CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

SECTION D: THE BUSINESS OF FARMING

ECONOMIC FUNCTIONS OF PRODUCTION, MARKETING AND CONSUMPTION

1. THE ECONOMIC FACTORS OF PRODUCTION AS RELATED TO AGRICULTURE

In the production process, basic resources, termed factors of production, are combined to produce
a commodity. These factors are referred to as land, labour, capital and management and their use
is largely determined by the type of farming activity the farmer is engaged in.

A Business Farm

1. Resource or
Inputs:

a. Land and The farm business: 2. Farm Products (Outputs)

Buildings
Dairy, poultry, pigs,
b. Labour, vegetables, etc. 3. Marketing of farm products
Equipment and
Supplies
4. Income and Profit / Loss
c. Capital d. Farm Management
(Farm Manager)

Budgets and Plans Supervises and executes farm Keeps farm records
farm programmes programmes and activities and accounts

Land

Land is required for:

a. the cultivation of crops and livestock
b. the establishment of pastures
c. building sites for farmhouses

Land provides a site where production can take place. The amount of land required will depend on
the type of agricultural enterprise, e.g. a vegetable garden versus a dairy farm.

Labour

The human effort used in production. Labour as a factor of production can be classified into three
types:

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

a. Farmer / Operator Labour

The farmer is the only worker on the farm. The farmer does all the chores and makes all the
decisions. This is not very efficient and productive since an individual has limited capacity.

b. Family Labour

Labour is supplied by the farmer and members of his family. This is commonly used in subsistence
farming. It cannot be efficient in larger enterprises, e.g. poultry, pork and beef.

c. Hired Labour

This is the use of other workers on the farmer other than family members. There are two types:
i) Permanent
ii) Temporary (occasional / seasonal)

These will be required in medium and large farms to ensure the smooth running of the farm. Farms
that hire a large labour force are called labour intensive.

Capital

This is the factor of production which comprises buildings, machinery, tools and cash. These things
are required to assist in the production of other commodities. Capital can be grouped into two
broad groups:

i) Durable or Fixed
Items have more than one year of useful life, e.g. buildings, machinery, equipment, tools etc.

ii) Working or Circulating

Inputs that are consistently being used up, e.g. fuel, feed, fertilizer, cash etc. These are required
for the day to day running of the farm. They usually have one year of useful life or less. Capital
can be sourced from Commercial Banks (FCB, Scotia Bank, RBTT etc.), Agricultural
Development Bank (ADB) and Credit Unions.

Management or Entrepreneurship

This combines the other three factors or production (land, labour and capital) to produce or
generate wealth. Management determines the success or failure of the farm.

2. THE CONCEPT OF VALUE CHAIN AND SUPPLY CHAIN

A value chain is a set of activities businesses go through to develop a product or service for the
market.

For companies that produce goods, the value chain starts with the raw materials used to make their
products and consists with everything added to it before it is sold to the consumers.

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

To conduct a value chain analysis, the company pinpoints each part of the production process and
identifies where steps can be eliminated or improvements can be made. These improvements can
result in either cost savings or improved capacity.

The end result is that customers derive the most benefit from the product for the cheapest cost,
which improves the company’s bottom line in the long run.

A supply chain is a set of activities involved in moving a product or service from supplier to
customer.

3. THE RELATIONSHIP BETWEEN PRODUCTION, MARKETING AND

CONSUMPTION

There are distinct relationships between production, consumption and marketing.

Production may be defined as the set of activities that make goods and services available to satisfy
human needs.

Marketing is the set of activities that move the product from its production site to its consumption
site.

Consumption is the set of activities related to the use of the product.

The relationship can therefore be expressed as follows:

Production Marketing Consumption

4. THE LAW OF DIMINISHING RETURNS

In production the farmer is concerned with:

1. how much to produce;
2. if it is economic or wise to produce more than a given amount at a particular time.

This decision is determined from the returns of production. The returns of production can be
examined under the Law of Diminishing Returns which in turn is based on the Production
Function. The production function expresses the relationship between inputs and outputs/products.

The Law of Diminishing Returns states that if a variable resource is added to fixed resources,
marginal output will eventually decline.

For example, of the three factors of production (land, labour and capital), land is fixed, labour and
capital are variable.

