UNIT- 3

AGRICULTURAL PRODUCTION AND PRODUCTIVITY

3.0 Objectives

3.1 Introduction

3.2 Analysis of the Unit

3.2.1 Agricultural Production

3.2.2 Size of Farm and Laws of Returns

3.2.3 Farm Budgeting and Cost Concepts

3.2.4 Technical Change and Agricultural Productivity

3.3 Summary

3.4 Key Terms

3.5 Questions for Practice

3.6 Field Work

3.7 References

3.0 Objectives-
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After studying this unit we will able to understand-

i. Resource and efficiency in traditional agriculture

ii. Production function analysis in agriculture

iii. Factor combination and resource substitution

iv. Cost and supply curves

v. Theoretical and empirical findings of size of farm and laws of returns

vi. Farm budgeting and cost concepts

vii. Technical change and agricultural productivity

3.1 Introduction-

In previous unit, we have studied diversification of rural economic activities which

consists livestock economics, problems of marketing, white revolution, fishery and poultry.

Besides this, we have studied issues and problems in rural industrialization as well as rural

infrastructure. In this unit, we will study the resource and efficiency in traditional agriculture,

production function analysis in agriculture, factor combination and resource substitution, cost

and supply curves, theoretical and empirical findings of size of farm and laws of returns,

technical change and agricultural productivity.

3.2 Analysis of the Unit:

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 In this unit, we will study the agricultural production and productivity, production

function analysis, farm size and laws of returns. Besides, farm budgeting and cost concepts as

well as technical change and agricultural productivity is assessed.

3.2.1 Agricultural Production:

Resource and Efficiency in Traditional Agriculture:

Today in India, as in many other developing countries with a rich agricultural tradition of

their own, the words ‘improved agriculture’ and ‘progressive agriculture’ have become

synonymous with the spread of HYVs grown with ever-increasing doses of chemical fertilizers

and pesticides. Wherever the new crop varieties have spread, time-honoured crop rotations, inter-

cropping patterns and other important features of traditional agriculture have been harshly

uprooted.

At the back of this trend, and the official policies which support it, is the belief that

traditional agriculture is ‘backward’ and incapable of meeting the need of increasing population.

1. Traditional Implements: The existing ploughs and other implements used by the

farmers were useless and ready to be replaced. The native cultivator had ‘improved’

ploughs he could dispense with the many ploughings which he gives to the land.

2. Irrigation System: An important agent of traditional Indian agriculture was the well-

developed irrigation system. Irrigation by wells is at once the most widely distributed

system, and also the one productive of the finest examples of careful cultivation. Further,

as regards wells, one cannot help being struck by the skill with which a supply of water is

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 first found by the native cultivators, then by the construction of the wells, the kinds of

wells and their suitability to the surroundings and means of the people; also by the

various devices for raising water, each of which has a distinct reason for its adoption, but

efficiency of traditional irrigation system was less productive.

3. Crop rotation system: Another important aspect of traditional agriculture was that of

the scientific rotation system of crop cultivation. Frequently more than one crop at a time

may be seen occupying the same ground but one is very apt to forget that this is really an

instance of rotation being followed. Now- a -days mono crop culture has been introduced,

it increase the productivity of land and earn market surplus.

4. Soil-mixing practices: Mixing is not unknown in India. The addition changes the

consistence of the sand, so that it becomes better suited for sugar cane and other garden

crops rose under irrigation. The cultivator appreciates the value of tank silt and in those

districts where these water reservoirs are common they are cleaned out with the utmost

care and regularly each year. The silt which has collected in these tanks being the

washings of village sites and cultivated fields, has some manorial value, and applied as it

is at the rate of 40 bullock cart loads or more per acre, adds considerably to the body of

the soil.

5. Grain-storage practices: Foodgrain storage of Indian farmers is no less glowing. Indian

farmers are great adepts in storing grain, and will turn out of rough earthen pits, after 20

years, absolutely uninjured. They know the exact state of ripeness to which grain should

be allowed to stand in different seasons; in other words under different meteorological

conditions, to ensure its keeping when thus stored; and equally the length of time that,
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 under varying atmospheric conditions, it should lie upon the open threshing floor to

secure the same object.

6. Scientists Farmer: In the Chhatisgarh region has revealed the high level of skills of the

farmers of remote tribal villages still untouched by the official development programmes.

Tribal communities still lead a life of their own; they were taking comparable and even

larger yields from indigenous rice varieties, compared to the HYVs being spread

officially in other parts of the state. Another revelation was the very large number of rice

varieties being grown by the farmers, who possessed detailed knowledge of each of their

properties. Some of those varieties were remarkable for their high yields, some for their

supreme cooking qualities, some for their aroma, and some for other cherished qualities.

7. Grazing land: Traditionally, man, animals, trees, grass lands and agricultural fields were

inseparable and harmonious components of a single system. The villager looked after the

trees on his fields and also contributed to the maintenance of the community grazing

land. Farmer looked after the animals owned by him, sometimes with the assistance of a

grazing hand and cultivated the fields owned by him, with or without hired labour or

share croppers. Meanwhile their soil and water conservation properties were beneficial

for the villagers and contributed to maintaining the fertility of agricultural fields, as well

providing shade during the summer season.

8. Husbandry: Cattle provided milk and milk products and contributed to the nutritional

content of the villagers' diet. Cattle dung provided organic fertilizers for the fields, while

the poultry provided eggs and meat. The skins of dead cattle were used for making

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 footwear and other leather products-all such activity being carried out in the village. Not

least, bullocks ploughed the fields.

9. Crop Management: The numerous varieties of crops being grown in traditional

agriculture, it should then make good quality seeds available to the villagers. Better field

preparation and help with manuring, sowing operations, crop management and with post

harvest storage will lead to better quality of crops as well as yields.

