FARM ECONOMICS AND MANAGEMENT

Farm means a piece of land where crop and livestock enterprises are taken up under a common
management and has specific boundaries.

Economics is the Science which studies human behavior as a relationship between ends and scarce mean
which have alternative uses.

This definition mean:

Our wants are unlimited.

Means to satisfy these wants are strictly limited

Hence a man has to make choice

From the definition of economic problem we can derive the following fundamentals farmer’s problems
which an economy has to tackle.

(1) What to produce: The first major decision relates to the quantity and the range of goods to be
produced since the resources are limited we must choose between different alternative collections of
goods and services that may be produced. It also implies the allocation of resources between the different
types of goods e.g. consumer goods and capital goods.

(2) How to produce: Having the decided quantity and type of goods to be produced we must next
determine the techniques of production to be used e.g. labour intensive and capital intensive.

(3) For whom to produce: This means how the national product is to be distributed, i.e. who should get
how much. This is the problem of the sharing of the national product.

(4) Are the resources economically used? : This is the problem of economic efficiency or welfare
maximization. There is to be no waste or misuse of resources since they are limited.

(5) Problem of full employment: Fullest possible use must be made of the available resources. In other
words, an economy must endeavor to achieve full employment not only of labour but of all its resources.

(6) Problem of growth: Another problem for an economy is to make sure that it keeps on expanding or
developing so that it maintains conditions of stability. It is not to be static. Its productive capacity must
continue to increase. If it is an underdeveloped economy. It must accelerate it process of growth.

Definitions of Agricultural Economics:

Agricultural Economics is an applied field of economics in which principles of choice are applied in the
use of scarce resources such as land, labour, capital and management in farming and allied activities. It
deals with the principles that help the farmer to use land, labour and capital. Its role is evident in offering
practicable solutions in using scarce resources of the farmers for maximization of income.

Agricultural economics is a social science which is concerned with human behaviour during the process
of producing, processing, distributing and consuming the products on farms and ranches.
Importance of Agricultural Economics:

The field of agricultural economics finds to seek relevance between cause and effect using most advanced
method thus, production functions and programming models. It uses theoretical concepts of economics to
provide answers to the problems of agriculture and agribusiness. Initially earnest efforts were made by
economists to use the economic theory to agricultural problems. Now, the subject of agricultural
economics is enriched in many directions.

Utility of Agricultural Economics:

Due to commercialization of agriculture, the importance of Agriculture Economics has increased. The
study of Agriculture Economics is helpful in many ways.

a. It is helpful in developing the logical efficiency and faculty of observations.

b. It provides knowledge about production, consumption, exchange, distribution and public finance.

c. By the study of Agriculture Economics, the householders can get maximum return out of their
expenditure.

d. It provides wisdom for keeping proper family budgets.

e. Study of Agricultural Economics helps in getting more income with minimum cost.

f. The knowledge of Agricultural Economics increases the marketing efficiency

g. It provides knowledge about division of labour and increases the efficiency of labour.

h. It shows the relationship with other social sciences.

Scope of Agricultural Economics:

The scope of Agricultural Economics is to include the questions- what to distribute, among whom to
distribute and on what basis to distribute, what to consume and how to consume. Agricultural economics
also includes the participation and functioning of government in agriculture. The role of government
cannot be neglected as a process of production, distribution and consumption and overall upliftment of
the rural masses.

It provides technical knowhow, aid and assistance, infrastructure on one hand and regulate input and
output prices in the interest of the consumer and the producer on the other hand. Therefore, government

participation is a relevant part of the study of agricultural economics.

Agricultural economics deals with the principles which underline the farmer's problem of what to
produce and how to produce, what to sell and how to sell in order to secure the largest profit for him,
consistent with the interest of society as a whole. More specifically, it deals with the selection of land,
labour and equipment for a farm, the choice of crops to be grown, the selection of livestock, enterprises to
be carried on and the whole question of the proportions in which all these agencies should be combined.
Consumption production and distribution economics is as important for farm people as it is important for
them to understand the economics of their farm production.

In short the scope of Agricultural Economics includes production, distribution, consumption and
government activities in relation to agriculture and farm enterprises

Importance of Agriculture to the Economic Development of Tanzania

When we say that a country is developed, we usually jjudge its development in the two sectors that is
agriculture and industry. Increased agricultural output and productitivity contributes to the over all
economic development of Tanzania in the following ways.

i. It provides food for entire population

ii. It provide increasing agricultural exports

iii. It is the supplier of labour

iv. It is the biggest employer

v. It is a supplier of raw materials for domestic industries

vi. Share of agriculture in the national income:

vii. Agriculture as a source of livelihood

Production function

Production may be defined as a process through which a firm transforms inputs into output. It is the
process of creating goods and services with the help of factors of production or inputs for satisfaction of
human wants

Production function is a technical and mathematical relationship describing the manner and extent to
which a particular product depends upon the quantities of inputs or services of inputs, used at a given
level of technology and in a given period of time. It shows the quantity of output that can be produced
using different levels of inputs.

