Production Economics

Production:
Production is the creation of utility which has exchange value.
Production Economics
Production Economics is the application of the principles of micro economics in the field of
agriculture.
-Production Economics is the application of science where principles of choice are applied in the
uses of capital, land, labour and management of resources in the farming industry.
-Production Economics is the study of how farms allocate their scarce resources between
alternative uses in the pursuit of certain objectives.

Objectives of production economics

1. Allocation of resources and to analyze of the production process and the matters influencing the
processes of resource use.
2. To ensure the optimum uses of resources.
3. To assess the deviated situation from optimum resource uses.
4. To introduce guidelines how to reach the optimum resource use condition.

Uses of production economics in Bangladesh

Bangladesh is an agro-based country. Agriculture has been playing a vital role in socio-economic
progress and sustainable development by proper resource uses and this is the function of
Production Economics. Therefore, the study of Production Economics is very much important in
Bangladesh. The following are the points in favour of studying Production Economics in
Bangladesh.
1. Bangladesh is one of the third world countries. In third world countries resource are not properly
used. By studying of Production Economics, we can know how the best utilization of resources
can be possible.
2. The economy of Bangladesh is mostly agro-based. Mainly for agricultural development or for
overall development the study of Production Economics will be helpful for increasing productivity.
3. Production Economics helps us by informing of appropriate technology or machinery to be used.
4. The land tenure system is mostly traditional and defective which causes the decrease of
production. The study of Production Economics can solve this problem.
5. The agriculture of Bangladesh is dependent on nature. Risk and uncertainty in production is
always available which influences the decision making of the producers. We can minimize risk
and uncertainty by studying Production Economics.
6. Appropriate size of farm: We can choose the appropriate size of farm through the study of
Production Economics.
7. Optimum allocation of resources and profit maximization is possible through the study of
Production Economics.
8. Economic efficiency can be increased through the study of production economics.

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9. Agriculture production can be increased through increasing the management efficiency.

How producers make decision?

Producers’ decision making on the farm. All producers have so many alternative uses of resources:
Producers have to choose which one is to be accepted. So, a producer has to take five decisions in
a production system.
1. What to produce?
2. How much to produce?
3. What method of production is to be followed?
4. When to buy and when to sell?
5.From where to buy and where to sell?

1. What to produce?
Farm can produce different types of products. But due to limited amount of resources production
is also limited. So, the producers have to decide which one is to produce among so many
alternatives.
2. How much to produce?
A producer has to take decision how much of the producing items are to produce. Generally, the
producer takes decision considering the demand of a particular product. If the demand of a product
is higher than higher amount of that product is to produce. If a product has higher prospect of
profit, then the product may be produced by a higher rate.
3. What method of production is to be followed?
The producer chooses the method of production which will carry maximum production through
minimum cost combination.
4. When to buy and when to sell?
The price of a product changes in time. So, keeping the quality unchanged agricultural product
may be sold at higher prices in other seasons. On the other hand, the required to may be bought at
lower prices in harvesting period.
5.From where to buy and where to sell?
A producer has so many alternative markets. Prices of a product are differentiation in market. If
the distance factor is not kept in consideration during the choice of market, then a producer can’t
earn profit.

Producer’s surplus
Producers’ surplus is the difference between the price a producer is willing to receive and the price
he actually receives. We know that summations of marginal revenue are the total revenue. In
perfect market goods are sold or purchased at a single rate. Therefore, the marginal revenue is
always the same. On the other hand, the summation of marginal cost is the total cost. With the
increase 0f production the marginal cost increases. The producer’s surplus can be calculated the in
following schedule-

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 Unit of Price/Unit in Marginal revenue Marginal cost Producer’s
production TK. (TK.) (TK.) surplus (TK.)

1st unit 10.0 10.0 5.0 5.0

2nd unit 10.0 10.0 7.0 3.0
3rd unit 10.0 10.0 10.0 0
Total= 30.0 30.0 22.0 8.0

From the above schedule we can see that price/unit commodity is Tk.10 and that is fixed.
Therefore, marginal revenue is also unchanged. Summation of marginal revenues of that
commodity is (10+10+10) =30TK. The total marginal cost is (5.0+7.0+10.0) =22.0TK.
Therefore, the Producer’s surplus is = Total revenue –Total cost.
= (30.0-22.0) TK.
=8.0TK.

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Here, OX axis indicates the quantities of production and OY axis indicate the revenue and the cost.
P=AR=MR line shows the demand and revenue. On the other hand, S=MC curve shows the supply
and expenditure. In the above figure, the cost incurred for producing OQ amount of product
=OQEG.
On the other hand, revenue earn from selling OQ goods =OQEF.
Therefore, producer’s surplus=total revenue –total cost
=OQEF-OQEG
Thus, Producer’s surplus=EFG.

Consumer’s surplus:
The consumer surplus is the difference between the price a consumer is ready to pay and the price
he actually pays.
Measurement of economic welfare with the help of producer’s surplus and consumer’s surplus-
Explain.
Measurement of Economic welfare with the help of consumer’s surplus and producer’s surplus.
Summing up the consumer’s surplus and producer’s surplus Economic welfare can be calculated.
It may be graphically shown below-

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Here, OX axis indicates the quantity of output and OY axis indicates price and DD` is the demand
curve and E is the equilibrium point. equilibrium price is OF and equilibrium quantity is OQ. The
consumer surplus is (OQED-OQEF) =EFD
Measurement of economic welfare with the help of producer surplus and consumer surplus.
Explain:

We know that, economic welfare = producers’ surplus + consumers surplus = EFG + EFD.

Production function
The quantity produced by a production institute is the result of input used in the production process.
Therefore, production function is the functional relationship between the quantities of input used
and the quantity of output. Production function is the technical relationship telling the amount of
output capable of being produced by each and every set of specified input
Q=f (L. K)
HERE,

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Q=Quantity of output
L=labour
K=capital
f= function
The production is dependent not only on labour and capital but it is dependent in raw materials,
land technology, returns to scale. Therefore production may be expressed, Q=f (L,K,Z,N,V,T)
Here, L=Labour K=Capital z=Raw materials N=returns to scale T=Technology
So, we can say in brief that, Production function is the functional or dependency relationship
between inputs used of a farm and the quantity of output produced.
There are two types of production function,
1. Short run production function
2.Long run production function

1. Short run production function: It is the production function of fixed input and variable input.
In the other word, it is that production function where in a production process fixed input and
variable input is considered together at the same time. A short run production function is shown
below, Q=(L, K)
Here, Q=Quantity of output
L=Number of labors which is variable
K=Capital which is fixed
f=Function
Here, Bar on the k shows that the quantity of K is fixed.
Keeping the quantity of K fixed if the quantity of L varies. That is if K remaining unchanged and
the L increases quantity of output will also increase. If L is decreased then Q will also decrease.