10. New agricultural technology: New agricultural technology in the form of tractors and

fertilizers will again benefit the richer farmers, who will therefore be able to increase

their agricultural production and cash receipts. On the other hand, their dependence on

organic manure and bullocks is reduced, so that their requirement for fodder becomes

less. All those factors may lead them to neglect the growth and proper maintenance of

grazing lands.

11. Water Use: The adoption of flat rate pricing for agricultural power is cause for this

perverse state of affairs. Under this system, a farmer pays a fixed price per horsepower

per month for electricity use. Therefore the marginal cost of pumping water is zero. This

leads to energy wastage, over-pumping and inefficient selection of crops. Flat rate

pumping also masks the true cost of power to farmers. The tariff structure and the poor

combination of technology and management are responsible for water loss, unsustainable

exploitation of groundwater and the high energy losses associated with the distribution

and end-use of electricity in irrigation water pumping.

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 12. Energy losses: Significant energy losses are associated with the distribution of

electricity and in the poor selection, installation, maintenance and operation of the

electrical motor pump system. A vicious cycle operates two subsystems in tandem: the

electrical distribution system and the water pumping system. This vicious cycle

comprises three sub-cycles: The technology sub-cycle, the financial sub-cycle and the

socioeconomic sub-cycle.

Production Function Analysis in Agriculture:

Production Function:

Production function is the creation of utility and units of values; it is the relationship

between inputs and outputs. It is a technological relation showing, for a give state of

technological knowledge, how much can produced with given amounts of inputs. Production

function expresses the technological or engineering relationship between supplied by factors and

outputs. Production is the function of land, labour, capital, organization, technology, enterprise

and government contribution. It represents production efficiency achieved with the help of least-

cost combinations of inputs or factors.

In the words of Stigler: “The production function is in fact the economist’s summary of

the technical engineers’ knowledge.”

“Production function describes the laws of proportion, that is, the transformation of factor

inputs, into products of any particular time period. It thus represents the technology and

technically the most efficient method of production”

Diminishing Returns in Agriculture:

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 The law of diminishing returns is a part of the law of variable proportions. It is regarded as

the ‘long term law of agriculture’- in fact long term law of life itself. That the law of diminishing

returns should apply ultimately is not unknown to anyone.

There are limits to the extent to which one factor of production can be substituted for

another. The elasticity of substitution between factors is not infinite. If all factors are kept

constant and only more water is supplied, unlimited output at increasing returns cannot be

expected for ever. The same can be said about the application of fertilizers or pesticides or high

yielding variety of seeds. Land becomes the greatest limiting factor or at least its fertility.

Following are the important characteristics of diminishing returns in agriculture:

1. Diminishing returns emerge because of the declining fertility or the original state of

the land.

2. Diminishing returns are due to limited substitutability of the factors of production.

According to Mrs. Joan Robinson the elasticity of substitution between factors is not

infinite.

3. Diminishing returns are obtained when the scale of operation is not increased but

when only one variable input is changed while the quantities of other inputs are kept

constant.

4. The total production increases but the incremental production becomes smaller and

smaller due to marginal productivity of the land declines and later on the average

productivity also declines.

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 5. Diminishing returns may be obtained after increasing or constant returns and become

the natural outcome of agricultural operations.

Increasing Returns in Agriculture:

This simply means that increasing outputs can be obtained with the same inputs or that

the rising inputs bring more than proportionate outputs. This relationship better has to be in

physical terms and not merely in revenue terms. Increasing revenue cost ratio can be a function

of better terms of trade only.

Increasing returns are obtained when diseconomies are less than the economies of

production. If the indivisibilities can be overcome, economies of scale are reaped. Large size

farms can afford to use machines and big farm machines require large size farms.

Generally, it will not be sufficient to employ additional labour or capital only to obtain

increasing returns. In the long run the sizes of all factors of production and all inputs have to be

increased. If the same land can be used for raising two or three crops it is land augmenting

technique. Land augmenting and save techniques help in realizing increasing economic returns,

including higher production. Higher yield and outputs take us towards increasing returns.

Higher economic returns require several other things also. Optimum sized land holding,

availability of credit at the right time so that the real inputs can be procured at the right time,

extension facilities, technologies increase the production. Subsidies and price support provide

incentives to the farmers for better production.

Constant Returns in Agriculture:

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 It means each marginal unit of a variable resource adds the same amount of the output to

the total production. Though ‘diminishing marginal productivity’ is the rule, constant

productivity is frequently observed when no resource is fixed and all are increased together in

the same proportion. For example, another acre may be as productive as the first with same

inputs. If one acre of wheat requires 20 man-hours of labour, 30 kg of seed and 13 inches of

irrigation water and yields 10 quintals of wheat, the second acre will require additional 20 man-

hours of labour, 30 kg of seed and 13 inches of irrigation water and will also yield 10 quintals of

wheat. The second acre is just as productive. The marginal or added production from each

increase in resource input is the same: this is a case of constant productivity.

Another case is when one or more resources are fixed but have excess capacity. For

example, family labour or a farmer may not be fully employed. A storage godown may have

surplus capacity. A tractor may be big enough to control 50 acres holding but the farmer may

have only 27 acres. If variable input is added to such a resource-mix situation, constant returns

may result.

Under constant productivity, each unit input increase is just as profitable as another.

Under such conditions the profit rule is: If production is profitable on first unit, keep producing

till the constant returns hold. Do not produce at all, if production is not profitable on first unit. In

a sense, follow the same principle i.e. continue adding the variable resource to the fixed

resource(s) as long as the return is greater than the added costs.