Is a systematic and mathematical expression of the relationship among various quantities of inputs or
input services used in the production of a commodity and the corresponding quantities of output

A production function can be expressed in different ways: in written form, enumerating and describing
the inputs that have a bearing on the output; by listing inputs and the resulting outputs numerically in a
table; depicting in the form of a graph or a diagram; and in the form of an algebraic equation.
Symbolically, a production function can be written as

Y=f (X1, X2 , X3 ,…….., Xn) where Y is output, X1, X2 , X3….. Xn are inputs. It,however, does not tell
which inputs are fixed and which are the variable ones. Since in production, fixed inputs play an
important role, these are expressed as: Y=f (X1, X2 / X3…..Xn) where Y is output, X1, X2 are variable
inputs and X3…..Xn are fixed inputs.
There are mainly the following three measures of production:

(a) Total Physical Product (TPP)

TPP is the total amount of a commodity that is produced with a given level of factor inputs and
technology during a given period of time. For example, 2 units of labour combined with 2 units of
capital can produce 26 fans per day. Here 26 fans is the total physical produt which is produced
with the given level of inputs (labour and capital)

(b) Average Physical Produt (APP)

APP is the output produced per unit of input employed. It can be obtained by dividing TPP by the
number of units of variable input. So APP = TPP/L where L is the units of labour. For example, if
10 workers make 30 chairs per day, the APP of a worker per day will be 30 ÷ 10 = 3 chairs. If the
productivity of a factor increases, it implies that the output per unit of input has increased.

(c) Marginal Physical Product (MPP)

MPP of an input is the additional output that can be produced by employing one more unit of that
input while keeping other inputs constant. For example, if ten tailors can make 50 shirts per day
and 11 tailors can make 54 shirts per day, the marginal product of 11 workers will be 54 - 50 = 4
shirts per day.

We can further clarify the above three concepts of production with the help of the following table

Fixed factor Variable factor TPP APP MPP

(Capital (Labour (units) (units) (units)
units) units)
(
(1) (2) (3) (4) (5)
2 1 10 10 10
2 2 26 13 16
2 3 48 16 22
2 4 68 17 20
2 5 85 17 17
2 6 96 16 11
2 7 98 14 2
2 8 98 12.25 0
2 9 90 10 -8
Example, APP= TPP/units of variable factor

How to calculate APP and MPP will be discussed during class session

RELATIONSHIP BETWEEN TPP AND MPP

The relationship between TPP and MPP can be explained as given below:

(i) As long as MPP increases, TPP increases at an increasing rate.

(ii) When MPP falls but remains positive, TPP increases but at a diminishing rate.

(iii) When MPP becomes zero, TPP is maximum.

(iv) If MPP becomes negative, TPP starts decreasing.

RELATIONSHIP BETWEEN APP AND MPP

(i) As long as MPP is greater than APP, APP increases.

(ii) When MPP is equal to APP, APP is maximum and constant.

(iii) When MPP is less then APP, APP decreases.

(iv) MPP can be zero and negative but APP is never zero or negative.

The relationship among TPP, APP and MPP can also be explained with the help of the following table.

Table: Hypothetical schedule of TPP, APP and MPP

Land Units of variable TPP APP Units) MPP (Units)

(Fixed factor) Factor (labour) (Units) (TPP/L) (TPP/L)
1 Acre 0 0 – –
1 Acre 1 2 2 2
1 Acre 2 6 3 4
1 Acre 3 12 4 6
1 Acre 4 20 5 8
1 Acre 5 25 5 5
1 Acre 6 29 4.8 4
1 Acre 7 31 4.4 2
1 Acre 8 31 3.9 0
1 Acre 9 29 3.2 –2
In the above table MPP is increasing upto 4 units of labour and TPP is increasing at an increasing rate.
MPP is decreasing but remains positive from 5th to 8th unit of labour so TPP is increasing at a
diminishing rate. For 8th unit of labour MPP is zero where TPP is maximum. But for 9th unit of labour
MPP becomes negative so TPP also starts decreasing.
In the same way upto 4 units of labour MPP is greater than APP, so APP is increasing. At 5th units of
labour MP = APP so APP is maximum and constant. At 6th units of labour MPP is less than APP, So
APP is decreasing.