2. Long run production function: It refers to such type of time period where the existence of any
fixed input in a production process is totally absent. There all the inputs in a production process
turns to variable inputs. The production function including such type of variable inputs is termed
as long run production function. Therefore, the production function which includes all the variable
inputs is called long run production function. A
long run production function is shown below,
Q=f (L, K)
Here Q=Quantity of output
L=Labour (variable)
K=Capital(variable)
f=Function
In the above production function both L and K are variables. The quantity of output (Q) is
dependent on both L and K which are variables. The quantity of output (Q) varies with the variation
of L and K.

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Difference between long run and short run production function:

SHORT RUN PRODUCTION FUNCTION LONG RUN PRODUCTION FUNCTION

1. The production function with variable input
as well as fixed input is known as short run
production function.
2. Q=f (L,K)(L Variable K means quantity of
fixed input)
3. The short run production function is related
to law of variable proportion.
1. The production function which includes
variable inputs is known as long run
production function.
2. Q=f (L, K) (L and K Variables input)
3. The long run production function is related
to returns to scale.

Total product (TP): The total of output which is produced using certain amount of input is
called total product. In the other word, the amount of output which is produced through a
production process by employing all the inputs is known as total product.
Q= f(L, K)
Here ,
Q=Total output /product
L= Labour
K=Capital
Here inputs(L, K) are variable
In the above production function, the amount of Q which is earned by using L and K is known as
total product.
On other hand if one input is fixed then the production function will be Q=f(L,K)
Here L is variable input and K is fixed input. Keeping the fixed input silent the production function
can be expressed as Q=f(L). here the total product can be obtained by summing up the output
earned by using different units of Therefore the total product is the total amount of product which
can be earned through using certain amount of an output.
Labour (No) Total product (TP)
0 0
1 10
2 24
3 36
4 46
5 54
6 60
7 64
8 64
9 60

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The total output is dependent on the use of variable input. If the variable input is
increased the total product will also increase. Here from a hypothetical production
schedule (TP) is drawn. When OX axis indicates labour (L) and OY axis shows
the total product. One unit of labour is used then 10 units of total product is
produced. Using 2 units of labour the total product is produced by 24 units. Thus,
the total product increases up to the use of 7th units of labour. Therefore, the total
product (TP) moves upward to the right up to the use of 7th units of labour. When
an 8th unit of labour is used then TP Curve remains fixed in 64 units of TP (total
product). There the TP product reaches to the highest position. After that, if the
labour use is increased then the total product decreases.

In the figure, up to 7units of labour use the slope of TP curve is positive. It is

important that at the beginning of labour use the slope of TP curve was
comparatively greater. That means the TP product was increasing by an increasing
rate. After that the slope of (TP) curve was decreasing. That means, the total
product (TP) was increasing by a decreasing rate. In that position between labour
use of 7th and 8th units the slope of (TP) curve was 0 and it is parallel to OX axis.
If more input is used after 0 slope of (TP) curve then the slope will be negative
and the (TP) curve will be downward sloping to the right.

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Average product:
Keeping others input fixed, output earn from each unit of variable input is called
average product. In other words, average product can be obtained through dividing
the total output by the number of variable inputs.

If labour ‘L’ is considered as variable input and the TP is ‘Q’ then the average
Q
product of labour can be obtained by [AP L = L ]
It is graphically shown as below:
Labour (L) Total Product Average Product
0 0 0
1 10 10
2 24 12
3 36 12
4 46 11.5
5 54 10.8
6 60 10
7 64 9.14
8 64 8
9 60 6.67

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If per unit output of variable input used in a production system is graphically
shown then it is called AP curve. In the above figure labour is indicated along OX
axis and average product moves along OY axis. The average product increases up
to two units of labour. The (AP) remains fixed up at a point when three units of
labour are used.
Here, AP reaches the highest position. After it if more units of labour are
employed then AP decreases and the AP curve moves down ward to the right.

Marginal Product:
It refers to the amount change in total output due to one unit change in variable
input.
Marginal Product can be obtained through dividing the change of total product by
variable input. If labour is considered as variable input then marginal product can
be denoted by the following way-
MP=
Here MP = Marginal product of L

dQ= Amount in change quantity of output.

dL= Change in the quantity of labour.
Marginal product may be turned as the extra output earned by using an extra unit
of variable input. A marginal product curve is drawn from a hypothetical schedule.

Labour (L) Total product (TP) Marginal

0 0 0
1 10 10
2 24 14
3 36 12
4 46 10
5 54 8
6 60 6
7 64 4
8 64 0
9 60 -4

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If the figure OX-axis indicates labour L and OY axis shows the marginal product
of L. The MP increases up to two units of labour (L) used. Therefore, the MP
curve is upward to the right. After that if labour use is increased then MP will
decrease. When 8 units of L is used then marginal product becomes O. Therefore,
MP curve cuts the OX axis. After it if more L is employed then the marginal
product will be negative.

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Relationship between total product, average product and
marginal product:
TP, AP and MP are closely related to each other. Graphically it is shown below—

In the above figure OX axis indicates variable input labour and OY axis measures
TP, AP and MP. Up to the use of L1 variable input, the total product increases by
increasing rate. That is up to the point ‘M’, TP increases by increasing rate. Here
the marginal product reaches the highest position and average product goes on
increasing, after that, if more variable input is employed then the total product
increases by decreasing rate. The marginal product is decreasing. At that stage the
average product AP is the highest and AP becomes equal to marginal product MP.
That is here, AP=MP. At the point where ‘L 2 ’ level of labour or variable input is
used. If more labour is employed then the total product (TP)becomes highest at a
point where ‘L 3 ’ level of labour is used. The marginal product then becomes Zero
and the average product is then decreasing.
In the figure, after L 3 level of labour is used if more labour is used then total
product is decreasing. When total product is decreasing then marginal product is
then negative.
When total product TP is increasing by increasing rate the marginal product MP
and average product ‘AP are increasing.