Limits on constant returns are reached as some of the factors become fixed. If nothing else

becomes fixed, management becomes a fixed resource. The productivity of one resource depends

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on the amount of the others with which it is used. For example, if capital is fixed at a low level

for the farm as a whole, labour productivity will be lower. Since the productivity of one resource

depends on the amount of other resources with which it is combined, farmers having different

quantities of land, capital, labour and management will have different programmes.

Factor Combination and Resource Substitution:

For cultivation of agriculture, various inputs or practices can be substituted in varying

degrees for producing a given output. A producer has to choose a particular combination of

inputs, which would be most profitable or more income generated.

For produce the certain level of output, farmer has to decide upon the least cost-

combination of inputs. There are large number of alternatives for performing different farm

operations and obtaining output through different combinations of inputs. For ex ample - 1. Use

of bullocks vs. tractor for a given size of a farm, 2. Harvesting of crops by machines vs. by

manual labour, 3. Milking machines vs. hand milking for a given herd of cows, 4. Wheat bhusa,

green fodder and grains-mix in dairy feeds, 5. Combinations of potash, phosphate, and nitrogen

in fertilizers for crops.

A number of combinations of concentrates and green fodder, for example, can be used in

producing a given amount of milk. Forage usually substitutes at diminishing rate for grain.

Problem here is to find the least cost combination of fodders and grains, milk production

remaining the same a combination of fodders and grains which, cost remaining the same, will

yield maximum output of milk.

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 Cost minimization will not depend only upon the cost of inputs and prices of products but

also on the rate of substitution. For example, if labour costs less relative to cost of performing the

operations by machines, costs may be lowered by substituting labour for machinery. If machine

costs are low relative to labour, labour should get substituted with machine operations.

Procedure for Working out the Least-Cost Combination:

Step 1. – Compute the substitution ratio or marginal rate of substitution by dividing the number

of units of the replaced resource by the number of units of the added resource:

No. of units of replaced resource D X1

MRS = ------------------------------------------ = ------

No. of units of added resource D X2

Step- 2. – Compute the price ratio by dividing the price of the added resource by the price of the

replaced resource:

Cost per unit of added resource Px2

PR = ------------------------------------------------------

Cost per unit of replaced resource Px1

Step- 3. – Find the point where the substitution ratios and price ratios are equal:

 D X1 Px2

------- = ------- OR D X 1. Px1 = D X2. Px2

D X2 Px1

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Profit Rules:

a. If the substitution ratio is greater than the price ratio, one can reduce the costs by using

more of added resource.

b. If the substitution ratio is less than the price ratio, costs can be reduced by using more of

replaced resource.

c. If the substitution ratio equals the price ratio, it is the point of least cost.

Application of the principle:

The rate of inputs exchanged to maintain a given level of output may be either constant or

varying. Given the technical rate of substitution, the least cost combination of resources will

differ with different prices. As an example we consider a simple case of substitution with two

variable inputs substitution at either constant or diminishing rate.

Table No.3.1 Least-Cost Combination of Farm Labour

(Use for Hoeing of One Acre of Wheat – Men and Women Labour substituting at a Constant

Rate)

Combination of labour Cost of hoeing one acre with

Added doses ofMarginal rate of
Days for hoeing different levels of wages for
inputs substitution
one acre of wheat men (Px2) & women (Px1)

Px2 @
Women X1 Px2 @ Rs.40/- -Px2 @ Rs.60/-
Men Labour Rs.60 Px1
Labour X1 X2 ------ Px1 @ Rs.30/- Px1 @ Rs.30/-
(X2) @ Rs.20/-
(X1) X2 (PR = 1.33) (PR=2.00)
(PR=3.00)

1 2 3 4 5 6 7 8

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 12 0 - - - 240 360 360

10 1 2 1 2 260 340 360

8 2 2 1 2 280 320 360

6 3 2 1 2 300 300 360

4 4 2 1 2 320 280 360

2 5 2 1 2 340 260 360

0 6 2 1 2 360 240 360

PR = Price Ratio

Figure 3.1

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Above figure 3.1 elaborates that the least cost combination agriculture. The farmers always try to

minimize the cost and maximize gains or returns.

Cost and Supply Curves:

Supply means the quantity of a good or service that a producer is willing and able to

supply in to the market at a given price in a given time period. Normally as the market price of a

commodity increase, producers will expand their supply onto the market. There are three main

reasons why supply curves for most products slope upwards from left to right giving a positive

relationship between the market price and quantity supplied. When the market price raises an

increase in consumer demand, it becomes more profitable for businesses to increase their output.

Higher prices send signals to firms that they can increase their profits by satisfying

demand in the market. When output rises, a firm's costs may rise, therefore a higher price is

needed to justify the extra output and cover these extra costs of production. Higher prices make it

more profitable for other firms to start producing that product so we may see new firms entering

the market leading to an increase in supply available for consumers to buy. For these reasons we

find that more is supplied at a higher price than at a lower price.

The supply curve shows a relationship between the price of a good or service and the

quantity a producer is willing and able to sell in the market. 

Figure 3.2

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 Above figure elaborates the supply of agriculture product is higher, due to raise in the

price.

Causes a Shift in the Supply Curve of Agricultural Products:

i) Costs of production: A fall in the costs of production leads to an increase in the

supply of agricultural products because the supply curve shifts downwards and to the

right. Lower costs mean that a farmer can supply more at each price. For example he

might benefit from a reduction in the cost of imported raw materials. If production

costs increase, a business will not be able to supply as much at the same price - this

will cause an inward shift of the supply curve. An example of this would be an

inward shift of supply due to an increase in wage costs.

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 ii) Changes in production technology: Technology has changed very quickly in

agricultural sector. We expect to see increases in supply (and therefore lower prices for the

consumer)

iii) Government taxes and subsidies: Government intervention in a market can have a

major effect on supply. A tax on producers causes an increase in costs and will cause the supply

curve to shift upwards. Less will be supplied after the tax is introduced. A subsidy has the

opposite effect as a tax cut. A subsidy will increase supply because a guaranteed payment from

the Government reduces a firm's costs allowing them to produce more output at a given price.

