if prices fall to a very low level. It is not unusual for
the prices of particular farm products to vary by a third or a half from year to
year. That extreme variability results from the relatively low responsiveness of
demand to changes in price—i.e., from the fact that in order to increase sales
by 5 percent it may be necessary to reduce the price by 15 percent.

Instability of income

The instability of farm prices is accompanied by instability of farm income.

While gross income from agriculture generally does not vary as much as do
individual farm prices, net income may vary more than prices. In modern
agriculture, costs tend to be relatively stable; the farmer is unable to
compensate for a drop in prices by reducing his payments for machinery,
fertilizer, or labour.

The incomes of farm workers are generally below those of other workers.
There are two major reasons for that inequity. One is that in most economies
the need for farm labour is declining, and each year large numbers of farm
people, especially young ones, must leave their homes to seek jobs elsewhere.
The difference in returns to labour is required to bring about that transfer of
workers out of farming; if the transfer did not occur, farm incomes would be
even more depressed. The second major reason for the income differences is
that farm people generally have less education than do nonfarm people and
are able to earn less at nonfarm jobs. The difference in education is of long
standing and is found in all countries, developed and undeveloped; it also
exists whether the national education system is highly decentralized, as in the
United States, or highly centralized, as in France.
Product - Product Relationship.

The relative quantity of two or more outputs (Products) is related to a fixed

quantity of inputs (factors).

Product-product relationship is concerned with the allocation of a fixed

resource set between competing enterprises. The farmer has to take great care
in selecting the most appropriate product or product mix to maximize his profit
from the given resource set. The relationship between products can be
categorized as competitive, supplementary, and complimentary or joints
products. To explain these categories we can make use of production
possibility curve, which represents various possible combinations of two
products that can be produced with fixed level of inputs as shown in Figure
No.4. The slope of the production possibility curve denotes the rate at which
one product substitutes for another.

Costs of Production:

Costs of Production is total sum of money required for the production of a

specific quantity of output.

Following elements are included in the cost of production;

1. Rent of land.

2. Wages of labour.

3. Interest on capital.

4. Wear and tear of the machinery and building.

5. Advertisement charges.

6. Insurance charges.

7. Payment of taxes.
The costs of production from the point of view of individual firm is divided into
two parts;

1. Explicit Costs.

2. Implicit Costs.

1. Explicit Costs: Explicit cost represents all such expenditure which are
incurred by an entrepreneur to pay for the hired services of factors of
production and in buying goods and services directly. The explicit costs include
wages and salary payments, expenses on the purchase of raw materials, light,
fuel, advertisements, transportation, taxes and depreciation charges. In short,
all the items of expenses appearing on the debit side of trading account of a
firm represent explicit costs. Explicit cost is also called accounting costs.

2. Implicit Costs: The implicit costs are imputed value of the entrepreneur’s
own resources and services. Implicit costs can be defined as expenses that an
entrepreneur does not have to pay out of his own pocket but are costs to the
firm because they represent an opportunity cost. Implicit costs thus are the
alternative costs of the self-owned and self-employed resources of a firm.

Other Costs of Production:

3. Real Costs: Real costs ate the pains and inconveniences experienced by the
labour to produce a commodity.

4. Opportunity Costs: It is amount of income or yield that could have been

earned by investing in the next best alternative. The costs foregone
opportunity to take advantage of next best alternative.

Accounting profits, economic profits, and normal profits. The difference

between explicit and implicit costs is crucial to understanding the difference
between accounting profits and economic profits. Accounting profits are the
firm's total revenues from sales of its output, minus the firm's explicit costs.
Economic profits are total revenues minus explicit and implicit costs.
Alternatively stated, economic profits are accounting profits minus implicit
costs. Thus, the difference between economic profits and accounting profits is
that economic profits include the firm's implicit costs and accounting profits do
not.

A firm is said to make normal profits when its economic profits are zero.

Total Cost (TC): Total cost is the sum of all its variable and fixed costs.

