Economic Principles Applied to Farm Management (The law of diminishing returns)

B.Sc.Ag. (Hons) Part-III     

Economic Principles Applied to Farm Management (The law of diminishing returns). https://cststudy.blogspot.com/

Economic Principles Applied to Farm Management

Farm management is the application of economic principles in organization and operation of farm business. There are some economic principles applied to farm management, which is discussed below:

1. The law of diminishing returns

2. Cost principle.

3. Principles of substitution

4. Principle of opportunity cost

1. The law of diminishing returns

The law explains the input-output relationship known as factor-product relationship. According to Benham, "As the rate of one factor in a combination of factors is increased, after a certain point, average and marginal product for that factor will diminish.

In other words, when various inputs are applied in a production process, if one input is added at an increasing rate, other inputs remaining constant, alter a situation at first marginal return (MR), then average return (AR) and finally total return (TR) will diminish, which is known in agricultural economics as the law of diminishing return.

For example, to illustrate the operation of diminishing return and making a decision of the optimum dose by the operator is given below: i) Price of urea per mound is Tk. 400 ii) Price of rice per mound is Tk. 800

Unit of fertilizer applied (urea), mounds	Yield/acre (mounds)	Increased unit or marginal unit added/acre (mounds)	Added cost (Tk)	Added return (Tk)
0	52	0	0	0
1	56	4	400	3200
2	58	2	400	1600
3	59	1	400	800
4	59.5	0.5	400	400
5	59	-0.5	400	-400

From this example, it is observed that the total yield is 52 mounds when no fertilizer is used. When one mound urea is added to the same land, yield becomes increased by four mounds. When two and three mounds urea are successfully added to the same land, yield becomes increased by two mounds and one mound respectively.

We see that the added return is in decreasing tendency, the total yield is increasing condition till four units of fertilizer dose. After this situation, if more urea is added to the land both the total return and added return decrease which is not economic. This is the point of diminishing return.

Rule: Variable resources should be added to the fixed resource as long as the added return is greater than the added cost.

Application: This principle is important in specifying, how large a farm we should operate or how much labour or how machineries we should add to our present unit,

To find out the most economic dose of any variable resource to be applied, this law is applicable. Diagrammatic representation:

Fig: Stages of the law of diminishing return 

If you can't understand something please comment below...