For undergraduate agricultural students of the course ‘Ag. Econ. 6.4 Farm Management, Production, and Resource Economics (2+1)’ of Junagadh Agricultural University, Gujarat and other State Agricultural Universities in India.

1. Lecture 01:
Introduction to
Production Economics
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2. What is Agricultural Economics?
•The application of principles and
methods of economics to study the
problems of agriculture and to get
maximum output and profits from farming
by the use of scarce resources for the well
being of the society in general & farming
industry in particular.
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3. Goal of agricultural economics
3
Increase efficiency in agriculture
To produce the needed food, fodder, fuel and fibre
without wasting resources.
(i) required output must be produced with the smallest
amount of scarce resources
(ii) maximum possible output must be obtained from a given
amount of resources.
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4. Macroeconomics Vs.
Microeconomics
• Macroeconomics is the branch of economics that
looks at economy in a broad sense and deals with
factors affecting the national, regional, or global
economy as a whole.
• Microeconomics looks at the economy on a smaller
scale and deals with specific entities like
businesses, households and individuals.
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5. Key concepts
• Economics: Study of scarcity, the study of how people use
resources and respond to incentives, or the study of decision-
making.
• Production: The process through which some goods and
services (i.e. inputs) are transformed into other goods called
products or output.
• Production function: A systematic and mathematical
expression of the relationship among various quantities of
inputs or input services used in the production of a commodity
and the corresponding quantities of output is called a
production function.
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6. Production Economics
• Production economics is the application of the
principles of microeconomics in production.
• The principles explain various cost concepts, output
response to inputs and the use of inputs/resources to
maximize profits and/ or minimize costs.
• Definition: PE may be defined as an applied field
of science wherein principles of economic choice
are applied to the use of resources of land, labour,
capital and management in the farming industry.
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7. In short,
• Production Economics: It is defined as an applied
field of science wherein the principles of economic
choices are applied to the use of resources or factors
of production so as to maximize profits or minimize
costs.
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8. Subject Matter of Agricultural
Production Economics
• Analysis of production relationships and
principles of rational decision making to
optimize the use of farm resources on individual
farms as well as to rationalize the use of farm
inputs from the point of view of the entire
economy.
• Any problem of farmers that falls under the
scope of resource allocation and marginal
productivity analysis is the subject matter of
agricultural production economics.
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9. Efficient utilization of resources
or
Optimal utilization of resources
Lifeline of Production Economics
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10. Subject matter
• Resource allocation and marginal
productivity analysis.
Marginal Product = additional change in total product /
additional change in input
Total Product = output (product) obtained / input used
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Marginal Cost = additional change in total cost /
additional change in output

11. Marginal Product
NPK (X) Groundnut yield (Y) / ha Marginal Product
0 100
50 250
75 350
100 440
150 500
200 550
250 570
300 570
350 500
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12. 12
Productivity of farm inputs:
1. resource allocation,
2. resource combinations,
3. resource use efficiency,
4. resource management and
5. resource administration.
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13. Why study production economics?
1. What is efficient production?
2. How is most profitable amount of inputs
determined?
3. How the production will respond to a change in
the price of output?
4. What enterprise combinations will maximize
profits?
5. What should a farmer do when he is uncertain
about yield response?
6. How will technical change affect output?
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14. Goals of Production Economics
1. Assist farmers in determining the best use of resources.
2. Assist policy makers in determining the consequences of
alternative public policies on output, profits and
resource use on farms.
3. Evaluate the uses of theory of firm for improving farm
management and understanding the behaviour of the
farm as a profit maximizing entity.
4. Evaluate the effects of technical and institutional
changes on agricultural production and resource use.
5. Determine individual farm and aggregated regional farm
adjustments in output supply and resource use to
changes in economic variables in the economy.
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15. Resources Vs. Resource Services
• Resources: Anything that aids in production is
called a resource. The resources physically enter the
production process.
• Resource services: The work done by a person,
machine or livestock is called a resource service.
Such resources services do not enter the production
process physically.
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16. Types of resources
• Free resources
• Economic resources
• Fixed resources
• Variable resources
• Stock resources
• Flow resources
• Mono-period resources
• Poly-period resources
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17. • Free resources: A helpful resource in a production process
that has no price is called a free resource. Such resources are
not scarce and are free gift of nature. Their supply is more
than the demand and one can get to the extent they need. No
efforts are needed to be put forth by humans to secure free
goods. They have value in use but no value in exchange. e.g.
sunshine, rainfall, air, etc.
• Economic resources: These are produced through human
efforts and are to purchase at a given price. Supply is less
than demand. They have value in use and value in exchange.
E.g. Seeds, fertilizers, building, tractor.
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18. • Fixed resources: The resources that remain unchanged
irrespective of the level of production are called fixed
resources. For example, land, building and machinery. These
resources exist only in short run. The costs associated with
these resources are called fixed costs.
• Variable resources: The resources that vary with the level
of production are called variable resources. These resources
exist both in short run and long run. For example, seeds,
fertilizers, chemicals, etc. The costs associated with these
resources are called variable costs.
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19. • Flow resources: The resources that cannot be stored and
should be used as and when these are available. For example,
services of a labourer on a particular day.
• Stock resources: The resources that can be stored for use later
on. For example: seeds.
• Both stock and flow: Defining an input as a flow or stock
depends on the length of time under consideration. For
example, tractor with 10 years life is a stock resources if we
take the services of tractor for its entire useful life of 10 years.