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When total product curve ‘TP’ turns to move from increasing rate to decreasing
rate then it is termed as point of inflexion. Then the marginal product curve is in
the highest position.

When total product TP increasing by decreasing rate then the marginal product is
decreasing.
When Average product ‘AP’ is the highest then AP=MP

After the level when AP is the highest both then Average product and marginal
product starts to decrease. Although the total product is then increasing by
decreasing rate.

When the total product is in the highest position then the marginal product is Zero
and average product is decreasing.
When the total product TP is decreasing the marginal product MP becomes
negative and the average product is decreasing.

Total Physical Product: (TPP)

The sum of output obtained by using different units of physical inputs is called
total physical product. By using labour ‘L’ the production function may be
expressed as –
Q= f (L), as the production is considered from physical view point. Therefore, Q
is termed as total physical product.

Average Physical Product:(APP) The physical product earned by using a

unit of physical input is known as Average Physical Product (APP).
TPP
APP= L
L= Physical Input Labour.

Marginal Physical Product: The change of total physical product due to one unit
change of physical input is termed as marginal physical product (MPP).
dq d(TPP)
MPP = dL = dL =f(L)

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Laws of Returns:
Land, labour, capital and organization are to be combinedly employed in ordered
to produce a product. If the producers want to increase the quantity of output, he
has to increase the amount of input employed in the production process. But the
output doesn’t increase in the same rate as the input increases. Sometimes the
input increases by a lower rate than the rate of increase in the output. Sometimes
it may increase by a higher rate than the rate of increase in the output. It may be
at the same rate as the input increases. The law by which the ratio of increase in
output and in comparison, with the increase in input can be obtained that is called
laws of returns. The laws of returns may of be three types.
Diminishing Marginal returns.
Constant marginal returns.
Increasing marginal returns.

Diminishing marginal returns:

“An increasing the capital and labour applied in the cultivation of land causes in
general, a less than proportionate increase in the amount of produce rate.”—
Marshall.
According to old economist the law is especially applicable in the field of
agriculture.

According to old economist the law is especially applicable in the field of

agriculture. If in a piece of land double labour and capital are employed then the
total product will increase. But if will not increase proportionately as the input
increases. Therefore, the rate of input used doesn’t result in the increase of output
as the same rate of input use. It will be increasing by diminishing rate. This rate
of increasing output by diminishing rate is known as law of diminishing marginal
returns.

Assumptions of the law of diminishing marginal return:

Supply of land is limited.
Labour and capital are variable keeping other inputs constant.
Short run production is considered here.
Production technology is given.
The units of variable inputs are homogenous.
It can be shown by following hypothetical schedule:

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 Labour and Total Product Marginal
Land
capital (TK) (TP) Product
1 acr. 100 15md 15 md
1 acr. 200 32 md 17 md
1 acr. 300 42 md 10 md
1 acr. 400 48 md 6 md

Suppose, in 1 acre of land capital and labour of 100tk is employed and 15md of
paddy is produced. Therefore, the marginal product was 15md. In the 2nd year in
the same piece of land labour and capital 200 (TK) is used and paddy was
produced was 32md. In the 3rd year labour and capital of tk (300) is used and the
total product of 42md was produced. Here the marginal product (10md) is less in
comparison with the additional input use. In 4th year labour and capital of tk 400
is used and the total product was earned 48md with only marginal products of
6md. Thus, it is observed that, labour and capital are increased at a certain rate but
the marginal product increases at a diminishing rate. This diminishing rate of
marginal product is termed as law of diminishing marginal returns.

In the above figure labour and capital moves along OX axis and marginal product
MP is indicated by OY axis. MP curve is the marginal product curve. In a piece

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of land first unit or OA amount of labour and capital is employed then Aa amount
of marginal product is earned. If the 2nd unit or AB amount of labour and capital
is employed then Bb amount of marginal product is earned. In the use of third unit
of labour and capital that is BC is employed then Cc marginal product is earned.
When the 4th unit or Cd amount of labour and capital is employed then the
marginal product of Dd is earned.

Here it is observed that, after 2nd unit of input use the MP is decreased. Therefore
in a piece of land input employed increasing. Then the total product increases but
the marginal product diminishes. This is the law of diminishing marginal returns.

Limitations of the law:

Preliminary stage of production: The law of diminishing marginal returns
cannot be operate in the initial stage of production. If the labour and capital is not
sufficient for better cultivation then extra input of labour and capital may earn
extra marginal product instead of less marginal product.

Modernization of the methods of cultivation:

The operation of the law depends on the methods of cultivation. If the mechanized
cultivation is adopted then the law of diminishing marginal returns may not
operate. For example: tractor may be introduced in lieu of country plough. Then
the use of extra input will not be cause of less marginal product rather it will
produce extra marginal product.

High yielding variety of seed and fertilizer use: In agricultural production HYV.
of seed, fertilizer and irrigation can improve the condition of land. Production may
be increased and the law may not operate there.

Natural cause: Suddenly the fertility of land can be increased for any natural
cause then marginal product may be increased in lieu of decreasing for using extra
input.

Professor Samulson says, “Diminishing returns is a fundamental law of economics

and technology. ``
With some exception the law has great importance.

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Is the law of diminishing marginal returns is applicable only the
field of agriculture? Explain it.

Ans: The law is especially applicable in agriculture. But it is not applicable only
for agriculture but also it is applicable for fisheries, minerals, forestry and
industries. The application of the law is discussed below-

In agriculture: The law is especially applicable in agriculture because the supply

of land is naturally limited. Man cannot increase the amount of land but demand
for food increases day by day. Demand for extra food for increasing population is
to meet up by employing extra input and by adopting intensive culture. Therefore,
the production is increasing by decreasing rate.
Fisheries: In fisheries sector the law is also applicable. In a pond or in a river
production of fish cannot be increased according to one’s own desire. If extra fish
is to produce then extra labor, boat, net and extra equipment is to be used but fish
production is increasing by decreasing rate.
Forestry: For collecting extra forest resources it is needed to reach dense area,
therefore the cost incurred in collecting extra forest resources is comparatively
higher than the increased resource collection. Thus, the law is applicable here.
In mining: In case of mining the law of diminishing marginal returns is also
applicable. If more coal, iron is to withdraw from a mine then the deeper position
is to reach. The cost of lightening and aeration is needed here. Therefore, the more
is the collection of minerals extra cost of lightening and aeration is needed. Thus,
the law of diminishing marginal returns is applicable here.

