Economic of agricultural production

1. ECONOMICS OF
AGRICULTURAL
PRODUCTION
(AGR553)
CHAPTER 2:
AGRICULTURAL PRODUCTION WITH ONE VARIABLE

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. 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. 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. Figure 7-1
Example of the production process in agriculture
Economics of Agricultural Production (AGR553)

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. Average Physical Product
Average physical product (APP) is the
average amount of output produced
per unit of input used.
APP = TPP
input level

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. Table 7-1
Production Function in Tabular
Form

10. Figure 7-2
Graphical illustration of a
production function
Economics of Agricultural Production (AGR553)

11. Table 7-1
Production Function in Tabular
Form
Note that TPP is the portion of yield attributed to
nitrogen use.

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. 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. 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. 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. 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. 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. 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. 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.

21. 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.

22. 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.

23. 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.

24. Figure 7-1
Graphical illustration of a
production function
(Ep > 1) (Ep < 1) (Ep < 0)
% change in output
Ep = --------------------------
% change in input

25. 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.

26. Elasticities of Production for a
Neoclassical Production Function