The supply curve shifts downwards and to the right depending on the size of the subsidy.

iv) Climatic conditions: For agricultural commodities such as coffee, fruit and wheat the

climate can exert a great influence on supply. Favourable weather will produce a bumper harvest

and will increase supply. Unfavourable weather conditions such as a drought will lead to a poor

harvest and decrease supply. These unpredictable changes in climate can have a dramatic effect

on market prices for many agricultural goods.

v) Change in the price of a substitute: A substitute in production is a product that could have

been produced using the same resources. Take the example of barley. An increase in the price of

wheat makes wheat growing more attractive. This may cause farmers to use land to grow wheat

and less to grow barley. The supply of barley will shift to the left.

vi)The number of producers in the market: The number of sellers in a market will affect total

market supply. When new firms enter a market, supply increases and causes downward pressure

on the market price. Sometimes producers may decide to deliberately limit supply by controlling

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production through the use of quotas. This is designed to reduce market supply and force the

price upwards.

The entry of new producers in a market causes an increase in market supply and normally

leads to a fall in the market price paid by consumers. More producers increase market supply and

expand the range of choice available.

Self Learning questions-

A. Fill in the blanks

1. Production function is the relationship between inputs and ------------.

a) Outputs b) Inputs c) Technology d) Transport

2. The quantity of a good that a producer is willing and able to supply in to the market at a

given price in a given time period it is called as ---------

a) Supply b) Demand c) Production d) All above

B. Write answer in one sentence.

1. What is production function?

2. What increasing returns to scale?

Answers

A. Fill in the blanks

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 1. Outputs 2. Supply

B. Write answer in one sentence

1. Production function is the creation of utility and units of values; it is the

relationship between inputs and outputs.

2. Increasing returns to scale means that increasing outputs can be obtained with

the same inputs or that the rising inputs bring more than proportionate outputs.

3.2.2 Size of Farm and Law of Returns – Theoretical and Empirical Findings

The efficient scale of farm operation depends both on narrowly-defined scale economies

in production, essentially a matter of irregularity of inputs and specialization of labour and on

scale-related transaction costs in input and output markets, including both information costs and

scale economies in transport and marketing.

These give rise to economies of scale, so it could be that the mechanization of farming

that results from a rise in the price of labour relative to capital would lead to such a large

increase in the minimum inputs that the family farm would become obsolete. Studies of the UK

and US quoted by BDF suggest that the average cost minimizing scale might be about 50 ha. in

British mixed farms or as much as 250 ha. in cash-grain farms in Illinois, but as is pointed out

there, such large-scale farms 'are still managed largely by family labour' . Whether lumpy inputs

will have a substantial influence on optimal scale in a given case depends on whether a rental

market exists in those inputs, which is itself dependent partly on whether processes are e.g

because of climatic homogeneity, synchronized across farms. In the United States, for instance,

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there is an active rental market in combine harvesters, which follow the seasons across the

country.

Transaction costs associated with the care, maintenance and transport of irregular inputs

may be such as to inhibit renting, with not only a potential impact on optimal scale but also on

mode of organization of farming, which may be essentially driven by the accumulation of wealth

in the form of these inputs.

Such a measure not only allows for transaction costs and scale economies, but also for the

possibility that optimal factor proportions vary with scale, which would in general imply that

narrowly- defined scale economies would vary according to the factor-proportions ray along

which they were being measured.

Similarly, it was suggested in a study of rice farming in one area of Andhra Pradesh that

the ownership of irregular irrigation equipment was determining farm size, at a level above that

of the family farm. An extra element in this case was that the farms were almost all owner-

operated, suggesting the absence of secure long-term land rental contracts that might allow

tenants to amortize investments in immobile, irregular equipment. Yet it may be that choice of

technique rather than mode of production will adjust. Examples are the emergence of hand and

treadle pumps in Bangladesh and of bamboo tube wells in India, where the initially-introduced

tube well and pump technologies had favoured larger scale.

Management skill is another irregular input that may account for scale economies.

Moreover good farm managers are likely to find it optimal to manage larger farms than poor

managers. To the extent that the availability of new seeds, fertilizers and pesticides, together

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with the possibility of obtaining credit to pay for them, has increased, one expects the returns to

scarce managerial skill to have risen, which is lent support by evidence that the impact of

schooling on agricultural productivity is substantially higher in such modernizing environments

than in traditional ones. Where this has in fact induced the acquisition of greater skills, one

would expect optimal scale to have risen. Against this, some technological advance may favour

local knowledge sufficiently that efficiency demands more intensive managerial input, leading to

smaller scale.

Self Learning questions-

A Fill in the blanks

1 The efficient scale of farm operation depends on---------------

a) Scale economies in production b) Specialization of labour c) Both d) None of above

2. --------- associated with the care, maintenance and transport of irregular inputs.

a) Technology b) Production c) Transaction costs d) All above

B. Write answer in one sentence.

1. State one irregular input for scale of economies.

2. What transaction costs?

Answers

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 A. Fill in the blanks-

1) Both 2. Transaction costs

B Write answer in one sentence

1) Management skill is another irregular input that may account for scale

economies.

2) Transaction costs associated with the care, maintenance and transport of irregular

inputs may be such as to inhibit renting, with not only a potential impact on optimal

scale.

3.2.3 Farm Budgeting

As like farm planning farm budgeting is equally significant. Budgeting is a method of

analyzing plans for the use of agricultural resources at the command of the decision maker. Farm

plan is a programme of the total farm activity of a farmer drawn up in advance. Farm plan serves

as the basis of farm budgeting. Therefore farm plan can be prepared without a budget but

budgeting is not possible without farm plan. Therefore the budgeting can be defined as under.