Law of variable proportion or 3 stages of production:

In short run production system, some fixed inputs are used along with the use of
some variable inputs. If fixed inputs keeping unchanged one variable input are
increased then the rate of charge of output can be explained through the law of
variable proportion. According to professor Marshal, “The law of variable
proportion is applicable in Agriculture. According to him, if in a piece of land,
labour and capital is employed increasingly then the output increases less than
proportionately with input use, unless the status of technology of production is so
developed”. Afterword, the modern economist suggested that, the law is not only
applicable not only agriculture but also in other sectors.

The technology of the production will be unchanged.

Short run production should be considered.
Only one input will be variable keeping other inputs unchanged.
The ratio of inputs may be changeable.

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The variable input is changed by a constant rate.
A unit of variable input is homogeneous.

The law is explained by hypothetical schedule:

Variable Total Average Marginal
Stage of
input product Product Product
Production
(L) (TP) (AP) (MP)
1 10 10 10
2 24 12 14 1st Stage
3 36 12 12
4 46 11.5 10
5 54 10.8 8 2nd Stage
6 60 10 6
7 60 8.57 0
8 56 7 -4 3rd Stage
9 50 5.56 -6
In the above schedule we can observe that keeping other inputs unchanged if the
units of variable input or labour are increased then their emergences three different
situation. These three stages are described below: -

Stage:1
In the first stage when the 2nd unit of variable input is used then the total product
is increases from 10 to 24 units. That is the total product increases by increasing
rate. At that time both the marginal and average product increases. At the use of
3rd unit of variable input the total product increases but it increases by a decreasing
rate. Here, the marginal product goes on decreasing and both the average product
and marginal product equals at 12 units. The stage 1 is extended up to 3units of
variable input use.

Stage: 2
This stage is extended from 4 units to 6units of labour and variable input use. Here,
the total product increases by decreasing rate. The marginal product goes on
decreasing. The stage 2 extends up to the position that MP. becomes O and total
product is the highest.

Stage-3
the total product is fixed up in 7 units of labor use. After marginal product is zero
then more labor use will result in the decrease of total product and marginal
product will become negative. The average product goes on deceasing but it
remains positives. For example, in the input use of 8th and 9th unit the total

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product decreases from 60 units to 56 united thus 50 units. The marginal product
decrease from 4 to 6 of average product decreases from 7 units to 5.66. The
marginal product goes down from zero to negative position is termed as stage-3
of production. The stages of the law of variable proportion are graphically shown
above. In the figure OX axis indicates labour (L) and OY axis indicates total
product (TP), marginal product (MP) and average product (AP). Here TP is the
total product curve, MP is marginal product curve and AP is the average product
curve.

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 International trade

International trade: A trade between different countries is called international trade. The trade
across the political frontier is known as international trade.

Domestic trade: Domestic trade is trade between different regions within the country.

Difference between International Trade and Domestic Trade:

There are several differences between domestic trade and international trade which necessitate the
formulation of a separate theory for international trade.
1.Mobility of factors of production: Ricardo advocated a separate theory of international Trade on
the ground that within the country labour and capital are mobile than different countries. Several
causes are responsible for this-
(a)Differences of language
(b) Tradition
(C) Religion
(d) Social and political life etc.

Capital is more mobile than. labour. But even here People prefer to invest their savings in their
own country for various reasons. such as security. The result of this comparatively greater
immobility of labour and capital between different countries is that competitor fails to make cost
of Production of a similar goods equal as it does in the same country. This gives unequal
advantages to different countries in the production of different goods. For this reason, international
trade happens between different countries.
2. Natural Endowments: Differences in advantages of trade to different countries may arise
because of natural causes like Geographical and Climate condition. For instance, some countries
may have particular mineral have land resources like coal, gas, iron etc. Other may climatic
particularly suitable for certain crops. This leads to international trade.
3.Human capabilities: Countries differs in human capabilities too. People in some countries are
stronger where as in others they are physically more intellectually superior. Some have greater
skill and others have exception in spite of enterprise and organizational quality. Example: Hard
working people in China, Japan, physically stronger People are German.
4. Stock of capitals Some countries possess large stock of capital goods like USA, Japan and others
like India. Bangladesh suffered from capital deficiency. This makes a great difference in types of
goods produced in. different countries thus international trade occur.
5. Political Sovereignty: Independent countries can Peruse /adopt independent policies with
respect to the movement of goods, wages and prices, banking law etc. Several kinds of restrictions
may be placed on the movement of goods beyond their Frontières by the state.

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6. Currency System: Different countries have different currency system. This hampers smooth
flow of trade as between one country to another. A number of foreign exchange problems in
foreign treads which not exist in international trade. For this international trade theory is urgent.
7. Separate market. There are cultural distinctions. between markets of different countries. The
national frequently separate from one to another. For instance: The British use right hand drive
cars whereas the France uses left hand drive cares. Thus, the markets for automobiles are
effectively separate. But markets are also separate by language, customs, habits etc. are designed
in inches, feet, tons and others in matrix measurement.
8. Economic Nationalism: Different countries have separate economic life. Along with political
independence has grown a demand for economic self-reliance. self-esteem, and hopes for
economic development. Political and economic nationalism is widening the differences between
the domestic and international Trade.
9. Trade and exchange control: It is found that trade and exchange controls are instituted by almost
all modern states which are obstacles of the movements of goods and services from one country
to another. It also makes it necessary for separate theory of international trade.

Theory of absolute advantage:

Adam Smith argued that a country certainly gains by treading with other nations. According to
Smith, "If one country has an absolute advantage over another in one line of production and the
others. country has absolute advantage over the first country in another line of production, then
both countries will gain by treading.
For example, it takes 10 units of labour to produce one unit of goods x in a country. A but 20 units
of labour to produce the same units of goods in country B. but takes 20 units of labour to produce
one unit of goods Y in country B labour to produce the but 20 units of same goods in country A.
Then the both countries will gain by treading. After opening of trade country, A will be specialized
in the production of good X while country B will be specialized in the production of good Y.
Country A will export X good to country B and Country B will export Y good to country A.

