15 min read
Mathew Wahome
Topic 1: Production Economics
1. Meaning
Production economics is the study of how a farmer chooses and combines limited resources (land, labour, capital and management) to produce goods and services at a profit.
2. Factors of Production
| Factor | Meaning | Reward |
|---|---|---|
| Land | Soil, water, climate and natural resources | Rent |
| Labour | Human effort (family, hired) | Wages |
| Capital | Money, machines, buildings, livestock, tools | Interest |
| Management | Planning, organising and risk bearing | Profit |
3. Basic Concepts
- Scarcity: resources are limited while wants are unlimited.
- Choice: a farmer must decide what, how and how much to produce.
- Opportunity cost: the value of the next best alternative given up.
- Fixed costs: do not change with output (rent, depreciation, permanent labour, interest on loans).
- Variable costs: change with output (seeds, fertiliser, chemicals, casual labour).
- Total cost = fixed cost + variable cost.
4. Law of Diminishing Returns
When successive units of a variable input are added to a fixed input, the additional (marginal) output eventually decreases.
Example
| Fertiliser (bags) | Total product (bags of maize) | Marginal product |
|---|---|---|
| 1 | 10 | 10 |
| 2 | 18 | 8 |
| 3 | 24 | 6 |
| 4 | 28 | 4 |
| 5 | 30 | 2 |
| 6 | 29 | -1 |
Stages of Production
- Stage I: increasing returns; not wise to stop.
- Stage II: diminishing returns; the best stage for the farmer.
- Stage III: negative returns; should not be reached.
Assumptions
- At least one input is fixed.
- Technology is constant.
- Units of the variable input are equal in quality.
5. Enterprise Relationships
| Type | Meaning | Example |
|---|---|---|
| Complementary | One enterprise helps the other | Dairy cattle and fodder (manure for crops) |
| Supplementary | Enterprises use idle resources without competing | Poultry with crop farming |
| Competitive | Enterprises compete for the same resources | Maize and beans on the same land |
6. Economies of Scale
Reduced cost per unit as production expands because of:
- Bulk buying of inputs.
- Better use of machinery and labour.
- Access to credit and markets.
- Spreading fixed costs over more output.
7. Farm Size and Productivity
- Very small farms may fail to use resources fully.
- Very large farms may be hard to manage.
- Choose a size that allows efficient management and profit.