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When MP increases
2)
MP is constant
3)
MP decreases
4)
MP is zero
TP is maximum
5)
MP is maximum
6)
When MP > AP
AP is increasing
2)
When MP < AP
AP is decreasing
3)
MP equals AP
AP is at maximum
Total
Change
Change
Average
Marginal
Remarks
Input (X)
0
1
2
3
4
5
6
7
8
9
10
11
12
Product
(TPP)
(Y)
0
2
6
11
17
23
27
30
32
33
33
32
29
In input
( X)
1
1
1
1
1
1
1
1
1
1
1
1
1
in total
product (
Y)
2
4
5
6
6
4
3
2
1
0
-1
-3
product
(APP)
(Y/X)
0
1
3
3.60
4.25
4.60
4.50
4.28
4.00
3.66
3.30
2.91
2.41
product
(MPP)
( Y/
X)
2
4
5
6
6
4
3
1
1
-1
-1
-3
Total product
Increasing at
Increasing rate
Increasing at
Constant rate
Increasing at
Decreasing
Rate
Decreasing at
Increasing rate
3)
4)
5)
6)
7)
2)
Stage I
Stage II
Stage III
Graph :
The figure 5 shows the production function with its derived MPP and APP
curves. So long as TP rises at an increasing rate, MPP also increases and the
production function is concave upwards. At point A, TPP starts to increases at a
diminishing rate, MPP starts to decrease and the production function becomes
concave downwards. TPP is maximum at B, and at this level of output MPP value
becomes zero. After this, if more of the variable factor is applied TPP will fall
absolutely, in which case MPP becomes negative.
So long as MPP increases, APP will also increases. It will continue to do so
even though MPP starts to fall, so long as MPP is greater than APP. From A, the point
of inflection MPP decreases and the MPP curve intersects the APP curve at D, the
point of maximum value of APP. This intersection indicates the equality of MPP and
APP at maximum APP.
Stage 1 Characteristics
1) This stage starts from the point of origin up to the point where MPP remains
greater than APP.
2) APP increases through this region, indicating the efficiency of all the inputs, if
the variable input keeps increasing.
3) TPP increases with increasing rate
4) Stage I ends when APP is maximum or MPP = APP.
5) Elasticity of production (Ep) is more than unity, because MPP us greaterthan
APP, up to maximum average product. At maximum average product, Ep is
one.
6) Point of inflection : Point of inflection occurs in stage I, where the rate of
increase in output start to fall off and the production function becomes
concave downwards. When MPP is maximum, the corresponding point on
TPC is called point of inflection. Inflection point indicates the changes in
curvature of TPC.
Stage 2 Characteristics
1)
This stage is obtained when MPP is decreasing and is less than APP.
i.e.APP > MPP.
2)
3)
4)
5)
Optimum point of input use is in this rational region. This region embodies
diminishing phase region.
6)
7)
Elasticity of production is less than one, but greater than zero between
maximum average product and maximum total product.
Stage 3 Characteristics
1)
TPP decreases.
2)
3)
4)
5)
6)
Px
Py
. . . . . (1)
= (X ) . (Px )
........(2)
Py
Py
Py
< X
. Px
Y
MC
. . . . . (3)
. Py
x
MR.
. . . . . (4)
Chapter 6
Law of Equi-marginal Returns
If a farmer has access to nay amount of working capital and labour and could
expand his acreage and building facilities, etc., as far as he wished, he would not have
any difficulty in deciding which commodities wished, he would not even compare one
enterprise with another. Instead he would produce all crops and livestock products
physically possible in his locality, considering weather, climate, soil and other
physical factors. The decision rule would be simple, select all product which can be
produced and expand output as long as the added returns are greater than added costs.
But choice on the number and size of enterprises in this manner cannot be
made, because resources are limited. Expansion of one enterprise or practice generally
requires an equivalent contribution in another. The questions, which enterprise or
combination of enterprises will give the greatest income? Such an optimum choice of
enterprises is made based on the principle of equimarginal returns or the principle
of opportunity costs.