Country cotton Wheat

A 10 25
B 15 10

B can Produce 15 units of cotton and 10 units of wheat under a certain number of labors. Therefore,
Country A are efficient in production of cotton whereas country B is efficient in production of
wheat. So, country A will be specialized in the Production of wheat and will export wheat to
country. In other words, country B will be specialized in the Production of cotton and will export
it to country A.

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Theory of comparative advantage/ Comparative Cost theory:

David Ricardo has provided the theory of comparative advantages. The principles of advantage
holds that a comparative country can earn benefit from trade even it is absolutely more efficient or
absolutely less efficient than other countries in the Production of every good. The principles of
comparative advantage holds that each country will be benefited if it is specialized in the
production and export those goods that it can produce at relatively low cost in which it is relatively
more efficient than other countries. Conversely each country will be benefited if it imports these
goods which are produced at relatively higher cost in which it is relatively less efficient than other
countries.

Assumptions:
1. There are two countries England and Portugal Producing two goods wine and cloth.
2. Labor is the only factor of Production.
3. Factors of Production are perfectly mobile within a country and imperfectly mobile between
inter country.
4. Constant returns to scale prevails and no change in technology.
5. Perfect competition as well as no intervention of the government in economic activities.

Country Wine Cloth Internal terms of trade

Portugal 80 Hours 90 Hours 80/90=0.89

England 120 Hours 100 Hours 120/100=1.2

In the above example -

Portugal is efficient in the production of both goods-wine and cloth as it requires less amount of
time that is 80 hours and 90 hours. Whereas, England is insufficient in comparison with Portugal
as it requires 120 hours for wine and 100 hours for cloth.
On the basis of absolute cost theory there will trade. Hence David Ricardo evolved a theory of
comparative cast.
According to, Ricardo, Portugal is efficient in the Production of both goods that is wine and cloth
but it has comparative greater advantage in the Production of wine. Hence, it will be specialized
in the production of wine and will export it to England. On the other hand, England having
disadvantage the position in the production of both goods. But it has less disadvantage in the
Production of cloth. Hence, it will be specialized in the production of cloth and wine import from
Portugal.

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 Cooperative

Cooperative
Cooperative is a form of organization where in persons slantingly associate together as human
beings on the vases of equality for the promotion of economic interest of themselves.

Basic principles of cooperative

1. Mentality of cooperation: The success of a cooperative depends on the cooperative mentality
of its members therefore cooperative mentality is must for its members.
2. Unity: the fundamental basis if cooperative is unity. For development and success of a
cooperative society the members must have unity and integrity. Always the members should
keep in mind that unity is strength.
3. Honesty. The members should be honest and dedicated. It this can be ensured then
cooperative society can be established.
4. Equality: All are equal in cooperative society irrespective of caste and create irrespective of
gender irrespective religion. And all the activities will be performed this motive.
5. Democratic process: The activities of a cooperative society should be followed the rules of
democracy. Following this rule everybody should enjoy equal right and perform equal duties.
6. Freedom of expression: Every member should enjoy freedom of in to expression. Nobody will
be forced to inter of exit from the society. Everybody can voluntarily inter into the society or
can canal his membership.
7. Inductiveness: Every member will be allowed to be known to others and come close to there.
Because for greeter interest or for development of society the members should have
closeness with each other’s.
8. Reducing cost: For the success of cooperative the members should be economical. Following
this policy all activities should be from economical motive.

Importance of cooperative in Bangladesh Economy

For agricultural development cooperative movement has great importance. Agriculture has the
problem of old cultivation system subdivision and fragmentation of holdings defective marketing
of agril products. All these problems can be solved through cooperative movements. These can be
discussed under following heads:
1) Accumulation of holdings: The major problem of agriculture is subdivision and fragmentations
of plots. Through cooperative farming these plots can be accumulated and thus agriculture can be
developed.
2) Agriculture mechanization can be introduced: For fragmentation of plots agricultural
mechanization is not possible. But through cooperative society all fragmented plots can be
accumulated and agril mechanization is possible.

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3) Agril Credit disbursement: Our farmers need credit for their forming development. In these
circumstances cooperative credit society can be formed and credit can be disbursed without land
security.
4) Irrigation facility introduction: Through cooperative society both irrigation and drainage can be
introduced and thus agril development can be ensued.
5) Insurance of legal price of agril commodities. For defective marketing system the farms are
deprived from legal prices of their products. Through the formation of cooperative society quality
seed fertilizer and other inputs can be purchased and equipment which the farmers person ally can
with purchased that can be provided with them.
Therefore, there is creating importance of cooperative movement. This is the only way in order to
solve the problems in the field of agricultural thus.

The defects of cooperative movement in Bangladesh

in Bangladesh the cooperative movement cannot bring about success in cooperative movement.
The following causes are responsible for this -
1. Lacking in cooperative spirit: The major cause of failure in cooperative movement is the
lacking in cooperative spirit. It is the people are not inspired then the movement must have
failure. The people are so much indifferent to the cooperative society they are busy for personal
interest.
2. Lacking behind in literacy: Majority people are illiterate for want of education they cannot
understand the necessity and suitability of cooperative society.
3. Lacking in capital: Majority people are poor. They cannot effort for registration fee and
membership fee. For wand of fund our cooperative societies can run smoothly.
4. Lacking in honesty: Most of members are corrupted. For want honesty most of societies are
not effective and face loss.
5. Corruption and nepotism: For the failure of cooperative society in Bangladesh is dishonesty of
directors and their nepotism. They do not judge property the capacity of loan recovery and loan
disbursements are not legally.
6. Mismanagement of loan recovery system. The loan recovery capacity of loan takers in not
properly examined. Therefore, a huge amount of loan is termed as dead loan and the society
faces loss.
7. Want of efficient director: In most of the cases the executive members are selected without the
judgment of their quality and morality therefore the society cannot run prophecy
8. Lacking capable and educated staff: For the establishment cooperative society educated and
rained staff are essential but in our country such type of people is very few.
9. Defective account system: Proper monitoring and it is not done in case of cooperative societies.
Therefore, executive members can easily be able adopt unfairness. Thus, are generally done
by departmental personnel thus some corruptions are remained untouched unnoticed.