Relationship among TPP, APP and MPP (through diagram)

To understand the relationship among TPP, APP and MPP, let us considers the following diagram.

Total Product Y
B

TPP
A
Average and marginal
product

0 X

No. of units of variable factor

C
R
APP
D

0 No. of units of X

variable factor
MPP

–Y

In the above figure TPP increases from point O to pint B. There are two phases of this increase in TPP.
First, from O to A in which TPP increases at on increasing rate. In this phase in the lower portion of the
diagram MPP increases upto point C. So we can conclude that when MPP increases TPP increases at an
increasing rate. Second phase of increase in TPP is from A to B in which TPP increases at a diminishing
rate. In the lower portion of the diagram, MPP decreases from point C to point D but it remain positive.
So we can conclude that when MPP falls but remains positive, TPP increases at a diminishing rate. At
point B on TPP curve, TPP is maximum. In the lower portion of the diagram MPP is zero at point D. So
we conclude that where MPP is zero, TPP is maximum. After point B, TPP falls. After point D MPP
becomes negative and TPP falls.

In the lower portion of the above figure, APP and MPP curves have been drawn. Before point R on APP
curve, MPP is greater than APP, so APP increases. At point R MPP is equal to APP. At this point. APP is
constant and maximum. After point R on APP curve, MPP curve is below APP curve, so we can say that
when MPP is less than APP, APP falls.

LAW OF VARIABLE PROPORTIONS

The law of variable proportions is a short period production law. It is also called returns to a factor. Let us
first understand the meaning of variable proportions. In a production process when only one factor is
varied and all other factors remain constant, as more and more units of variable factor are employed, the
proportion between fixed and variable factors goes on changing. So it is termed as the law of variable
proportions.

This law states that if you go on using more and more units of variable factor (labour) with fixed factor
(capital), the total output initially increases at an increasing rate but beyond a certain point, it increases
at a diminishing rate and finally it falls.

This law was initially called the law of dimishiing returns Marshall who applied the law only in
agriculture sector but modern economist called it the law of variable proportion and proposed its
applicability to all the sectors of the economy.

Assumption of the law

The law operates under the following assumptions:

(i) The firm operates in the short run.

(ii) There is no change in technology of production.

(iii) The production process allows the different factor ratios to produce different levels out output.

(iv) All the units of variable factor are equally efficient.

(v) Full substitutability of factors of production is not possible.

According to the law when we employ more and more units of a variable factor with the fixed quantity of
other factors and technology, the marginal product of the variable factor first increases and then
decreases. In other words, with employment of more and more units of a variable factor with fixed
quantity of other factors, the total product first increases and then starts decreasing. It means that in short
run labour is the only variable factor, Return to labour or marginal product of labour initially increases
but as more units of labour are employed its MPP declines and may also become negative. There are three
phases of returns to a variable factor which are discussed below.

(a) Phase I: Increasing Returns to a factor

In this phase TPP increases at an increasing rate and marginal product of variable factor, labour
increases. In the end of this phase MPP is maximum. So, this is the phase of increasing returns to
a factor.
(b) Phase II: Constant Diminishing Returns to a factor

In this phase TPP increases but at a diminishing rate MPP declines but remains positive. At the
end of this phase MPP is zero. At this point TPP is maximums. So, this is the phase of
diminishing returns to a factor.

(c) Phase III: Negative Returns to a factor

In this phase, MPP declines and it becomes negative. Here the TPP also starts falling. It operates
from the level of output where MPP of labour is zero but subsequently becomes negative. The
table given below illustrates the three phases of the law of variable proportions.

Table. law of variable propotion

Units of Units of TPP MPP Phases

land labour (units) (units)
(Fixed (variable
input) input)
1 1 3 3  TPP increase at an increasing rate

1 2 7 4   MPP is increasing (Phase I)
1 3 12 5 
1 4 16 4  TPP increases at a diminishing rate
1 5 19 3  and MPP falls but remains
1 6 21 2   positive (Phase II)

1 7 22 1 
1 8 22 
0 
1 9 21 –1  TPP falls and MPP becomes
–2 
1 10 20  negative (Phase III)
This law can also be explained with the help of figure given below.

B
TPP and MPP

TPP
A
Phase I Phase II Phase III

O Units of labour X
(variable input) MPP
 Y

The figure given above shows that TPP increases from 0 to B but there are two parts of this increase. First
is from 0 to A in which TPP increases at an increasing rate. This is in the I phase of the law. In this phase
MPP increases from 0 to C.

In the second part from A to B TPP increases at a diminishing rate. This is in the II phase of the law. In
this phase MPP decreases from point C to point D. At point D MPP is zero. TPP is maximum at point B.
After point B TPP starts falling. This is in III phase of the law. In this phase MPP becomes negative after
point D.