This law states that profits are maxmised by using a resource in such a way,
that the marginal returns from that resource are equal in all cases. (table 6)
Table 6. Estimated total and added yields of rice (kg/ha)
Goutami
Total
4,458
4,702
4,906
5,070
5,194
5,278
5,323
5,327
5,291
0
10
20
30
40
50
60
70
80
Added
244
204
164
124
84
45
4
-36
Vasistha
Total
4,437
4,648
4,809
4,918
4,976
4,982
4,937
4,842
4,695
Added
211
161
109
58
6
-45
-95
-147
Pankaj
Total
4,653
4,818
4,953
5,059
5,135
5,182
5,200
5,188
5,146
Added
165
136
105
75
47
18
-12
-42
A farmer has Rs. 320 for the purchase of nitrogen fertilizer for applying to
three varieties of rice, viz. Gautami, Vasistha and Pankaj. The problem is, how much
amount of this limited capital should be spent on each variety to obtain highest profit?
If the farmer follows the law of average returns he gets a net product of Rs. 666.40 on
Gautami if the farmer follows the principle of added returns and added costs, the
most profitable levels of nitrogrn application for each rice variety are as follows :
(table 7)
Table 7. Most profitable level of nitrogen use in three rice
varieties
Nitrogen
Per ha
(kg)
Added
Nitrogen
(kg)
Cost of
added
nitrogen
(Rs.)
0
10
10
10
40
40
Gautami
195.20
163.20
Vasistha
168.80
128.80
Pankaj
132.00
108.00
20
30
40
50
60
70
80
10
10
10
10
10
10
40
40
40
40
40
40
131.20
99.20
67.20
36.00
3.20
-28.80
87.20
46.40
4.80
-36.00
-76.00
-117.60
84.80
60.80
37.60
14.40
-9.60
-33.60
The farmer needs 130kg of nitrogen for all the three varieties. But the
availability of capital with the farmer is limited to the extent of Rs. 320, that means he
can purchase only 80 kg of N at the rate of Rs. 4/kg of N. The problem is, how he
should allocate Rs. 320 or 80 kg of N to all the three varieties to maximize net
income? The farmer has to follow the principle of equimarginal returns to allocate 80
kg of N to the three varieties of rice as shown in table 8.
Table 8. Allocation of nitrogen among the three varieties of rice based on the law
of equimarginal returns
Dose of nitrogen
I
II
III
IV
V
VI
VII
VIII
Total 80 kg N
Variety
Gautami
Vasistha
Cautami
Pankaj
Gautami
Vasistha
Pankaj
Gautami
limited, the farmer must obviously stop short of its application to the level where MC
= MR. He is handicapped to follow the added cost-added return principle, because if
he used more of it in one enterprise, there will be equivalent decrease in its use for
other enterprises, with the result that profit cannot be maximized when its application
is extended to the level where MC = MR the essence of the added cost-added return
principle.
preparation of his cropping scheme and fitting there in his livestock programme.
b)
competitive.
c)
there is a profitable limit for each enterprises as well as most profitable enterprise.
This principle is also called as the law of opportunity cost, which is defined as:
the cost of using one resources in production of one product is the return that would
have been received from the same resource used in its most profitable alternative
use.
The principle refers to the money returns or advantage which might have been
obtained from any factor used in the production of a commodity, if it had not been
used in producing that commodity; but could have been used for some other
commodity.
The value of one enterprise is sacrificed as a cost in the production of another
enterprise. In simple terms, it is cost equivalent to the returns from the next best
alternative foregone.
Absolute advantage
b)
Relative advantage
Region-A
500.00
425.00
75.00
1.18
118%
Region-B
375.00
350.00
25.00
1.07
107%
1,000.00
475.00
525.00
2.10
210%
1,500.00
500.00
1,000.00
3.00
300%
From the above figures, (table 9) it will be seen that region-A has an absolute
advantage in paddy, because the net income per hectare or per rupee spent is greater
than that of region-B. Region-B has an absolute advantage in sugarcane, because the
income from sugarcane is 300% greater than the cost.
Region-A has a greater absolute advantages in growing both paddy and
groundnut than C, because the income from sugarcane is 300% greater than the cost.
Region-A has a greater absolute advantages in growing both paddy and
groundnut than C, because the net income per hectare are Rs. 75.00 and Rs. 25.00,
respectively. In other Words respective incomes are 118% and 113% higher than
costs. Farmers of region-A can make profit by growing both the crops. But they want
to make the greater profit, which can be done by having the largest possible acreage
under paddy alone, as it is a question of relative advantage.