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10. The governmental negligence: The government should take initiative for the success of
cooperative. But the government had not shown effective any interest for preview cooperative
societies. The principal cause of failure for lacking in government patronization.

Measures to remove the defects cooperative

1) To crate cooperative motive: It is possible thorough proper education and proper advertisement.
It is possible though proper education and proper advertisement. It the society follow the policy of
cooperative society then favorable environment of cooperative society will be created and people
will be motivated.
2) In executive body honest and efficient people are needed.

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 AGRIL. CREDIT

Agril. Credit
The credit which is used for purchasing the necessary inputs and for operational functions of
agricultural production is called agricultural credit.

Why a farmer takes loan?

Now-a-day’s capital is essential for any production system. Agricultural machinery, quality seed,
fertilizer, insecticides, expanding the irrigation system needs fund. The farmers need fund for land
development also. The world-famous economist Fredaric Nikolson said `` The history of the world
bears the testimony- a must for agriculture is credit’’.
For Bangladesh case, the statement of Nikolson is true. Because our agricultural system is very
much defective. The traditional cultivation system is lacking in irrigation system, made our yield
very low. For higher productivity, agricultural machinery, quality seed, bullock for ploughing,
insecticide is to be purchased, and our farmers cannot maintain all these. They are to borrow for
all of these. For providing all sorts of inputs the farmers are to borrow. The farmers of Bangladesh
need three types of credit -
(a) short term credit;
(b) Medium term credit; and
(c) Long term credit.

Short term credit: Generally, this credit is taken for very short period. This loan is taken for
purchasing seed, fertilizer and insecticides and sometimes for payment of wages of labor and
farmers family expenditure. This loan is to repay within a year.
Medium term credit: The farmers take this loan for 1-5 years. The loan is taken for purchasing
bullock pair for fair price, or agricultural machinery, for preparing roads etc.
Long term credit: This loan is for permanent development of land. To purchase new land, to
make use of fallow land, by clearing weeds and jungles, to make land plain, to arrange irrigation
system are the purposes of long-term credit. The heavy machines, tractors, pumping machine and
raising embankment are also the items of long-term loans.

Sources of agricultural credit

Mainly there are two types of credit sources in agriculture.
A) Non-institutional source;
b) Institutional source

Non-institutional sources are as follows:

Relatives and friends
The village money lenders
The village businessmen and shopkeepers

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The village rich farmers
Faria and Bepari.

Institutional sources are as follows

Bangladesh Krishi Bank (BKB)
Co-operative credit society
Land security Bank
Commercial Bank
Bangladesh Bank
Government

Institutional sources:
1) BKB.
Among the institutional sources of agril. Credit the BKB is the most important sources. It provides
loan to the farmers in short term and long term and also in medium terms. It provides short term
loans for purchasing seed, fertilizer, insecticides. For purchasing agril. Machinery for lower prices
also bullock pair for ploughing at lower cost it provides medium term loan. It also provides heavy
machinery, land development and new land purchasing by sanctioning long term agril. Credit.
2) Cooperative Credit Society:
It is one of the most important sources of institutional agril. Credit. It also provides short term,
medium term and long term agril.credit. The cooperative societies collect fund from Bangladesh
bank and Bangladesh Krishi bank. They lend money to the farmers for lower rate ofinterest. In
spite of it, the amount of loan disbursed by the cooperative credit societies is not enough for the
need of the farmers.
3) Land security Bank:
This bank advances loan to the farmer for long term by keeping security of land in the context of
the failure commercial bank and BKB to meet the need of farmers ’loan. The loans are to repay
within 20 years. But the number of this type of bank in Bangladesh is very small therefore; an
insignificant portion of farmers cleaned is satisfied by this bank.
4) Commercial banks:
Commercial banks also have the credit program me. This bank advances loan for marketing of
jute, cultivation of sugar cane,cotton and other crops. The contribution of commercial banks in
agricultural credit is very insignificant.
5)Bangladesh bank:
It does not disburse loan directly. But Bangladesh bank has an agriculture division and through the
division it advances loan to the commercial banks or institutions such as Bangladesh Krishi bank,
cooperative credit society etc. It assures loan to the farmers at lower rate on conditions through
advancing money to BKB and cooperative banks at the rate of 6%. For achieving self-sufficiency
in food Bangladesh has adopted the policy favorable to agril. credit.

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6)Govt: Sometimes government has the provision of directly sanctioning loan for agricultural
programmed. This loan is called Taccavi loan.This loan is specially sanctioned during disaster
flood and other calamities for purchasing seed, fertilizer,ploughingbllocksagril.criditment. This
loan is for very low rate of interestand terms and conditions for repayment are also very easy.

Non-institutional sources
1)Relatives and friends:
It is one of the most important sources of agril credit. The principal advantage of this loan is that
the borrower has not to pay interest in many of the cases, or the rate of interest is very low.
2)The village money lenders:
This type of lenders has captured a large portion of agricultural credit. During undivided India near
about 70% of agril.credit was from this source. At present rich classes of village are in the business
of money lending. They lend money to the village farmers on the security of ornaments, land and
other real estate properties and takes higher rate of interest from them.

3) The village businessmen and shopkeeper:

At present there are a type of businessmen and shopkeepers who deal with money lending, and
also they act as the professional money lenders. They advance money to the farmer’s. In order to
purchase their agril. Product for lower price. Now, a day this type of money lending has been
prioritized.
4) The village rich farmers:
There some farmers in the village who are the owner of adequate land and they are much solvent.
These rich farmers also lend money to the marginal farmers and medium class farmers, they lend
money for higher rate of interest as well as they follow cheating process in lending money to the
poor and marginal farmers. As a result the loan takers become landless in the long run.
5)Faria and Bepari:
In the marketing process of our agricultural product there are some middlemen traders. They also
lend money to the farmers for higher rate of interest.
In Bangladesh the farmers have to take loan from these non-institutional sources. But they have to
pay so higher rate of interest that at last they are loss everything.

What is Agricultural credit?