Marginal Cost (MC): Marginal cost is the per unit change in total cost that
results from a change in total product.

Average Cost (AC): Average cost is the ratio of total cost to the total quantity of
output.

Product - Product relationship :-Types. Production possibility curve, iso

revenue line and optimum combination of outputs
In this section, instead of considering the allocation of inputs to an enterprise
or among enterprises, we discuss enterprise combinations or product- mix
involving product-product relationships. We deal with what combination of
enterprises should be produced from a given level of fixed and variable inputs.
A. PRODUCTION POSSIBILITY CURVE (ISO-RESOURCE CURVE) 200
The production possibility curve or product transformation curve is the locus of
maximum amounts of two products, say Y1 and Y2, that can be produced from
a given quantity of resources (X(0)). Mathematically, such product
transformation curve is represented by: Y1 = f (Y2, X(0) ) or Y2 = f ( Y1, X(0) ).
The Rate of Product Transformation (RPT) (or) Marginal Rate Product
Substitution (MRPS) between two products, Y1 and Y2, is given by the negative
slope of this curve. The RPT of Y2 for Y1 can either be expressed as:
dY1 / dY2 ,
the slope of the product transformation curve can be defined as the change
(increase or decrease ) in the level of Y1 that must be accompanied by a unit
change (decrease or increase ) in the product (Y2) at a given level of resource.
i) Relationship among Products: The basic product relationships can be: joint,
complementary, supplementary and competitiveness.
a) Joint Products: Products, which result from the same production process,
are termed joint products. In the extreme case, two products are combined in
fixed proportions and the production of one without the other is impossible.
E.g. Grain and No substitution is possible in this case. However, for example,
different varieties of paddy produce varying proportions of straw and grain.
Thus, the proportions may be changed by technologies or cropping practices
usually associated with the fixed inputs. For such products, a narrow range of
product substitution may exist as presented in
b) Competitive Products: Products are termed 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. the manager can expand production of one output only by
divert inputs-land, labour, capital and management-from one enterprise to
another.
When the production possibility curve has a negative slope, the products
concerned are competitive. Two competitive products can substitute each
other either at a constant or increasing or decreasing rate. Substitution of one
product for another product at a constant rate is only a short-run phenomenon
because such a relationship may not hold for long. Two varieties of any crop
with all inputs held constant, during any single season provide an example of
this type of substitution. Economic decision-making is easy in this case, i.e., the
farmer would produce only one of these products depending upon yields and
prices. Whenever a decreasing RPT exists between two products, every unit
addition of one product, say Y2 replaces less and less of other product, Y1.The
product transformation curve is concave away from origin and convex toward
the origin. This type of relationship is quite rare. This type of decreasing RPT
can be found in very small farms where capital is very limited and the produce
of none of the two competitive commodities can be extended beyond the first
stage of production. Decision-making is simple in this case, i.e., the farmer
would produce only one of the two products depending on relative yields and
prices. An increasing rate of product transformation between two products
occurs when both products are produced in the stage of decreasing returns.
The product transformation curve is concave towards the origin, i.e., increasing
amounts of Y1 must be sacrificed for each successive gain of one unit of other
product, Y2 for a given level of input.
c) Complementary Products: Two products are complementary, if an increase
in one product causes an increase in the second product, when the total
amount of inputs used on the two are held constant. Complementary usually
occurs when one of the products produces an input used by the other product.
An example of this is the use of a legume in rotation with cash crop. The
legume may add nitrogen and improve soil structure or tilth and improve weed
and insect control. These factors, in turn, serve as “inputs” for cash crops thus
causing, over a period of time required by the rotation, an increase in the
production of cash crop. The complementary products may eventually become
competitive.
For example, while one year of alfalfa in a four-year rotation may be
complementary, two, three or four years of alfalfa could be produced only by
successive reductions in the cash crops.
d) Supplementary Products: Two products are called supplementary, if the
amount of one can be increased without increasing or decreasing the amount
of the other. In figure 12.4 (a) Y2 is supplementary to Y1. Y2 can be increased
from zero to OH amount without affecting the amount of Y1 produced. Beyond
E, the two outputs become competitive. In Fig.12.4 (b), each enterprise is
supplementary to the other and competitive between FG.Supplementary
enterprises arise through time or when surplus resources are