b) Relative or comparative advantage
Table 10.Relative or comparative advantage
Total income/ha
Total expenditure/ha
Net income/ha
Return per rupee spent
Region-A
Groundnut
225.00
200.00
25.00
1.13
Region-C
Groundnut
220.00
200.00
20.00
1.16
Paddy
225.00
210.00
15.00
1.07
113%
116%
107%
Similarly, farmer of the region-C can make some profit by growing paddy, but
they have relative advantage in growing groundnut. They make greater profit by
growing groundnut, the percentage return over the cost of production being 107%for
paddy and 116% for groundnut.(table 10)
Chapter 7
Cost Concepts
In line with the lengths of planning periods, there are two major categories of
costs, i.e. fixed costs and variable costs. Fixed costs are those which would be
incurred even if no output were produces and variable costs are those costs, incurred
only if production is carried on. Variable costs re the relevant costs in making
production decisions and the fixed costs have to bearing on production decisions,
once they are incurred. To consider whether a particular cost item is a fixed cost or a
variable cost, it is to be considered, whether the input is fixed or a variable cost, it is
to be considered, whether the input is fixed or a variable. In the long run period, all
inputs are variable and hence there are no fixed costs. .(table 11)
Table 11. Cost Relationships
Output Variable
Costs @
Rs.10
Per unit
0
10
28
42
52
60
66
70
75
0
10
20
30
0
50
60
70
80
Fixed
Costs
@
Rs.
40
per
unit
40
40
40
40
40
40
40
40
40
Total
cost
(VC+FC)
Rs.
40
50
60
70
80
90
100
110
120
Average
Variable
Costs
(VC +
Y)
(Col.2 +
Col. 1)
1.00
0.71
0.71
0.71
0.77
0.83
0.91
1.11
Average
Fixed
Costs
(FC+Y)
(Col.3 +
Col. 1
4.00
1.43
0.95
0.77
0.67
0.61
0.57
0.55
Average
Total
Costs
(TC +
Y)
(Col4 +
Col. 1)
5.00
2.1
1.67
1.54
1.33
1.36
1.51
1.67
Marginal
Cost
( VC+
Y)
1.00
0.55
0.71
1.00
1.25
1.67
2.50
5.00
Fig.6
TFC + TVC
Marginal cost is the additional cost necessary to product one more unit
of output. Marginal costs depend entirely upon the nature of production
function and the unit costs of the variable inputs. Marginal cost is comprised
entirely of variable costs. No fixed costs are part of marginal costs, because
they are neither increases nor decreased by additional production.
MC
iii)
MVP
Y
.Py MPP.Py :
X
MIC Px
MPP of X should be equal to the ratio of the input price (Px) and output price
(Py). To justify the application of an additional unit of input the MPP of that unit of
input should be equal to the price ratio Px/Py.
For example, if Px = Rs.10 and Py = Rs.5, then Px/Py = 10/5 = 2 i.e. the price
of X is two times greater than the price of Y. Therefore, to justify the application of an
additional unit of input, the MPP of that unit of input should at least be 2 so that the
value of that 2 units of output. ie, Rs.10(2x5) will be equal to the price of the input
(Rs.10.).
Fig. 8 Determination of
optimum Level of Input
Fig 9. Determination of
Optimum Level of Output
MR = MC and
ii)
MC must be rising
where,
MR=Marginal return
TR
= --------- (or) Py
Y
TC
MC=Marginal cost
= --------Y
Chapter 8
Economies of Scale
Economies of Size
All inputs are variable in the long run. Production Planning in the long run
consists of evaluating all production possibilities the farmer could take up. All durable
inputs put together is known as plant. In farming, durable inputs such as land,
buildings, machineries, and animals constitute a plant. The size of the plant decides the
maximum production capacity of the farm. An increase in one or more durable inputs
increases the plant size and consequently the production capacity. To make the analysis
simple let us consider two inputs viz., X1, available labour and X2, the plant size. For each
plant size (output level) there will be a corresponding level of variable input that
minimizes the cost of producing a given output level. The average cost of production at
different level of output (Plant size) decreases up to certain level and beyond that it starts
increasing. Economies of size is realized as long as the long run average cost declines in
response to increases in plant size. The optimum plant size (output) is one which
results in minimum long run average cost. Diseconomies on size occur when it is
rising. Increase in plant size improves efficiency due to specialization of labour,
mechanization, purchase of inputs at discount, etc. But beyond certain level the long run
average cost rises due to difficulties in management and control. ( Fig.10)
Economies of size
In farming as the size of a farm increases, cost per unit of production decreases,
increased efficiency resulting from large size. (Eg.). the cost of production per kg of
paddy in case of a 10 ha farm will be lesser than that of a per kg of Paddy produced from
a 5 ha farm. This is because a 10 ha farm can effectively utilize labour and get other
inputs at cheaper cost comparatively than that of a 5 ha farm.
a) Internal Economies
Internal economies are those economies in production, those reductions in
production costs, which accrue to the farm itself when it expands its output or
enlarges its scale of production. This is due to use of methods which small farms do
not find it worth while to employ.