The credit which is used for purchasing different agricultural inputs and operational cost of
production of agriculture is called agricultural credit.

Why the farmers take credit?

The history of the world bears the testimony a must for agriculture is credit. The world famous
economist Fredaric Nikoloson the statement of Nikolson is true for the farmers of Bangladesh.
Near about 55% of our GDP is contributed by agriculture. But our agriculture system is most
defective. The cultivation system is old system, lacking in irrigation system. For want of quality

28
seed fertilizer insecticide the yield of our agriculture is very low. For arranging these agril .inputs
a large fund is necessary. But our farmers are mostly poor. Their income is so low that they cannot
spend for development providing the extra an agricultural production expenses after maintaining
the family expenditure. They have to depend upon agril credit have to lose their last resort like
their cultivable land.

Causes of farmers’ lndebtness in Bangladesh

Major numbers of farmers are indebted in Bangladesh. They are supocated by loan. There is a
proverb of an economist “They are born in debt, live in debt and die in debt. The indebtness of our
farmers has created an obstructed in the path of our agricultural development. The principal cause
of indebtness our farmers are as follows.
A)By born loan:
Our farmers are born under the burden of parental loan. This loan goes on generation after
generation. The parental loan is to share every child. The some become indebted in order to repay
the parental loan. It is one the important come of indebtness.
B)Low income of agriculture:
Here the productivity of agriculture is very low due to lack in appropriate farming, lack in quality
seed, fertilizer and Insecticide. Due to their low income from agriculture, the farmers cannot
maintain his own expenditure and thus become indebted.
C)Shortage of complementary work:
The farmers cannot increase his income from alternative sources other than agriculture. The
cottage industry could be the additional source of their extra earning but now not available and
thus only agriculture is the unique resource for their livelihood and for insufficiency of it farmers
become indebted.
D)Defective marketing system:
For want of organized marketing our farmers are deprived of legal prices of their agril. Products.
The brokers ,middleman and other intermediaries deprive the farmer from getting legal price of
their product in different ways. As a result the farmers face financial crisis and become indebted.
E)Natural hazards: Near about every year Bangladesh faces draught, excessive rainfall, flood and
other calamities and thus farmers are in financial crisis and become indebted.
F)Lacking in economical expenditure:
Farmers are not in most of the uses economical. They spend a lot in their occasional ceremonies
such a marriage of their children, cases in courts etc. Consequently they are in want of money and
become indebted.
G)Defective credit policy:
The number formal credit sanctioning institute is very small. For that they are depend upon the
village money lenders.
H)The ignorance of the farmer/Illiteracy:

29
Our farmer is mostly illiterate and lacking in for sightness. They cannot save some during surplus
production. Therefore, if there is deficiency in production in any year. There the farmers see no
alterative way but indebtness.
I)Population growth:
Over population in Bangladesh has created an excessive pressure on the land of the comity.
Therefore, the income is decreasing and the farmers are becoming indebted.

Remedies
1. Increase the income of agriculture by increasing productivity and then escape them from the
burden of debt.
2. Develop the marketing system: For ensuring the legal price of agril. Product the marketing
system should be well organized and controlled. Due to legal. Prices of agril. Products the
farmer’s financial conditions will be developed and will come out of the burden of debt.
3. The repayment of old loan should be ensured: The previous loan should be settled through
establishing risalis Board’.
4. The disbursement system of loan should be moderated. The number of Krishi bank and
cooperative credit societies should be increased in order to provide loan to the farmers for
lower rate of interest and for easy terms and conditions.
5. Legal protection should be ensured so that the lenders cannot take ownership of land from
borrowers. For that the govt. Should take legislative steps.
6. Complimentary works should be arranged by government: When in agricultural sector there is
off season then they should be provided with complimentary jobs so that they are not to sit
idle. For that cottage industries and other small-scale industries should be developed in the
country.
7. Disaster management programme: Near about in very year a lot of damage is caused by flood
drought, excessive rainfall and the farmers face loss. For safety of farmers from these
calamities comprehensive flood control system, widen irrigation and drainage system should
be developed.
8. Education: For awareness of farmers expansion of agricultural education is needed.
Compulsory primary education should be introduced. Information regarding agriculture should
be broadcasted. All these necessary steps would help farmers not to be indebted.

The problems of agricultural credit

The agricultural credit system of our country is not satisfactory. The rural agricultural credit system
is problematic in the following cases:
1) The majority people live in rural areas of Bangladesh and supply of agricultural credit is less in
comparison with its requirement.

30
2) Major portion of agril. credit comes from non-institutional sources such as village money
lenders, landlords, businessmen etc. Only 20% of total agril. credit is from institutional sources
the rest is from non-institutional sources for higher rate of interest.
3) As the agril. credit is dependent on non-institutional source. Our farmers are exploited by the
money lenders, land lords and businessmen taking advantage of their insolvency or financial crisis.
They have to pay very high rate of interest. These money lenders make the agril. Credit medium
for exploiting the poor farmers.
4) The principal problem of our agril. Credit is the incapability of the poor farmers to ensure the
land security against the loan. Bank and other finance institutes advances loan against the land
security. But our farmers are unable meet this and faces problem to take loan.
5) Another problem of our agril. credit is that the significant number of credit institutes are not
available within the reach of our farmers in the rural areas rather than these are located in urban
areas which is not known to the farmers.
6) Most of our farmers are illiterate and they cannot follow the credit disbursing process of the
institutes such BKB and land security bank has respective credit disbursing procedures and
complicated procedures are not clear to them. Consequently, they do not feel interest for
institutional loan.
7) At long last we can conclude that our agril. credit are being used in unproductive activities of
social ceremonies. Such as marriage ceremony, court case purposes. For these unproductive uses
of agril. credit the condition of our farmers is detoriating instead of being well. Consequently, they
cannot repay the loan.

Remedies
The agril. credit should be given importance. For this the agril loan structure and management
system should be developed and remodeling should be done. Following steps should be taken:

Sixthly we look into the uses of agril. credit that the loan should not be used in unproductive
purposes. For that proper monitoring should be ensured through the supervision by the staff of the
institutions.
At last, the farmers should be provided with the suggestions regarding the objectives and uses of
these loans. The major objectives of agril. credit is to increase productivity and to achieve better
condition of the farmers through earning more.

