Laws of Returns
Law of Diminishing Marginal Returns
- Given by Turgot (1767) and later refined by David Ricardo (1815).
- States that as additional units of one input are applied, keeping others constant, marginal product eventually decreases.
- Operates in the short run.
Example: Adding more fertilizer beyond optimum reduces yield increment.
Law of Constant Returns
- When equal increments of input result in equal increments of output.
- Common in initial stages of production.
Law of Increasing Returns
- When proportional increase in inputs results in more than proportional increase in output.
- Operates due to better utilization of fixed factors and improved management.
Law of Variable Proportions (Three Stages of Production)
|
Stage |
Marginal Product |
Total Product |
Economic Meaning |
|
Stage I |
Increasing |
Increasing at increasing rate |
Underutilization |
|
Stage II |
Diminishing but positive |
Increasing at decreasing rate |
Economic stage (rational) |
|
Stage III |
Negative |
Decreasing |
Overutilization |
Returns to Scale (Long-Run Concept)
|
Type |
Meaning |
|
Increasing Returns to Scale |
Output increases more than inputs. |
|
Constant Returns to Scale |
Output increases in same proportion as inputs. |
|
Decreasing Returns to Scale |
Output increases less than inputs. |
Cost concepts in agriculture
|
Type |
Description |
|
Fixed Cost (FC) |
Does not change with output (land rent, depreciation). |
|
Variable Cost (VC) |
Changes with output (fertilizer, labour, seed). |
|
Total Cost (TC) |
FC + VC. |
|
Average Fixed Cost (AFC) |
FC / Output. |
|
Average Variable Cost (AVC) |
VC / Output. |
|
Average Total Cost (ATC) |
TC / Output. |
|
Marginal Cost (MC) |
Additional cost for producing one more unit. |
Revenue Concepts
|
Type |
Formula |
|
Total Revenue (TR) |
Price × Quantity sold |
|
Average Revenue (AR) |
TR / Output |
|
Marginal Revenue (MR) |
Change in TR / Change in Output |
|
Profit (π) |
TR – TC |
Break-Even Point (BEP)
- The level of output where total cost equals total revenue.
- Formula: BEP = Fixed Cost Selling Price per unit – Variable Cost per unit
Farm Efficiency Measures
|
Efficiency Type |
Formula / Meaning |
|
Technical Efficiency |
Maximum output from given inputs. |
|
Allocative Efficiency |
Optimum allocation of inputs at given prices. |
|
Economic Efficiency |
Combination of technical and allocative efficiency. |
Important Ratios
- Benefit-Cost Ratio (BCR): BCR = Gross Returns / Total Cost. BCR > 1 ⇒ Profitable enterprise.
- Cost of Production per unit: Total Cost / Total Output
- Net Income: = Gross Income − Total Cost
Farm Appraisal Methods
- Net Present Value (NPV): Present value of cash inflows – cash outflows. NPV > 0 ⇒ Project is profitable.
- Internal Rate of Return (IRR): Discount rate where NPV = 0.
- Payback Period: Time taken to recover initial investment.
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Types of Farm Efficiency
|
Type |
Example |
|
Labour Efficiency |
Yield per man-hour. |
|
Land Efficiency |
Output per hectare. |
|
Capital Efficiency |
Return per rupee invested. |
|
Management Efficiency |
Net income per hectare. |