Yields of Rice from Varying Amounts of Labour

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

No. of Workers Total Product or Average Product Marginal Product

Return or
(input) Or Return / Output
(kg) Output / Return

(return added by
last

Worker)

0 0 0 -

1 100 100 100

2 328 164 228

3 570 190 242

4 800 200 230

5 1000 200 200

6 1152 192 152

7 1260 180 108

8 1312 164 52

9 1312 146 0

10 1300 130 -12

Total Product – the cumulative output obtained by successive additions of variable input

Average Product – total product divided by input

Marginal Product – extra or additional product divided produced by using one extra unit of input.
That is, change in total product divided by change in input.

For example, from 100 to 328 = 228 = 228

From 1 to 2 1

From the table, it was observed that:

1. Each extra worker raises both the Total Product and the Marginal Product;

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

2. The maximum number of workers that should be employed is three;

3. Any additional worker will cause the Marginal Product to decline even though the Average
Product may continue to rise.

Graph Showing Yields of Rice with Increase in Labour

This graph shows the following:

1. The point of maximum Average Product is achieved when four to five workers are engaged.
2. With more than five workers the fall in the Marginal Product becomes steeper and the
Average Product becomes steeper and begins to drop off.
3. Total Product increases at an increasing rate up to three workers. That is, 100, 228 and 242.
(Increasing Returns).

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

4. After three workers the Total Product continues to increase but a decreasing rate.
(Diminishing Returns).
5. With the tenth worker there is negative Marginal Product.
6. Therefore, after the ninth worker the Total Product Curve really starts to fall. (Decreasing
Returns).

Graph Showing the Stages of Production

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

There are three stages of production:

Stage 1

1. Begins at zero input level and continues to the point where Average Product curve is
maximum and equal to Marginal Product.

2. In this stage the Total Product increases at an increasing rate up to where the Marginal
Product is maximum (3 workers). Then the Total Product increases at a decreasing rate.

3. Where the Marginal Product Curve is above the Average Product Curve, the Average
Product is increasing.

4. The farmer’s aim is to maximize net income while minimizing costs/losses. This objective
cannot be met in Stage 1 and the farmer has to increase production at least to the end of
Stage 1.

5. This is where the Marginal Product curve is above the Average Product curve and Average
Product is increasing.

Stage 2

1. Begins where the Average Product is maximum and equals the Marginal Product (at the
end of stage 1).

2. Ends where Marginal Product is zero or the Total Product is maximum.

3. This is the stage of profit maximization.

Stage 3

1. In this stage the Total Product begins to decrease.

2. The farmer should not operate in this stage because Marginal Product is zero.

Increasing Returns Constant Returns Decreasing Returns

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

5. THE RELATIONSHIP OF DEMAND AND SUPPLY TO THE PRICE OF

COMMODITIES

DEMAND

Demand is the amount of the commodity the consumer is willing and able to purchase at a
particular price and time.

Demand Schedule is the quantity of a commodity demanded at different prices, e.g. Demand
Schedule for sugar.

Demand Schedule for Sugar

Price ($) Quantity of Sugar (kg)

8 2

6 4

4 7

2 16

Demand Curve is the demand schedule represented graphically. That is, the demand curve
represents a relationship between price and quantity demanded.

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

The demand curve may be a curve or straight line.

The demand curve always slopes downwards from left to right.
It shows that more produce will be bought at a lower price.

The Law of Demand

The higher the price of a commodity, the smaller the quantities demanded at that point in time.
OR
The lower the price of a commodity, the greater the quantities demanded at that point in time.

According to this law if the price increases, demand should decrease, and if the price decreases,
demand increases at that point in time.

Shifts / Changes in the Demand Curve

This demonstrates an exception to the Law of Demand. A shift in demand means that a different
quantity will be demanded at each price level. This causes a change in the demand schedule /
demand curve.

The demand curve shifts either to the left (decrease in demand) or right (increase in demand).

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

Factors Causing Shifts / Change in Demand:

1. Change in consumers’ taste / preference / fashion.

2. Change in consumers’ income.
3. Change in the price of other goods.
4. Taxation – this is really a change in income.
5. Price speculation.
6. Change in population.
7. Change in season.
SUPPLY

Supply is the amount of a commodity that the farmer / producer is willing to put on the market at
a particular price at a particular time.

Supply schedule is the quantity of a commodity supplied at different prices, e.g. Supply Schedule
for sugar.
Supply Schedule for Sugar

Price ($) Quantity (kg)

12 1450

10 1250

8 1050

6 800

4 400

3 50

Supply Curve is the supply schedule represented graphically. That is, the supply curve represents
a relationship between price and quantity supplied.

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

The supply curve may be a curve or straight line.