31
 Producer equilibrium

Producer equilibrium:
Producer equilibrium is that condition in which a Producer or a producer institute is able to produce
maximum amount of goods through minimum cost.

The goal of every producer is to earning maximum Profit. The producer employs inputs in such a
way through in limited budget or in a certain amount of cost he on the a of cost. He can earn
maximum amount of output. On the other hand, the producer employs his input combination in
such ways so that he can Perform his production in least cost. In both the cases, equilibrium
condition is achieved. Therefore, it a producer ore a amount of a Producers or a Pro-institute can
produce maximum amount of product from given cost or a producer can produce certain amount
output a from has least cost then it is termed that the Producer attained equilibrium condition.

Determination of producer's Equilibrium:

Producer's Equilibrium can be determined through is product curve iso-cost line or budget line.

Here, the equilibrium of producers has two condition-

1.The necessary condition: The iso- product curve and iso- cost line both will be attached. That
means in the equilibrium point slop of the two will be equal to each other.

MRTSLK= MPL /MPK =PL /PK

2. The second condition. ore sufficient condition is_ At the equilibrium point the iso- product
causes especially is convex to the origin. In other words, the rete of technical substitutes is
diminishing

Assumptions:
In explaining or determining producer. Equilibrium the following assumptions are to be
considered-

1. The producers’ behaviors is rational·

2. Two inputs such as labour (L), capital (k) is to be considered.
3. The input price or price of capital is fixed.
4. The units of inputs are homogenous.
5. status of technology is unchanged.
4. Output maximization with a given costs:

32
In the above OX axis indicates labour (L) and OY axis indicates the capital (K). AB is the iso-cost

line or budget line IQ1, IQ2, IQ3, are three Iso-quant indicating 100, 200 and 300 unit of Production
respectively among IQ3 Iso- quant indicating is out of the reach of AB budget line. Therefore, it is
out of consideration. On the other hand, IQ1, iso- quant, touches the AB budget lines at point Q,
but the Production will touch is the AB budget line at the point Q, it is the equilibrium point. Here,
the producer produce can 200 units of product employing OM labour and ON capital. At point Q,
IQ₂ touches the AB budget line and at that point the IQ2 is convex to the origin. Therefore, Q is
the only point where two conditions of equilibrium is fulfilled. Thus, a producer institute can attain
equilibrium through maximizing output with a given cost.

B. cost minimizing for a given output: The producer can attain the equilibrium through minimizing
the cost a given product. In the figure OX axis indicates capital (K). IQ is an iso-product curve of
which each and every point on the curve the producer can produce 200 units of product. But every
point on IQ does not incur the equal cost. For determining the minimum cost combination of labour
(L), Capital (k) minimizing the producer has to attach the iso- quant IQ to the iso-cost map. In the
figure, there are three iso-cost maps. Such as AB, CD and EF. The equilibrium point will be at the
point. where the iso- quant will touch the budget line. And it will be the point of Least cost
combination for producing 200 units of product. In the figure, the three points P.Q.R are the on IQ

33
amount and at each of the points the producers can produce 200 units of product. But the
production costs at three points aren't equal respectively. In the figure iso product curve touches
the budget line CD at the points Q. It is conveyed to the origin here. Therefore, points Q in the
least cost indicating point which is the equilibrium point thus the producer can attain equilibrium
of least cost for a given output.

At conclusion, we may say that a a producer may attain equilibrium through output maximizing
with a given cost for a given output.

Expansion path

Producers’ equilibrium is attained at the touching Point of iso-product curve and budget line. With
the increase of input employment, the equilibrium Point changes. The path connecting the
changing equilibrium points is termed as expansion path. In other words, the expansion path is the
connecting line of the points in each of which and iso-product curve touches budget line.

34
In the figure by the side Ox axis indicates labour (L), OY axis indicates capital (K). AB CD+EF
are three budget lines IQ1, IQ2, IQ3 are three iso- quants. AB, CD and EF budget lines touches the
iso-quant. IQ₁, IQ2.IQ3 at the points EF+G respectively. Therefore, three equilibrium points EF+G
are achieved the path connecting the points E, FD +G is EP. And it is the production expansion
path.

Returns to scale:
If all inputs of production are changed at certain rate, then the change of output is termed a as
returns to scale. The concept of returns to scale is related to long run production system, because
in long run, all inputs are variable. In short run, some inputs. Are fixed. Therefore, in short run,
change in the scale is not possible. In long run, all inputs can equally be changed. Therefore, in
long run the changes in all output for proportionate changes in all inputs is termed as returns to
scale.

Different types of returns to scale:

1. Constant returns to scale: If all the inputs are increased by a certain rate and output in increased
by the equal rate then it is termed as constant returns to scale.

35
The constant returns. to scale is discussed below. In the above figure OX axis indicates labour (L),
OY axis indicates Capital (K). According to the figure, labour, capital are individually employed
by unit and output is 100 units. And it is indicated by point a IQ1, Iso- quant. If the labour (L),
Capital (K) is employed by double rate or L= 2 units and k=2 units then output is double or 200
units which as at point b, loan iso-quant 1Q₂. Similarly, if inputs are increased three times or L=3
or k=3, The output will be thus times or 300 is the equilibrium will be indicated by the points on
IQ3. It is observed that the increase in input is at the same rate as the increase in input use.
Therefore, here the returns to scale are constant rate.

2. Increasing Returns to scale:

If all inputs of a production system is increased by a certain rate and the output increases by a
higher rate or it increases higher than Proportionately then it is termed as increasing returns to
scale.

36
In the figure, OX axis indicates labour (L) and OY axis indicates capital (K). According by each
of the two then total output because 100 units which is shown by IQ1 iso-quant. If labour and
capital each of the two increased to units ten the total product increases to 250 that is more than
two times. Similarly, if the input increases to 3 times or L = 3 units and K = 3 units employment
then total output increases to 450 which is expressed by IQ3 is iso- -quant. Here output increases
than three times. It observed that the rate of increases input is more than the rate of increases in
input.

Therefore, here there increases return to scale.

3. Decreasing returns to scale: If all input of a production function increases by certain rate and
the output increases by less than the proportionately. Then it is termed as decreasing Returns to
scale.

37