Internal economies may be of the following types
(i) Technical Economies (ii) Managerial Economies (iii) Commercial
Economies (iv) Financial Economies and (v) Risk bearing Economies.
i. Technical Economies
It refers to the size of factory or establishment. It arises from use of (i) Large size
machineries (ii) Linking process- integration of two or more is more economical. Eg.
dairy farm + fodder farm, Sugar factory + Sugarcane farm, paper making & pulp making.
(iii) Superior technique Large establishments can have power driven machinery.
(iv) Increased specialization Specialization and division of labour are highly
advantageous.
ii. Managerial Economies
These economies arise from the creation of special departments or from
functional specialization. There is a vertical division of labour starting from workers to
manager.
In general concentrate on the jobs which bring more profits. In large farms
manager collects new technologies. For managing routine works, a permanent labour is
employed and to perform various operations workers are employed.
iii. Commercial Economies
These arise from purchase of materials and sale of goods. Large farms have better
bargaining power. Credit institutions will give special attention. Selling cost will be less
and the profit will be more.
iv. Financial Economies
Large farmers have better credit and can borrow on more favourable terms which
lead to more investment and more income.
Large farmers can spread risk and avoid risk/eliminate them by diversifying the
output.
b) External Economies
External economies are those economies, which accrue to each member firm as a
result of the expansion of the industry as a whole.
i. Economies of concentration
These arise due to availability of skilled labour, better transport and credit
facilities. Every firm in the industry shared the common stock of knowledge and
experience.
ii. Economies of Information
These economies refer to the benefits which all firms engaged in an industry
derive from the publication of trade and technical journals and from central research
institutions.
iii. Economies of Disintegration
When an industry grows it becomes possible to split up some of the processes
which are taken over by specialist firms. Examples are spare parts manufacturing
units/assembling units.
Diseconomies of size
It is opposite to Economies of Size. It is a proven fact as the size of farm expands,
the unit cost comes down. However, expansion beyond certain point results in increased
unit cost of production owing to managerial problem and other factors which is termed as
Diseconomies.
Increase in production (or) large scale production may lead to increase in cost due
to following reasons.
i) Over-worked Management: A large scale producer cannot pay full attention to
every detail. Cost often rises due to the dishonesty of the employees or waste of materials
by them. This is due to lack of supervision.
ii) Individual tastes: If the consumers are not satisfied because large scale production is
meant for mass. This leads to loss of customers.
iii) No personal Element: Large scale firms are managed by paid employees. Due to lack
of personal touch between the owner and employers there may be frequent
misunderstanding. Which lead to strikes and lock- outs. This is harmful to the business.
iv) Possibility of depression: Large scale production leads to over production.
Production is more than the demand. It is not easy to dispose a large quantity in a
profitable manner.
v) Lack of adaptability
Large farms find difficulty in switch over from one enterprise to another
enterprise. If there are more number of farms it leads to competition for labour, raw
materials which in turn increases higher cost, wages and cost of operation and hence less
profit. Sometimes, due to scarcity farms use inferior or less efficient factors which also
lead to increase in cost.
Returns to Scale
In the short run, quantity of certain inputs are increased, keeping others at
constant level to increase the output. But, in the long run, the output can be changed by
changing the quantity of all inputs in same proportion or in different proportion. The
response or behavior of out put when all inputs are changed in the same proportion
is known as returns to scale.
Fig. 12 Decreasing
returns to scale
AB=BC=CD
AB<BC<CD
AB>BC>CD
100
75,100,125
125,100,75
In response to the proportionate change in all inputs, if the output also increases in
the same proportion, the relationship is known as constant returns to scale (fig.11). If
the output increases at a higher rate than the rate of increase in inputs, the relationship is
increasing returns to scale (fig.13). if the output increases at a lower rate as compared
to the rate of increase in inputs, these are diminishing returns to scale. (fig.12). For
example, in the production function, Y = f (X 1, X2, X3), X1, X2,and X3 are increased
Consequently, the output of rice will also increase. It may increase in proportion to the
increase in inputs
ie, by 2 times (100 qtls) or by more than two times (>100 qtls.) or by less than 2
times (>50 but <100).