1. The physical aspects of farm planning when expressed in monetary terms called farm

budgeting.

2. The expression of farm plan in monetary terms by estimation of receipts, expenses and

net income is called budgeting.

3. Farm budgeting is a process of estimating costs, returns and net profit of a farm or a

particular enterprise.
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 4. Budget is a statement of estimated income and expenditure.

We will be concerned with both planning and budgeting as the budget helps us to

evaluate alternative plans and select the one that is most profitable. Therefore farm planning and

budgeting go side by sides.

Types of farm budgeting: There are four main types or methods of farm budgeting.

A. Enterprise budgeting

B. Partial budgeting

C. Full or complete budgeting & planning.

D. Cash flow budget

A. Enterprise budgeting:

The enterprise budgets are the input-output relationship for individual enterprises. An

enterprise budget includes all the variable resources required per unit (a hectare/animal/tree, etc.)

of an enterprise and its cost, the expected output, gross returns, etc. Enterprise budgets provide

useful information regarding the resources requirements and the relative profitability of different

enterprises. Thus these budgets, considered in the framework of farm resources, are the

alternatives from among which the most profitable ones are to be selected. In this context, the

enterprise budgets need to be prepared at different levels of technology, as

(a) The existing level of technology; and

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 (b) The improved or recommended level of technology.

A comparison of the enterprise budgets at the existing and improved levels of technology

provides the scope or the potential of making farm improvements. The enterprise budgets lack in

one important aspect that these do not consider the complementary and supplementary

relationships amongst themselves which are quite common among farm enterprises at low level

of production, but they simply assume to be competitive to one another right from the beginning.

But these relationships are taken care of in complete planning and budgeting.

B. Partial budgeting:

It refers to estimating costs and returns and net income of a particular enterprise. It refers to

estimating the returns for a part of the business i.e. one or few activities for example

1. To estimate additional cost and returns from growing one hectare of hybrid Wheat in

place of local Wheat.

2. To estimate additional cost and returns by adopting foliar application of chemical

fertilizers instead of soil application.

Partial budgeting is a method of making a comparative study of the cost-and-return

analysis resulting from a change in a part of the business organization. This change may be made

through a careful selection from among alternative methods of production or practices, the

choice of which is based on the opportunity cost of relative profitability and does not affect the

total farm organization vitally. This technique helps to make decisions whenever small changes

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in the existing farm organizations are contemplated. The following four points are important in

setting up a partial budget:

1. Additional returns from change

2. Reduction in unit cost

3. Reduction in yield, if any

4. Addition in cost incurred

Put in a format, a partial budget will look like this:

Debts Credit

Item Rs Item Rs

(a)Increase in costs (a)Decrease in costs

(b)Decrease in returns (b)Increase in returns

Gain Loss

Total Total

Thus partial budgets deal with such changes in the farm organization as can increase farm

incomes without changing the total farm organization. The farmer would know the total net

benefit from the change, the complete details of what he should do at what cost & what he is not

to do after the change and come out with higher profits.

Where partial budgeting is used?

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 Partial budgeting may be used where the change in the activity under study would not affect

the farm organization vitally; it has wide application and can be used to answer a wide variety of

questions such as:

a. The economic combination of CAN and superphosphate versus diammonium phosphate

with a basal dose of CAN,

b. the mechanical thinning of fruits like plums and grapes versus chemical thinning,

c. the substituting of a more economical dairy ration for a costlier one(a single or two

nutrients), and

d. American cotton versus hybrid maize versus desi cotton, etc

C. Complete Budgeting:

It is also called as total or overall budgeting. It refers to preparing budget for the farm as

a whole. Complete budgeting considers all the crops, livestock, methods of production and

aspects of marketing in consolidated form and estimates costs and returns for the farm as a

whole. Therefore complete budgeting can he specifically defined as “An estimation of the

probable income and expenditure is made for the farm as a single unit of course, a complete

budget is required when a farm plan is prepared for new farm or when drastic changes are

suggested in the plan of the existing pattern on an established farm”. Complete budgeting can be

prepared for short run or annual budget and for long run.

D. Cash flow budget:

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 Tallies the cash receipts and expenses of the farm over a fixed time period (usually a year).

This budget shows whether or not expected total cash income will be adequate to cover cash

expenses, which is useful to assess major purchase, and to plan loan repayment or new

borrowing.

The Different between complete and partial budgeting

Sr. Complete Budgeting Partial Budgeting

No.
1 The whole farm is considered as one unit It is adopted when a minor aspect of farm
organization is touched.
2 All the aspects like crops, livestock, It is practiced within the existing resources
machinery and other assets are considered structure of the farm.
3 Both fixed and variable costs are calculated Only variable costs are considered.
for working out costs and returns.
4 Net income is estimated by deleting fixed Net income is estimated by deleting only
costs and costs of variable inputs from the cost of variable inputs from the value of the
value of the product product.
5 It requires more efforts and time for It requires relatively less efforts and time
preparation. for preparation.

Advantages of Farm Budgeting

Following are the main Advantages of farm budgeting:

1. It evaluates the old plan and guides the farmers to adopt a new farm plan with advantage.

2. It makes the farmer conscious of the waste (leakage) in the farm business.

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 3. It gives comparative study of receipts, expenses and net earnings on different farms in the

same locality and in different localities for formulating national agricultural policies.

4. It guides and encourages the most efficient and economical use of resources.

5. It serves as valuable basis for improvements in farm management practices.

An agriculture budget is akin to gender budgeting piloted by Yeddyurappa in the JD(S)-

BJP coalition government in Karnataka State. This is disclosure of budget allocation which has a

bearing on women with the objective of enhancing gender equality.