Supplementary Products available at a given point of time. Once purchased, a

tractor is available for use throughout the year. Its use in one month does not
prevent its use in another month. Thus, a tractor purchased to plough and
plant may be put to a lesser use during the off-season. If two crops were
harvested at the same time, however, the relationship would be competitive-
use on one could reduce the amount of use on the other.
The supplementary relationship between products depends upon amount of
use left in the resource. If the harvester is completely worn out harvesting corn
in June, it will not be available for use in July. Milk cows and family gardens
represent supplementary enterprises on some farms. In each case, labour or
some other input is available for use on a small scale and rather than let it go
idle, a small enterprise is undertaken.
Production possibility curve is also known as opportunity curve as it presents
all possible production opportunities.
ii) Marginal Rate of Product Substitution or Rate of Product Transformation:
RPT is nothing but the slope of production possibility or opportunity curve. The
marginal rate of product substitution means the rate of change in quantity of
one output (Y1) as a result of unit increase in the other output (Y2), given that
the amount of the input used remains constant. As the amount of Y2 produced
increases, the amount of Y1 sacrificed steadily increases. This is due to the
decreasing marginal physical products displayed by the production functions.
iii) Iso Revenue Line: It is the line which defines all possible combinations of
two commodities which would yield an equal revenue or income. Iso revenue
line indicates the ratio of prices for two competing products. The point on Y2
axis is always equal to TR/PY2 while the point on the Y1 axis equal TR/PY1. The
distance of the Iso revenue line from the origin is determined by the
magnitude of the total revenue. As total revenue increases, the iso revenue
line moves away from the origin. The slope of the iso revenue line is
determined by the output prices.
Thus, the output prices ratio is the slope of the iso revenue line. The negative
sign means that the iso revenue line slopes downward to the right. The iso
revenue lines are used for revenue optimization, while iso cost lines are used
for cost minimization.
iv) Revenue Maximizing Combination of Outputs
The maximum revenue combination of outputs on the production possibility
This can be rewritten as follows:
Py1(ΔY1) = - Py2(ΔY2 ). This criterion states that at the maximum revenue
point, the increase in revenue due to adding a minute quantity of Y2 is exactly
equal to the decrease in revenue caused by the reduction in Y1. Thus, there is
no incentives change the output combination. WhenPy1 (ΔY1) > - Py2 (ΔY2),
the amount of Y2 should be decreased in favour of Y1. When Py1 (ΔY1) < -Py2
(ΔY2), then Y2 should be increased at the expense of Y1. As could be seen in
the Figure , the line connecting maximum revenue points is called output
expansion path. For each level of input, the maximum revenue combination of
outputs will fall on the expansion path.
Product flexibility: Product flexibility aims at changes in production in response
to price changes. In this category, machines, farm structure, etc, can be readily
shifted from one product to another
Some of the important technological rural development methods are as
follows;

1. On Farm Demonstration: Practical demonstration are carried out in the

farmers fields to show the performance of improved varieties, agronomic
practices and the overall impact of appropriate technologies. For wide
publicity, fields are also organized and farmers are invited to see the benefits
of adopting improved technologies.
3. Agriculture Information Service: A variety of information on different
aspects of agriculture is generated by National and International Research
work networks. This useful scientific and technological information is packed
into understandable language and disseminated through the press, radio and
TV for various client groups. Mostly magazines and brochures are also being
brought out for the audience of farming community.