The supply curve always slopes downwards from right to left.
It shows that less produce will be supplied at a lower price.

The Law of Supply

The higher the price of a commodity, the greater the quantities supplied at that point in time.
OR
The lower the price of a commodity, the lower the quantities supplied at that point in time.

According to this law if the price increases, supply should increase, and if the price decreases,
supply decreases at that point in time.

Shifts / Changes in the Supply Curve

This demonstrates an exception to the Law of Supply. A shift in supply means that a different
quantity will be supplied at each price level. This causes a change in the supply schedule / supply
curve.

The supply curve shifts either to the left (decrease in supply) or right (increase in supply).

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

Factors Causing Shifts / Change in Supply:

1. Change in cost of production

2. Change in technique of production.
3. Taxation.
4. Effects of weather / pests and diseases.
5. Consumers’ tastes / preferences.

How is Price Determined?

Equilibrium Market Price is the price at which the amount demanded equals the amount supplied.
At this price, the same quantity will be supplied as is demanded. Graphically, the equilibrium price
/ point at which supply curve intersects the demand curve.

Supply and Demand Schedule for Sugar

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

Price Quantity of Sugar Demanded Quantity of Sugar Supplied

($) (kg) (kg)

12 100 682

10 140 600

8 250 500

6 400 400

4 700 260

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

QUESTIONS

1. The diagram below shows the demand and supply curves for tomatoes in the local
market.

a) (i) On Figure 1, label the line which represents the demand curve, D.
(1 mark)

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

(ii) On Figure 1, label the line which represents the supply curve, S.
(1 mark)

(iii) State the equilibrium price.

_____________________________________________________________________
(2 marks)

(iv) State the quantity demanded at the equilibrium price.

_____________________________________________________________________
(2 marks)

b) (i) On Figure 1, draw the curve to represent an increase in demand and label it, D1.
(2 marks)

(ii) What effect will an increase in the demand have on the price of tomatoes?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________
(2 marks)

2. The diagram below shows the demand and supply curves for bottled water in the local
market.

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

a) (i) On Figure 1, label the line which represents the demand curve, D.
(1 mark)

(ii) On Figure 1, label the line which represents the supply curve, S.
(1 mark)

(iii) State the equilibrium price.

_____________________________________________________________________
(2 marks)

(iv) State the quantity demanded at the equilibrium price.

_____________________________________________________________________
(2 marks)

b) (i) On Figure 1, draw the curve to represent a decrease in supply and label it, S1.
(2 marks)

(ii) What effect will a decrease in the supply have on the price of bottled water?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________
(2 marks)

3. The table below shows the quantities of cabbage demanded and supplied at different
prices.

Price $ / kg Quantity Demanded / kg Quantity Supplied / kg

10 100 1350

9 200 1200

8 350 1020

7 480 900

6 680 680

5 800 480

4 950 250

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

3 1250 0

a) What is the equilibrium price for cabbage indicated in table above?

_____________________________________________________________________
(2 marks)

b) How will the price of cabbage be affected if:

(i) the overall demand for the commodity increases while the supply on the market
increases at an equal rate?

_____________________________________________________________________

_____________________________________________________________________
(2 marks)

(ii) the supply of the commodity increases but the demand remains the same.

_____________________________________________________________________

_____________________________________________________________________
(2 marks)

c) (i) List THREE factors that cause change in supply?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________
(3 marks)

(ii) List THREE factors that cause change in demand?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________
(3 marks)

4. Study the graphs in Figures 1 and 2 below and answer the questions that follow.

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

a) Using price and quantity, explain what is happening at point B of Figure 1.

_____________________________________________________________________
(2 marks)

b) If the price of tomato increases from $2.00 to $4.00:

(i) What will be the quantity demanded?

_____________________________________________________________________
(1 mark)

(ii) Suggest TWO ways by which the consumer will respond to the increase in price.

_____________________________________________________________________

_____________________________________________________________________
(2 marks)

(iii) How will the farmer MOST likely respond?

_____________________________________________________________________
(1 mark)

(iv) What will be the quantity supplied?

_____________________________________________________________________
(1 mark)

c) Suggest TWO measures which Caribbean governments can take to prevent the scarcity
of tomato.

_____________________________________________________________________

_____________________________________________________________________
(2 marks)

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 CXC AGRICULTURAL SCIENCE (SINGLE AWARD)

d) State the Law of Diminishing Returns, using an example of a crop grown on a farm.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________
(3 marks)

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