Agricultural economics

1. Economics of Farm Business
Topic: Principle of Combining Enterprises
& Principle of Comparative Advantage
Submitted to : Dr. R. Govindasamy
Assistant Professor
Department of Economics Presented by
S. Bhuvanesvari B.A,
II M.A Economics

2. PRINCIPLE OF COMBINING ENTERPRISES
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.
Y1 = f (Y2) or Y1 = f (Y 2. Y3 ....Yn)
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).

3. Joint and complementary production

4. 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.

5. 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, tea and coffee.
Determination of optimum production combination:
Optimum combination of two products can he obtained
by following allegoric and graphic method

6. 1) Algebraic Method; Algebrical1y, the combination can be
determined by calculating MRPS and Price ratio.
MRPS : It is marginal rate of product substitution
Units of replaced products
= -------------------------------------
Units of added products
Therefore, optimum combination of two Products for a given level of
input can he obtained by equating MRPS with inverse price ratio.
i.e. MRPS = Price ratio = Py1/Py2
2) Graphic Method: For obtaining optimum combination of two
competitive products, we have to depict two curves by taking added
quantities (y1) on horizontal axis and replaced quantities (y2) on
vertical axis

7. 3) Production Possibility curve: It is a locus of all
possible combinations of two products which can be
obtained from a given amount of input. Production
possibility curve are sometimes called as Iso-resource
curve or opportunity curve.
4) Iso-revenue Curve: It is the line which indicates the
different combinations of two products which gives the
same amount of revenue or income.
Principle of combining enterprises the combination two
products are produced in the same production process
which gives the same amount of revenue or income

8. Principle of Comparative Advantage
David Ricardo developed the classical theory of
comparative advantage in 1817 when one country's
workers are more efficient at producing every single
good than workers in other countries.
I. Resources productivity
II.Cost of production of enterprises
In the production of farm commodities there are two kinds of
economic advantages
Absolute advantage
Comparative advantage

9. Absolute advantage: net return per hectare (Gross
income)
Ex: Total return – cost of production
Comparative advantage: (Cost of production)
Refers to relative advantage of growing different crop
in a region.

10. Absolute Advantage
Particulars Region A Region B
Groundnut Sunflower Groundnut Sunflower
Gross income (Rs./ acre) 5,000 5,010 7,300 2,500
Total costs (Rs./ acre) 4,700 4,320 6,500 2,450
Net income (Rs./ acre) 300 690 800 50
Returns per rupee of investment 1.06 1.16 1.12 1.02
Suppose farmers in region A and region B are producing two
farm commodities groundnut and sunflower.
Region A has an absolute advantage in Sunflower
the size of the margin between the costs and returns is
greater then that for region B.
Region B has an absolute advantage in groundnut production
for the same reason.

11. It shows that the two crops growing at two
different region

12. Comparative Advantage
Particulars Region E Region F
Red gram Groundnut Red gram Groundnut
Gross income (Rs./ acre) 5,600 7,300 2,300 3,300
Total costs (Rs./ acre) 5,200 6,500 2,000 3,100
Net income (Rs./ acre) 400 800 300 250
Returns per rupee of investment 1.08 1.12 1.15 1.06
The Region ‘E’ has a greater absolute advantage in growing both
redgram and groundnut then region ‘F’ because, the net income per acre
are Rs. 400 and Rs. 800 respectively. In other words respective income
are 108 per cent and 112 per cent higher than the costs.
Farmers in region ‘E’ can earn profits by growing both the crops. But
in order to earn maximum profits, farmers in region ‘E’ should allocate
large acre (costs& gain more net income) and under groundnut alone
as it is related to comparative advantage.

13. Similarly farmers in region ‘F’ can make profits by
growing both the crops but they have relative
advantage in growing redgram. The farmers can
make greatest profits by cultivating redgram as, the
percentage of returns over the cost of cultivation
being 115 per cent for redgram and 106 percent for
groundnut.
If cultivator earns the greatest possible returns he
should produced those crop in which an their relative
advantage greater.

14. Conclusion:
The specialized or diversified farming depends largely on
this principle. This principle used in farming business its
helps to farmers to produced more commodities (different
agriculture commodities) with short time period and gain
more profit.