The agriculture budget is a gimmick as one doesn't reinvent the wheel. It'll only be a clear break-

up of funds for every agriculture-related sector.

According to Abdul Aziz, visiting professor, Institute for Social and Economic Change,

Bangalore, "Allocation for agriculture in a general budget is like a hit-and-run case. In the 2010-

2011 in Karnataka state budget, allocation for agriculture was 7% and irrigation 14%. But there

was no clarity in allocation for each sector and that's why a separate agriculture budget is always

welcome.''

However, Aziz was skeptical whether adequate homework would go into the farm budget

and also the proposal to pare the interest rate for cooperative loans from the current 3% to 1%.

Further Aziz explained that the 6% interest was itself not a wise decision and this would increase

the government's financial liability as allocation for subsidy goes up. Politics and economics

cannot go together. We need to be generous, but not over generous at the cost of the economy.

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 Cost-type and Concepts

The term ‘cost’ generally refers to the outlay of funds and or productive purposes. In

other words, cost refers to the expenses incurred on productive services and physical input

factors.

Cost analysis is an important tool to describe the relationship of costs to income.

Commonly, there are two types of costs used in farming viz. fixed costs and variable costs.

However, marginal or added cost is also an important tool to guide the farmer to decide, how far

he can push the production and how much of various resources he can use. There are other costs

which have boon derived from those main groups.

1) Fixed Costs: These costs are related to fixed resources and are overhead costs. They remain

constant irrespective of the yields obtained. These are the same at all levels of production. Rent,

interest on fixed capital, depreciation of building, taxes and wages of the permanent labourers

constitute fixed costs. Fixed costs have little relation to making decision on the level of

production of farming practices.

2) Variable Costs: These costs are related to the variable resources and change with the output.

The variable costs are nil, if there is no production on the farm. They change with the quantity of

production. In the beginning, as the production creases variable costs rise quite rapidly, but with

further rise in production variable costs do not increase proportionately with the production due

to economics brought about by mass production later on as diminishing returns set in, variable

costs start rising more rapidly than the production. If farming is to be carried, the variable cost

must be less than selling price, e.g. current supplies such as seeds, fertilizers, irrigation,

insecticides, hired labour charges, interest on working capital.

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3) Total Costs: The fixed and variable costs make total cost of production of each unit of crop or

livestock product. The total cost stands even when production is zero. The increase in variable

costs determines whether farming would be profitable, but once the total costs are covered, the

farmer remains indifferent to the average cost of per unit cost of production.

Profit = Gross income - Total Cost (Fixed Variable)

4) Average Total Cost: It refers to the average of all costs (fixed + variable) per unit of output.

It is the resultant of total cost divided by the output. In the beginning the average costs are very

high because the high fixed costs are distributed on a few units of production. But as more units

are produced the fixed costs are spread over on more and more units. When the fixed costs have

spread over on many units, there is not much effect of the fixed costs on the average costs.

Variable costs assume importance’s average cost begin to raise,

                                 Fixed Cost + Variable Cost         Total Cost

Average total cost =------------------------------------ = ---------------------- 

Total output           Total output

5) Average Fixed Cost: Average fixed cost is a fixed cost per unit of output. The total fixed cost

is the same at all the levels of production. The average fixed cost falls continuously at a

decreasing rate as more output is produced. It is because the fixed cost is divided by increasingly

large number as output increases. It can be expressed as      

TFC

AFC= ----------

             Y

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Where, AFC = Average Fixed Cost

             TFC = Total Fixed Cost

               Y   = Output.

6) Average Variable Cost: The average variable cost (AVC) refers to total variable cost per unit

of output. The AVC has an inverse relationship with average product (AP). When AP increases

AVC decreases, when AP decreases AVC increases, furthermore, when AP is at maximum the

AVC must be at its minimum. The AVC is expressed as:

AVC= VC/Y

Where, VC= Variable cost

             Y= Output

Figure 3.3

Costs Marginal Cost

(MC)
Average Total
Cost (ATC)

Average
Variable Cost
(AVC)

Average Fixed
Cost (AFC)

Q1 Output (Q)

7) Marginal Cost: Marginal cost MC is the change in cost associated with an increase of one

31
unit of output. The marginal cost has also certain relationship with Marginal Product (MP) just as

the average variable cost has with average product. There is an inverse relationship between

Marginal Product (MP) and Marginal Cost (MC) that is when MP is increasing, MC is

decreasing, when MP is decreasing MC is increasing and when MP is at maximum MC is at

lowest point.

As marginal costs are related to the cost of producing additional units of output, they are

affected only by the variable costs, fixed cost, as a rule, do not influence the marginal cost,

because they neither increase nor decrease with the additional production. Marginal costs are

very important in determining as to how far production should be pushed and how much of the

various resources should be used. A farmer should acid to the production as long as added return

is greater or at least equal to the added cost.

Cost Concepts and Items of Cost:

Cost is the value of the factors of production used in producing and distributing goods

and services. The cost of a factor unit equals the maximum amount which the factor could earn

in alternative employment. Concept means idea underlying or general motion.

The cost of production of a crop is considered at three different levels viz. Cost A, Cost-B

and Cost-C. The concept of three costs such as Cost-A, Cost B and Cost-C is followed by the

Directorate of Economics and Statistics, Government of India in their cost studies. These cost

concepts are generally followed in the studies of cost of production of crops.

The input items included under each category of cost are given below.