But it also provides its service every day, therefore it is a flow
resources.
• Mono-period resources: Those goods which are used only
once to satisfy a need are called mono period goods. E.g. Seed.
• Poly-period resources: Those goods which are used time and
again. E.g. machinery, implements, buildings etc.
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20. Efficiency and its types
• Technical efficiency: It is the ratio of the physical output to
inputs used. It implies the using of resources as effectively as
possible without any wastages.
• Economic efficiency: It is the expression of technical
efficiency in monetary terms through the prices. In other
words, the ratio of value of output to value of inputs is
termed as economic efficiency.
• Allocative efficiency: Reorganization of resources to attain
ideal resource combination for optimal resource use at
minimum cost which can maximize profit.
• Social Efficiency: It is a measure of social welfare whereby
the private and social (external) cost of production is equal to
the private and social (external) cost of consumption.
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21. Cost of cultivation vs. production
• Cost of cultivation: The expenditure incurred on all inputs and
input services in raising a crop on a unit area is called cost of
cultivation. It is expressed as rupees per hectare or rupees per
acre.
• Cost of production: The expenditure incurred in producing a
unit quantity of output is known as cost of production, for
example, Rs./kg of Rs./quintal.
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23. CONCEPT OF PRODUCTION
Production is defined as the process of
converting the input (raw material) into
output. Production may be an activity that
generate income.
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24. In a nutshell,
• Production: The process of converting inputs into
output is called as production.
• Production economics: Application of principles of
economic choice to the use of resources such as
land, labour, capital and management for
maximizing returns or minimizing costs.
• Production function: The mathematical expression
of the functional relationship between input and
output.
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25. Production Function
• Y = f {X1, X2, X3, X4, ………., Xn)
whereas,
Y = cotton yield
X1 = seed
X2 = fertilizer
X3 = land
X4 = farm building
X5 = machinery …………….. Xn
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26. Types of Production Function
On the basis of time-period:
• Short run production function
• Long run production function
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27. Short run production function
Y = f {X1, X2 | X3, X4, ………., Xn)
(Seed, fertilizer, land, farm building, machinery)
“Relationship between one or two variable factors
and output, keeping other factors constant”.
“Change in output when only one or two factors is
/ are changed, ceteris paribus”.
• Also called as law of variable proportions.
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28. Long run production function
Y = f {X1, X2 , X3, X4, ………., Xn)
(Seed, fertilizer, land, farm building, machinery)
“Change in output when all the factors or inputs
are changed.
• Also called as returns to scale.
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29. Continuous and Discontinuous PFs:
• Continuous PF:
It deals with those inputs which can be divided
into smaller units. Eg: seed, fertilizer
• Discontinuous PF:
Deals with those inputs which cannot be
divided into smaller units and can be
represented only in whole numbers.
Eg: number of harvestings, no. of ploughings.
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30. TPP, APP and MPP
• Total Product (Y): Sum of output produced by using
various units of an input.
• Average Product: Ratio of total product to total
input used. AP = Y / X
• Marginal Product: additional change in output
because of additional change in input.
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31. Elasticity of Production (EP)
• EP = % change in output
% change in input
• EP = % change in output = MP
% change in input AP
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35. Factors of production
• Factors of Production are parameters which affects
output of any production.
• Factors of production means ‘inputs’ and finished
goods means ‘output’.
• Input decides the quantity of output i.e. output
depends upon input.
• Input is the starting point and output is the end
point of production process.
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36. Factors of Production (FOP)
Production refers to creation of utilities.
FOPs: Land, labour, capital and
Entrepreneurship or Management.
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FOP Reward
Land Rent
Labour Wages
Capital Interest
Management Profit
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37. LAND
Land is that factor of production which is
available to us as a free gift of nature. It
not include not only the soil but also other
free gift of nature ( like forest, water,
natural resources etc.)
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39. CHARACTERISTICS OF LAND
• Free gift of nature.
• Limited in supply.
• Differ in variety.
• Immobile.
• Passive factor of
production.
• Alternative uses.
• Indestructible.
• Transferable.
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41. LABOUR
Labour is the human factor of production and include all the
physical and mental activities which are required in the process
of factor of production.
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42. CHARACTERISTICS OF
LABOUR• Natural factor.
• Active factor.
• Cannot be separated from labourer.
• Perishable.
• Labourers sell his labour not himself.
• Difference in efficiency.
• Mobile.
• Not transferable.
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43. Capital is the stock of produced means of production.
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CAPITAL
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45. • Man made
factor.
• Highly Mobile
and
transferable.
• Depreciates.
• Passive factor
of production.
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CHARACTERISTICS OF CAPITAL
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49. Entrepreneurship
 Brings all the factors of production together in a profitable way.
Functions of an
entrepreneur
 Identifies profitable
investment opportunities
 Decides location and size
of production unit.
 Identifies optimum
Combination of FOPs
 Decides reward payments.
 Takes risks
 Makes innovations.
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53. Reference books:
• Introduction to the Economics of Agricultural
Production – by P. L. Sankhayan
• Economics of Farm Production and Management –
by V. T. Raju and D. V. S. Rao
• Fundamentals of Farm Business Management – by
Johl, S.S. and Kapoor, T.R.
• Farm Management - Dhondyal, S.P.
• Agricultural Economics by Subba Reddy et al.
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