Nair a per unit of outp ut
The quantity of output to be produced is determined at the point where MC or TC = PY as shown in Figure 5.9
Y
Self-Assessment Exercise 2
State the law of diminishing returns in terms of (a) total physical product (b) marginal physical product (c) average physical product.
Naira per unit of input
X1
Quantity of variable input x
MVP = Value of marginal Product
MC = Marginal factor cost of Variable input
PY = Price per
Quantity of Output Y
Figure 5.8: Determination of quantity of variable input to use Q
Quantity of Variable Input X
Figure 5.9 Determination of quantity of output to produce
A particular farmer owns three farms each with its different enterprises or enterprise combinations. Judging from the average returns only, one would think that Farm 3 yields a greater return that is, 20% on N10,000 and 17.5%
on N12,000. Farm 1 yields a higher marginal return of 30% than either Farm 2 or 3. The farmer could be tempted to invest the extra N2,000 on Farm 3 based on the average returns only but considering the marginal returns, it should be invested on Farm 1. Therefore average figures taken in isolation can obviously be misleading.
When farmers have adequate capital, input can be employed up to the level where marginal revenue equals marginal cost. If capital is limited then the concept of equimarginal returns is relevant. The principle of Equimarginal Returns states that at least N1 spent on an enterprise or factor production will yield a marginal return exactly equal to the last N1 spent on all other enterprises or factors of production. This means that if N1 is spent buying fertilizers, then the additional feed should be purchased up to that point where the last N1 spent on deed will return exactly the same as the last N1 spent.
Self-Assessment Exercise 3
Show that taking average figures in isolation can be misleading Types of Enterprises
Within a farm business there are interrelationships between enterprises.
There are basically three classifications, namely: complementary, supplementary and competitive enterprises.
Supplementary enterprises are those which do not compete with other enterprises but may use up superfluous resources available in the farm e.g.
pigs and poultry using spare labour and buildings. Competitive enterprise are those that compete with each other e.g. sheep and dairy cows competing for grass; dairy cows and poultry competing for available building space.
Complementary enterprises are those that aid or contribute towards the success of each other e.g. pigs being fed cassava or yam peelings: groundnut haulms being fed to cattle.
4.0 Conclusion
This unit highlights basic principles of economics that aid in making decisions regarding the farm business. Your understanding of the elements of decision-making is enhanced by grasping these basic principles and their applications. The marginal cost and marginal utility curves referred to in Unit 2 are explained further in this unit. They help us determine the points of equilibrium where the specifications for choice or making decisions are met.
5.0 Summary
In this unit you must have learnt that the focal point in the study of farm management is the individual farming unit. Each individual farm firm behaves as an entity. It takes its own decisions regarding its resources and output with the sole aim of maximizing its own utility function in time and space. Each individual unit is assumed to be rational, choosing more of what
Commodity
it derive a greater level of satisfaction. The individual decision unit in attempting to maximize its utility is bound to make choices among relevant alternatives. In order to gain something the decision unit will have to give up something. This is the concept of opportunity cost.
In determining what quantity of a given commodity to consume the individual unit must equate the additional benefit. The law of supply and demand operates along the same line in which the quantity of the commodity to purchase is determined at the point of equilibrium between the demand and the supply curves.
The law of Diminishing Returns teaches that you cannot continue indefinitely to add a variable input to a set of fixed inputs and expect to obtain higher yields. The knowledge of the bahaviour of the total physical product, average physical product and marginal physical product in the three stages of production helps you to appreciate the relationship between the inputs and output. The cost curves are elated to the physical product curves as shown in the figures. This leads you to know that quantity of output to produce is determined by the point where marginal cost equals the price of output.
Finally, it makes for better decision-making when a manager is able to distinguish between average and marginal returns to capital. The principle of equimarginal returns teaches us that at least One Naira spent on an enterprise or factor of production will yield a marginal return exactly equal to the last One Naira spent on all other enterprises or factor of production.
You must have also learnt that there are complementary, supplementary and competitive relationships between enterprises on the farm.
Self-Assessment Exercise 1
a.
D1 D2 S
When the demand curve
P2 shifts from D1D1, to
D2D2 with supply curve D2 remaining constant, the
price of the commodity
P1 will rise from P1 to P2
and the quantity
S D1 demanded will increase
from OQ1 to OQ2. 0
Q1 Q2
Quantity of commodity
D S1
S2 When the supply curve
P1 right (i.e.. increases)
With demand curve
S1 Remaining constant, the
Price of the commodity
P2 Drops from P1 to P2 but
D Quantity supplied Increases from
S2 OQ1 to OQ2
Q1 Q2
b.
Self-Assessment Exercise 2
a. The law of Diminishing Returns states that as successive equal units of a variable input is added to a set of fixed inputs the total physical product (TPP) increases first at an increasing rate, reaches an inflection point when it is increases at a decreasing rate, reaches a maximum and then continues to decrease.
b. The law of Diminishing Returns states that as successive equal units of a variable input is added to a set of fixed inputs, the average physical product 9APP) first increases, reaches a peak when it equals the MPP then decreases.
c. The law of Diminishing Returns states that as successive equal units of a variable input is added to a set of fixed inputs, the marginal physical product (MPP) first increases, reaches a peak at the inflection point of
TPP and begins to decrease to zero at the point when TPP is maximum and then becomes negative.
Self-Assessment Exercise 3
Farm 1 Farm 2 Farm 3
Capital investment 10,000 10,000 10,000
Return on 10,000 2,000 1,000 1,500
Average return 20% 10% 15%
Increase in Capital 4,000 4,000 4,000 Return on extra N4,000 500 1,000 800 Marginal return on extra
N4,000 12.5% 25% 20%
From the information for Farms 1, 2 and 3, one would choose enterprise Farm 1 because it has higher average returns of 20%. But on the margin (when an additional N4,000 is injected in to the business) the marginal return of 25% for Farm 2 is higher. The choice would therefore be Farm 2.