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# CHAPTER 2 AGR553.pptx

Economic of agricultural production

Economic of agricultural production

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### CHAPTER 2 AGR553.pptx

1. 1. ECONOMICS OF AGRICULTURAL PRODUCTION (AGR553) CHAPTER 2: AGRICULTURAL PRODUCTION WITH ONE VARIABLE
2. 2. Chapter Outline ⚫General theory of agricultural production ⚫Types and characteristics of agricultural production function ⚫The Law of Diminishing Returns ⚫A Neoclassical Production Function ⚫Regions and elasticity of production (AGR553)
3. 3. Marginalism The term marginal refers to incremental changes, either increases or decreases, that occur at the edge or at the “margin.” It may help to mentally substitute “extra” or “additional” whenever the word marginally is used. But keep in mind that the “extra” can be negative.
4. 4. The Production Function The production function is a systematic way of showing the relation between different amounts of a resource or input that can be used to produce a product and the corresponding output.
5. 5. Figure 7-1 Example of the production process in agriculture Economics of Agricultural Production (AGR553)
6. 6. Total Physical Product Total physical product (TPP) is the amount of production expected from using each input level. Output or yield is often called total physical product.
7. 7. Average Physical Product Average physical product (APP) is the average amount of output produced per unit of input used. APP = TPP input level
8. 8. Marginal Physical Product Marginal physical product (MPP) is the additional TPP produced by using an additional unit of input. MPP = ΔTP P Δ input level
9. 9. Table 7-1 Production Function in Tabular Form
10. 10. Figure 7-2 Graphical illustration of a production function Economics of Agricultural Production (AGR553)
11. 11. Table 7-1 Production Function in Tabular Form Note that TPP is the portion of yield attributed to nitrogen use.
12. 12. Fixed Versus Variable Inputs and the Length of Run • Variable input - an input that the farm manager can control or for which he or she can alter the level of use. eg : Application of nitrogen in crop production • Fixed input - an input which for some reason the farmer has no control over the amount available. eg : The amount of land a farmer has
13. 13. Law of Diminishing Marginal Returns As additional units of a variable input are used in combination with one or more fixed inputs, marginal physical product will eventually begin to decline. Diminishing returns may start with the first unit of input used, or may start later after a period of increasing returns.
14. 14. Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Increasing Marginal Returns
15. 15. Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Diminishing Marginal Returns
16. 16. Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Negative Marginal Returns
17. 17. Stages of Production ⚫Stage I: APP increasing, MPP>APP, TPP increasing. ⚫Stage II: APP decreasing, MPP<APP, TPP increasing. ⚫Stage III: TPP decreasing, MPP<0.
18. 18. How Much Input to Use ⚫Do not produce in Stage III, because more output can be produced with less input. ⚫Do not normally produce in Stage I because the average productivity of the inputs continues to rise in this stage. ⚫Stage II is the “rational stage” of production.
19. 19. Three production function A - Each incremental unit of input use produces the exact same incremental output. B - as the use of input x is increased, x becomes more productive, producing more and more additional y. C - Here each incremental unit of x produces less and less additional y. Thus each unit of x becomes less and less productive.
20. 20. A NEOCLASSICAL PRODUCTION FUNCTION ⮚As the use of input X1 increase, the productivity of the input at first also increases. ⮚Inflection point – function changes from increasing at an increasing rate to increasing at a decreasing rate - marks the end of increasing marginal returns and the start of diminishing marginal returns. ⮚ Finally the function reaches a max and begins to turn downward ⮚ Beyond the max, increases in the use of the variable input X1 result in a decrease in total output (TPP). ⮚ Eg: Farmer applied so much fertilizer that it was actually detrimental to crop yields.
21. 21. Relationships that exist between the APP and the MPP function for the neoclassical production function. 1. The MPP function first increases as the use of the input is increased until the inflection point of the underlying production function is reached (point A). 2. Here the MPP function reaches its maximum. 3. After this point, MPP declines, reaches zero when output is maximum (point C), and then turns negative. 4. The APP function increases past the inflection point of the underlying production function until it reaches the MPP function (point B). 5. After point B, APP declines, but never becomes negative.
22. 22. REGIONS AND ELASTICITY OF PRODUCTION ELASTICITY OF PRODUCTION Percentage change in output divided by the percentage change in input, as the level of input use is changed.
23. 23. Figure 7-1 Graphical illustration of a production function (Ep > 1) (Ep < 1) (Ep < 0) % change in output Ep = -------------------------- % change in input
24. 24. ELASTICITY OF PRODUCTION ❑ Measure how responsive the production function is to changes in the use of the input. ❑ For examples: - Ep > 1 : the output responds strongly to increases in the use of the input. - 0 <Ep < 1 : output will increase as a result of the use of x, but the smaller the elasticity, the less the response in terms of increased output. - Ep <0 : as the level of input use increases, output will actually decline, not increase.
25. 25. Elasticities of Production for a Neoclassical Production Function