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Cost-A: Actual paid-out costs for owner cultivator, inclusive of both cash and kind expenditure

which include following cost items,

1. Hired human labour : a) Male b) Female

2. Total bullock labour a) Owned b) Hired

3. Seeds

4. Manures

5. Fertilizers

6. Insecticides and pesticides

7. Irrigation charges

8. Land revenue, cusses and other taxes

9. Depreciation or capital assets

10. Transport and Marketing

11. Interest on working capital

Cost B: If the amount invested in purchase of land would have been put in some other long

term enterprise or in a bank, it would have yielded some returns or interest. But due to the

investment of the amount in purchase of land, the farmer has to scarify returns or interest that he

would have otherwise gained. And as such this loss is considered as cost, it is called rental value

of land. Similarly, the hypothetical interest that the capital invested in farm business would have

earned, if invested alternatively is also considered as cost. Rental value of land and interest on
33
fixed capital represent imputed costs which are added to Cost A to give Cost B.

Cost B = Cast A + imputed rental value of owned land + Imputed interest on owned fixed

capital.

Cost C: It is the total cost of production which includes all cost items, actual as well as imputed.

The value of holding’s own labour is to be imputed and added to cost B to workout Cost C.

Cost C = Cost B + imputed value of family human labour.

Supply Response Individual Crops and Aggregate Supply

Like the majority of countries in Asia, India has been following a structural adjustment

programme since the mid-1980s. Significant progress was made during 1986-92: large and

frequent devaluations; exchange rate liberalization; reform and rationalization of the tax system,

especially tariffs; decontrol of agricultural prices and liberalization of marketing and the

agricultural sector was the principal source of economic growth over 1986-92;. The rationale

behind agricultural liberalization is that the biases against agriculture inherent in protectionist

policies, evident in India from the late 1960s, discourage production so that reforms which

introduce price incentives and efficient marketing will encourage producers to respond.

In many developing countries, governments have been inclined, implicitly or explicitly,

to tax the agricultural sector as part of a policy of industrialization-led growth, justified by the

belief that industry is the dynamic sector while the agricultural sector is static and unresponsive

to incentives. If supply response is low, then taxing agriculture will generate resources for other

sectors of the economy, without significantly affecting agricultural growth. But if, on the

contrary, agricultural supply response is high, then taxing agriculture can retard agricultural

34
growth, creating food and input supply bottlenecks which will eventually bring down the rate of

growth of the entire economy, increase reliance on imports to meet food requirements and

reduce agricultural exports (often the principal source of foreign exchange). In general, policies

biased against agriculture have done more harm than good, reducing growth in the agricultural

sector and consequently in the economy as a whole.

The performance of export crop production (measured as official purchases), in both the

long-run and short-run, can be fully explained by a secular downward trend. The dominance of

the trend prevented estimation of price elasticity, although the trend in production is in line with

that in prices. The failure to find a short-run response is consistent with the time lags inherent in

export crop response, as many of the major crops are perennials. Farmers are indeed responsive,

which is consistent with the evidence of agricultural sector growth. Liberalization of agricultural

markets, where it increases the effective prices paid to farmers, can be effective in promoting

production, and is consistent with the observed improved performance of the sector following

liberalization in the 1980s. Complementary interventions, to improve infrastructure, marketing,

access to inputs and credit, improved production technology etc, can be expected to make

producers even more responsive. This latter point is especially important if the objective is to

expand total agricultural output; our evidence is consistent with the view that much of the

response is substitution between (export and food) crops, although there is a strong suggestion

that total production will respond if constraints are relaxed and incentives improved.

Self Learning questions-

A Fill in the blanks

35
 1 Complete Budgeting is also called as ------------.

a) Total or overall budgeting b) Internal Budgeting c) External Budgeting d) All above

2. ----------is the change in cost associated with an increase of one unit of output.

a) Marginal cost b) Average cost c) Total cost d) All above

B. Write answer in one sentence.

1. What is farm budgeting?

2. State the meaning of average variable cost?

Answers

A Fill in the blanks

1 Total or overall budgeting 2. Marginal cost

B. Write answer in one sentence

1. Budgeting is a method of analyzing plans for the use of agricultural resources at

the command of the decision maker.

2. The average variable cost (AVC) refers to total variable cost per unit of output.

3.2.4 Technical Change and Agricultural Productivity:

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 The new agricultural strategy, adopted since the mid-sixties, has helped in revolution

Indian agriculture. The technology of agriculture is characterized by the use of the HYV seeds,

fertilizers, pesticides, irrigation, machinery, improved implements, soil conservation, etc. The

successful adoption of these components of new technology has resulted in the increase the

productivity.

Components of New Agricultural Technology:

1. Irrigation: it is the one of the fundamental factors in the adoption of the new

agricultural technology. Multiple cropping facilities, intensive and effective use of land

and higher production can be achieved through irrigation. Assured irrigation facilities not

only help in increasing productivity but their availability is a pre condition for application

of other productivity increasing inputs. Recently, India has attempted to develop

irrigation facilities. For the country as a whole, the irrigated area is about 45% at the end

of 2010.

2. Fertilizers: Organic manures and chemical fertilizers are crucial inputs in agricultural

production. These help in providing the nutrients to the soil and plant growth. As a result,

productivity of agriculture is boosted up even in the short period. Consumption of

fertilizers in India has been increasing steadily since green revolution.

3. Improved seeds: in order to feed continuously the increasing population, there is a need

to increase foodgrains production in general. HYV seeds are capable of increasing

production and are land using in character. Total area under HYV seeds in India has been

progressive increase from year to year in the five principal food crops, paddy wheat,

maize jowar and bajara, the highest area being under wheat and the lowest under jowar.

37
 4. Plant Protection: Plant protection is very important in order to reduce crop losses and

improve crop yield. Crops as they grow in the field and outputs in storages are prone to

damage through pests and diseases. Around 20percent of the cropped area suffered losses

from pests and diseases but in respect of the area treated with pesticides the loss was only

about 7 percent.

