This article throws light upon the top six principles of farm management. The principles are: 1. The Law of Diminishing Marginal Returns 2. Law of Equimarginal Returns 3. Law of Substitution or Principle of Least Cost Combination 4. Principle of Combining Enterprise 5. The Law of Opportunity Cost 6. Law of Comparative Advantage.
Farm Management: Principle # 1.
The Law of Diminishing Marginal Returns:
This law states that “An increase in the capital and labour applied to the cultivation of land causes in general a loss than the proportionate increase in the amount of produce raised unless it happens to coincide with an improvement in the art of agriculture.”
There are three stages of the law of diminishing returns. They are 1) stage II and 3) stage III. The positions of the parameters i.e. TP (Total Product), AP (Average Product) MP (Marginal Product) and EP (Elasticity stages of production (see production function curve) are as under.
Stage -I (Irrational zone):
1. This stage starts from origin and ends where AF & MF curves intersect each other.
2. The TP is increasing at increasing rate at first then at decreasing rate.
3. PP and MP both increase but MP is greater than IP.
4. The EP is greater than 1 (one)
Stage – II (Rational zone):
1. It starts where PP & MP intersect each other and EP = 1. It ends when MP = 0
2. TP increases but at decreasing rate.
3. MP starts to decline continuously and AP also starts to decline but it is greater than MP
4. The elasticity of production (EP) is greater than zero but less than 1.
1. This stage starts when MP is zero and TP is at maximum.
2. TP starts to decline and it declines continuously.
3. MP becomes negative, remains positive.
4. EP is always less than zero.
Farm Management: Principle # 2.
Law of Equimarginal Returns:
The law of Equimarginal returns is concerned with the allocation of the limited amount of resource among different enterprises. The law states that “profits are maximized by using a resource in such a way that the marginal returns from that resource are equal in all cases.”
Farm Management: Principle # 3.
Law of Substitution or Principle of Least Cost Combination:
The objective of profit maximization can be achieved by two ways, one by increasing output and other by minimizing the cost. The minimization of cost can be possible by deciding the use of more than one resource in substitution of other resources.
The objective of factor-factor relationship is twofold:
1. Minimization of cost at a given level of Output.
2. Optimization of output to the fixed factors through alternative resource use combinations.
y = f (x1, x2, x3, x4………… xn)
Y is the function of x1 and x2 while other inputs are kept at constant. The relationship can be better explained by the principle of least cost combination.
(4) Principle of Least Cost Combination:
A given level of output can be produced using many different combinations of two variable inputs. In choosing between the two completing resources, the saving m the resource replaced must be greater than the cost of resource added.
The principle of least cost combination states that if two factor inputs are considered for a given output the least cost combination will be such where their inverse price ratio is equal to their marginal rate of substitution.
1. Marginal Rate of Substitution:
MRS is defined as the units of one input factor that can be substituted for a single unit of the other input factor. So MRS of x2 for one unit of x1 is
2. Price Ratio:
Therefore the least cost combination of two inputs can be obtained by equating MRS with inverse price ratio.
i.e. X2 * Px2 = x1 * Px1,
This combination can be obtained by following algebraic method or Graphic method:
A. Isoquant/Iso Product Curve:
Iso = equal and quant = quantity.
An Isoquant represents the different combinations of two variable inputs used in the production of a given amount of output.
a) Properties of Isoquant:
1. They slope down ward to the right: If more of one is used less of another input will be employed at the given level of output.
2. They are convex to the origin.
3. Isoquant does not intersect: It is not possible to have different outputs from a single combination of inputs.
4. Slope of Isoquant represents the MRS.
1. Convex Isoquant (decreasing rate) Good substitution
2. Straight line Isoquant → Perfect substitute
3. Right angel No substitution complement
An Iso-cost line indicates all possible combinations of two inputs which can be purchased with a given amount of investment fund (outlay).
Each combination of inputs has same total cost which includes the cost of two inputs. (XI and X2) combined.
Total cost = PX1* X1+ PX2 * x2,
Properties of Iso-cost Line:
1. As total outlay increases, the Iso- cost line moves higher and higher away from the origin and vis- a-visa.
2. The Iso- cost lines are straight.
3. Slope of Iso-cost line represents price ratio i.e. Px1 / Px2 when x1 is taken on X axis and x2 on y axis.
It is a line passes through the points of equal slope or MRS on an Isoquant surface. With the input price ratio being constant for each Isoquant the MRS between the inputs is the same for each level of output.
D. Ridge Line:
These are also called as border line. Ridge lines join the end points of Isoquants. The area within the ridge lines is rational region of production arid beyond that the two regions are irrational. Therefore these lines represent the limits of economic relevance.
E. Expansion Path:
All the least cost combination points are joined to each other; the result is an expansion line. As such, MRS = PR.
F. Ridge (Border) Line:
Line joining the end points of Isoquant.
Farm Management: Principle # 4.
Principle of Combining Enterprise:
This principle is very important as it describes the product – product relationship. Here, instead of considering the allocation of inputs among enterprises, we discuses enterprise combination or product mix involving product relationship. Algebraically the relationship can be written as under:
There can be various relationships that can exist between enterprises or products:
1. Joint Product:
Two or more than two products are produced in the same production process Eg. Paddy and straw (Agricultural products).
2. Complementary Productions:
In this case relationship is directly proportionate. With the increase in one product there is also increase in other product. E.g. the cultivation of leguminous crop followed by cereals gives this relationship.
3. Supplementary Productions:
In this case, increase in one product does not effect for each other or they are independent and if relationship is there it is supplementary Eg. Crop production and dairy enterprise.
4. Competitive Relationships:
Here two products are said to be competitive when increase one needed to be reduction in other product e.g. Two cereal crops
Determination of Optimum Production Combination by Graphic Method:
A. Iso-revenue Curve:
It is the line which indicates the different combinations of two products which gives the same amount of revenue or income.
Properties of Iso-revenue line:
It is always straight line because the output prices do not change with the quantity sold.
The position of Iso revenue line shows the magnitude of the total revenue. As total revenue increases, the line moves away from the origin and vis-a-visa.
The slope of Iso-revenue curve represents the price ratio of two competing products.
Farm Management: Principle # 5.
The Law of Opportunity Cost:
1. The opportunity cost is also called as alternative cost.
2. Opportunity Cost is the earning from the next best alternative sacrificed.
Farm Management: Principle # 6.
Law of Comparative Advantage:
1. The concept of comparative advantage is associated with:
A. Resource productivity and
B. Cost of production of enterprise.