4. Crop Maximizing Programmes: This technical method of rural

development is applied on a large scale including a group of union councils or
the whole Tehsil / sub-Tehsil to show the impact of improved technologies and
according to production plan based on the assured supply of essential inputs.
High yields ae achieved through efficient cooperation and management of
various components: research extension and supply of inputs to farmers. Such
an approach boosts the morale of all the concerned especially the farmers and
helps in achieving his production within a short period through a multiplier
effect. With this approach 60-100 % higher yields of rice, maise and wheat
have been obtained in selected areas of Punjab, NWFP and Sindh Provinces.

5. Extension Through Fellow Farmers: The best educators for farmers in a

community can be fellow farmers who have a reputation for efficient
production. Experience and knowledge of farmers can be utilized to educate
other fellow farmers in the rural area. Progressive farmers can also be
organized in specified rural groups and forums for seed production, nursery
raising, livestock and poultry production and other related agriculture related
business.

6. Credit Based Extension: The availability of agriculture credit on

reasonable terms and conditions to the growers is also an important factor
determining their ability to use recommended technologies. In hilly and desert
areas, most farmers are fall of cash and need credit to use recommended
technologies is related to the availability of credit and credit and credit based
extension i.e making credit available, may prove very effective in improving
farm productivity levels and incomes of farmers in arid zones.

7. Women Extension Service: Rural women in agriculture perform many

crucial work. They carry out farms operations like sowing, hoeing and
harvesting, animal and poultry raising at home besides looking after household
management. However, they seldom get opportunities to enhance their
capabilities and skill through training or education programme. The training
and education of women is essential for rapid socio-economic development. As
women constitutes about 50% of total population and must play a vital role in
the economic and rural development of the country.

8. Farmers Training Programmes: Under this programme the farmers are

brought to the training centres for imparting knowledge mostly through
practical methods of rural oriented teaching. Even at present, short term
training courses are arranged by the Agriculture Training Institutes for farmers
to impart knowledge and skill about improved agriculture technology, but this
is on a very limited scale. The capacity of the institutes is limited. Moreover,
farmers from the distant corners cannot afford to come and attend the
training.

Conclusion:-

The overflowing of new industrial data is making the Farm issues creatively
testing and giving appealing chances to augmenting benefits. Consequently,
the utilization of financial standards to farming is basic for the effective service
of the farm business. Some of the time reasoning and religion preclude the
farmers to develop certain endeavors, however they are profoundly beneficial.
For instance, Islam restricts Muslim farmer to take up piggery while Hinduism
precludes meat production. The different bits of enactment and activities of
government influence the production choices of the farmer, for example, roof
ashore, bolster costs, nourishment zones and so forth. The physical sciences
indicate what can be delivered; economics determine how resources ought to
be utilized, while humanism, brain research, political theories and so forth
indicate the restrictions which are put on decision, through laws, traditions and
so on. The Agricultural Economics Principles tackles the issues of the amount
to deliver? It controls in the assurance of isale contribution to utilize and isale
yield to deliver. It clarifies the one of the fundamental production connections
viz., factor-product relationship.
Agriculture production depends somewhat on nature and thus, it marginally
shifts from modern production. Agriculture is modernizing quite a long time
after year and utilization of production economics is winding up wide. Be that
as it may, to what degree these information sources ought to be utilized
underway procedure is to be replied by production financial specialist.
Production economics isn't just utilized in crop production however in dairy
industry and in fisheries too. Production capacity can be communicated as a
table, where one section speaks to include, while another demonstrates the
comparing all out yield of the product. The two sectors comprise production
work.
Following things we’ve learnt :
 Two products can relate together as joint, competitive, complementary
or supplementary
 If the four types of product relationships are observed in agricultural
production.
 Products are competitive when increase in production of one will reduce
the output of the other one
 Two products are joint if increase in the production of one will
increasethe output of the other one
 Two products are said to be complementary if increase or decrease in
the output of one will not affect the output of the other one
 If one input can be used to produce used to produce two products at
different production periods, the two productsare said to be
supplementary vii. If input is fixed, it is possible to have some various
combinations of output from two products.