5. Mechanization: In India the growth in mechanization inputs in farming practices is of

recent origin and low. But, with the introduction of commercial agriculture, farmers are

adopting it on an increasing scale. The impact of technological innovation on agricultural

development depends upon its introduction. Use of tractor, oil engine, electric pump sets,

harvesters and consumption power per hectare has been increased since green revolution.

Effect on Agricultural Productivity:

The productivity increases which alone could influence output, in a country with adverse

land man ratio, did not do so. Thus both production, and its cause, productivity shows little

progress in the overall sense, with the exception of wheat.

1. Output-increase: the increase in output of foodgrains to which the new technology has

remained confined did show a rise since the mid sixties. In weight the extra production

was estimated to be due to the new technology. At present the foodgrain production of

Indian agriculture was increased by 232 million tonnes at the end of March 2011.

2. More of a wheat revolution: Quite a few regard the output rise as a normal trend

factor which was in evidence before the green revolution. But the new technology has

only very limited effect, in as much as it remained confined to wheat and rice only,

where it shows dramatic results.

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 3. Limited productivity rise: The productivity increase with so limited a spread of the

new technology could not but be small, except in wheat and rice, and in places where

this crop is grown.

4. Restricted coverage: The restricted coverage from the angle of crops, the change has

been confined almost exclusively to wheat and rice. The HYV seeds have been used

only in 7 percent of the land under cultivation. In dry areas, of course, the applicability

of water based technology is simply to be ruled out.

5. Utilized productivity potential: the successes of new agricultural technology are the

increase in yield per hectare has been tapped the potential of the seed fertilizers

package. Overall productivity of agricultural sector has been increased tremendous due

to the application of new technology.

6. Employment effect: the new technology has led to the adoption of labour saving

machines like tractors, threshers etc. At a differential level the new technology is

criticized on the ground that this has not promoted employment. But introduction of

perennial irrigation, HYV seeds, and fertilizers leads the multi crops and more crops in

a year. It results in to the more employment generation in the modern agriculture.

Self Learning questions-

A Fill in the blanks

1 The new agricultural strategy, adopted since ------------.

a) Mid-sixties b) Mid-seventies c) Eighty d) Ninety

39
2. Components of new agricultural technology is ---------

a) Irrigation b) HYV seeds c) Fertilizers d) All above

B. Write answer in one sentence.

1. What are the characteristics of agriculture technology?

2. State two fundamental factors of new agriculture technology?

Answers

A Fill in the blanks

1 Mid-sixties 2. All above

B Write answer in one sentence

1. The technology of agriculture is characterized by the use of the HYV seeds, fertilizers,

pesticides, irrigation, machinery, improved implements, soil conservation, etc

2. Irrigation, fertilizers are the fundamental factors in the adoption of the new agricultural

technology.

1.3 Summary:

A. Today in India, as in many other developing countries with a rich agricultural

tradition of their own, the words ‘improved agriculture’ and ‘progressive

agriculture’ have become synonymous with the spread of HYVs grown with ever-

increasing doses of chemical fertilizers and pesticides. For cultivation of

40
 agriculture, various inputs or practices can be substituted in varying degrees for

producing a given output. A producer has to choose a particular combination of

inputs, which would be most profitable or more income generated.

B. The efficient scale of farm operation depends both on narrowly-defined scale

economies in production, essentially a matter of irregularity of inputs and

specialization of labour and on scale-related transaction costs in input and output

markets, including both information costs and scale economies in transport and

marketing.

C. As like farm planning farm budgeting is equally significant. Budgeting is a method

of analyzing plans for the use of agricultural resources at the command of the

decision maker. Farm plan is a programme of the total farm activity of a farmer

drawn up in advance.

D. The technology of agriculture is characterized by the use of the HYV seeds,

fertilizers, pesticides, irrigation, machinery, improved implements, soil

conservation, etc. The successful adoption of these components of new technology

has resulted in the increase the productivity.

3.4 Key Terms

1) Production: The processes and methods employed to transform tangible inputs (raw

materials, semi finished goods, or subassemblies) and intangible inputs (ideas, information,

knowledge) into goods or services.

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2) Agricultural productivity: Agricultural productivity is measured as the ratio of agricultural

outputs to agricultural inputs.

3) Farm: A farm is an area of land, including various structures, devoted primarily to the

practice of producing and managing food (produce, grains, or livestock), fibres and, increasingly,

fuel.

4. Supply Curve: The supply curve shows the amount that producers are willing to supply given

a particular price.

3.5 Questions for Practice

A. Broad Answer Type Questions.

1. Discuss the role of traditional agriculture in economic development.

2. What is production function? Explain the decreasing returns to scale in agriculture.

3. Explain the law of returns to scale.

4. Discuss the effects of technical change on agricultural productivity.

B. Write Short Notes

1. Production function

2. Complete budgeting

3. Supply curves

4. Factor combination

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3.6 Field Work-

1. Visit to a nearest small size farm and obtain information about its productivity.

2. In order to know and understand the technical change in agriculture, the student should

visit the nearest farms.

3.7 References
1. Agrawal A.N. (1981), ‘Indian Agriculture’- Vikas Publishing House Pvt. Ltd.

2. Memoria C.B. and Tripathi B.B. (2007), ‘Agricultural Problems in India’- Kitab Mahal,
Allahabad

3. Mahendran T (2008), ‘Agricultural Development in India’ - Abhijit Publications, Delhi

4. Sadhu A.N. and Mahajan R. K(1985)., ‘Technological Change and Agricultural Development
in India’ Himalaya Publishing House, Delhi

5. Shrivastava O.S. (2010), ‘Theories and Policy Issues of Agricultural Economics’ Anmol
Publications Pvt. Ltd, New Delhi

6. Pawade B.B. and others (2008), ‘Adoption and Impact of New Agricultural Technology on
Tribal Agriculture’ Serials Publications, New Delhi

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