Managerial function

Management is a decision-making process which coordinates the factors of production to produce desired
output. The functions of management include planning, organizing, directing and controlling. These are
explained in detail below.

Planning

Planning is the establishment of organizational goals and a strategy for accomplishment. Plans that are
made may be concerned about short, medium or long run goals of the organization. Setting up a goal as
well as devising workable strategy for its attainment are important attributes of good management.

Organizing

Organizing is an operational function which depends heavily on the coordinated efforts of an entire
organization. Management directs the operations to achieve desired goal through motivation.
Management seeks to obtain a high level of production from employees through motivation and proper
guidance by maintaining a high level cooperation.

Controlling

The control function deals with the supervision of the achievement of goals and compares actual results
with those envisaged in the plans and the actual performances in past periods. The results are directly
estimated and related to the plans and performance standards established by other managerial functions.

Decision making
Decision making is the most important responsibility of a manager. These decisions form the life-wire of
the farm business. A successful manager is one who has the skill to choose between alternatives fast. In
doing so he uses the problem solving approach.

FARM MANAGEMENT DECISIONS

Farmers must be able to take appropriate decisions at appropriate time. Incorrect judgments and decisions
would result in the failure of execution of farm plan and in turn economic loss. The farm management
decisions can be broadly categorized into two ways.

i) The first method of classifications is according to the following criteria: a) Importance, b)

Frequency, c) Imminence, d) Revocability and e) Alternatives available. Each of the above
criteria is discussed briefly below.

ii) The second method classifies farm management decisions into: i) what to produce? ii) when to
produce? iii) how much to produce? and iv) how to produce? Discussed in the first page

a) Importance:

Farm management decisions vary as to the degree of importance measured generally through the
magnitude of profit or loss involved. For example, a decision to engage in poultry is relatively
more important than a decision regarding the type and location of poultry shed.

b) Frequency:

Many decisions assume importance on the farm because of their high frequency and repetitive
nature. The decision about what and how much to feed to the dairy animals is made more
frequently than that regarding the method or time of harvesting of paddy.

c) Imminence:

It refers to the penalty or cost of waiting with respect to different decisions on the farm.
Experience shows that while it pays to act quite promptly in some cases, postponement is
necessary in other cases till the required complete information becomes available. For example,
the decision to harvest paddy is much more imminent than a decision about buying a tractor.

d) Revocability:

Some decisions can be altered at a much lower cost as compared to others. For example, it is
relatively easier to replace paddy with groundnut, which perhaps becomes more profitable, than
to convert a mango orchard into a sugarcane plantation.

e) Alternatives available:
 The number of alternatives can also be used for classifying farm management decisions. The
decisions become more complicated as the number of alternatives increase. For example,
threshing of paddy can be done manually or with thresher.

Factors Influencing Farm Management Decisions:

Farm management decisions continuously undergo change overtime because of the changing
environment around the farm, farmer and his family. The factors which influence the decision
making process are:

a) Economic factors like prices of factors and products.

b) Biological characteristics of plants and animals.

c) Technological factors like technological advancements in the field of agriculture and

suitability of different varieties and farm practices to varied agro - climatic conditions.

d) Institutional factors like availability of infrastructural facilities which include storage,

processing, grading, transport, marketing of inputs and outputs, etc, government policies
on farm practices, input subsides, taxes, export and import, marketing, procurement of

produces

e) Personal factors like customs, attitude, awareness, personal capabilities

The Process of Decision Making

There are seven essential steps that must be followed when making decision in Farm Management:

ii. Identify the Problem:

A problem is identified as soon as the farm manager discovered some deviations from the past
experience. Once the farm manager noticed any strange happenings or unusual occurrence, then a
problem is already identified.

ii. Define the Problem:

Definition of problem involved locating the root course of the problem identified. This requires

establishing what is responsible for the problem identified

iii. Suggest Solutions:

After establishing the course of the problem, you can now suggest some possible solutions to it.

iv. Analyse the Suggested Solutions:

Analysis of the suggested solutions involves getting the implications of each possible solution.

This involve getting the cost of each solution, the resources required (both human and material
 resources) and workability of the solutions.

v. Select the Best Solution:

From the point of view of cost, human resources, material resources and workability of the

solutions, the farm manager can now choose the best alternative solution.

vi. Implement Decision:

The next step after choosing the best alternative solution is to put the chosen solution into action.

vii. Evaluation:

This is the last step in the process of decision making. It involves comparing the result or
performance of your farming business at the end of the decision to the time before thedecision
was taken.

A farm manager must not only understand different methods of agricultural production, but also he must
be concerned with their costs and returns.