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Farm Management Principles

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DOI: 10.4324/9781003490111-6

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88

6 Farm Management Principles

Dr. Sumit B. Wasnik1 and Dr. Sneha Pandey2

Assistant Professor (Guest Faculty), RSV CARS, Bemetara (CG)
1

Assistant Professor (Guest Faculty), Rajmata Vijyaraje Scindia Krishi Vishwa

2

Vidyalaya, Gwalior (MP)

Abstract
Nobody can deny the fact that it is the endeavor of the farming community only
that helps realize the higher farm production. Farm management, includes making
and implementing of the decisions involved in organizing and operating a farm for
maximum production and profit. Farm management draws on agricultural economics
and fall under microeconomics. In this chapter we studied about eight principles
of farm management viz., comparative advantage, opportunity cost, theory of cost,
product substitution, factor substitution, diminishing marginal return, equi-marginal
returns and time comparison. These principles provide the farmer to find the practical
solution of farm related problems such as production, marketing as well as management
of on farm resources. Along with efficient resource management these principles
guide to achieve profit maximization level at farm. Thus, farm management tools
help farmer in solving farm related problems for successful farm business.

Keywords: Costs, Diminishing Return, Farm management, Input, Principles,

Rational, Output.

Introduction
The prosperity of any country depends upon the prosperity of farmers, which in turn
depends upon the rational allocation of resources among various uses and adopting
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improved technology. To enable the farmers to gear up the situation, they need to
have knowledge on concept, principles and various issues of the farm to manage. The
role of farm management, is therefore, to supply the information for the farmers for
sound planning. All farm management tools are helpful to the farmers in solving
their managerial problems for successful operation on the farm business.

In the context of increased commercialization there is a greater need to improve

the managerial abilities of the farmer. So far, the managers in general have responded
admirably to the technological changes that accrued in Indian agriculture. Human
race depends more on farm products for their existence than anything else since
food, clothing – the prime necessaries are products of farming industry. Even for
industrial prosperity, farming industry forms the basic infrastructure. Thus, the
study farm management has got prime importance in any economy particularly on
agrarian economy.

Meaning of Farm Management

Farm Management comprises of two words i.e., Farm and Management. Farm means
a piece of land where crops and livestock enterprises are taken up under common
management and has specific boundaries. It is also called as socio-economic unit
which not only provides income to a farmer but also a source of happiness to him
and his family. While, management is the art of getting work done out of others
working in a group. Thus, management is the process of designing and maintaining
an environment in which individuals working together in groups accomplish selected
aims. Hence, it is the key ingredient. The manager makes or breaks a business. He
plays important role in making various farm related decisions.

Definitions
1. Farm management is a branch of agricultural economics, which deals with
business principles and practices of farming with an object of obtaining the
maximum possible return from the farm as a unit under a sound farming
programme (Raju and Rao).

2. Farm management is a branch of agricultural economics which deals with wealth

earning and wealth spending activities of a farmer, in relation to the organization
and operation of the individual farm unit for securing the maximum possible
net income (Bradford and Johnson).

Farm management is considered to fall in the field of microeconomics. Its objective is

90

to maximize returns from the farm as a whole as it is interested in profitability along

with practicability. What crops and livestock enterprises and their combinations to
grow, what number of resources to be applied, how the various farm activities to be
performed, etc., all these falls within the scope of farm management.

Nature of Farm Management

Farm management deals with the business principles of farming from the point of
view of an individual farm. Its field of study is limited to the individual farm as a unit
and interested in maximum possible returns to the individual farmer. It applies the
local knowledge as well as scientific finding to the individual farm business. Farm
management in short be called as a science of choice or decision making.

In other words, farm management seeks to help the farmer in deciding problems.
The farm manager has to take decisions on several aspects for profitable operation of
the farm. Decisions have to be taken regarding production (what to produce?, when
to produce?, how much to produce?, how to produce?, etc.), marketing (buying and
selling) and Organization and managerial i.e., administration. These three segments
are interlinked and decision making is also interlinked.

Thus, the objectives to be fulfilled for successful farm management are: (i)
examination of production pattern and resource use on the farm; (ii) identification
of the responsible factors for present production pattern; (iii) determination of the
optimality conditions in resource use and production; (iv) analysis of sub-optimality
condition in the resource use and (v) provide suggestions in optimal use of resources
at present.

Principles of Farm Management

A knowledge of economics provides a decision maker with a set of principles
for decision making which are useful when preparing farm plans to organized a
farm business. The economics principles guide the manager to setting the goals
and preparing plans based on optimum resource allocation, resource substitution
and combination and enterprise combination. Basically, farm management is the
application of agricultural sciences and economic principles to the organization
and operation of a farm business. The economic principles guide the manager in
setting the goals and preparing plans based on optimum resource allocation, resource
substitution and enterprise combination.

The outpouring of new technological information is making the farm problems

 91

increasingly challenging and providing attractive opportunities for maximizing

profits. Hence, the application of economic principles to farming is essential for
the successful management of the farm business. Some of the economic principles
that help in rational farm management decisions are;

1. Principle of Diminishing Marginal Returns

Marshall provided the foundation for the economic principles of farm management
through his law of diminishing returns. The law of diminishing returns is a basic
natural law affecting many phases of management of a farm business.

According to Marshall “An increase in the capital and labour employed in the cultivation
of land cause, in general, a less than proportionate increase in the amount of produce
raised unless it happens to coincide with an improvement in the art of agriculture”.

Stages of Law of Diminishing Returns

Three components are considered into law are total product, marginal product and
average product.

Table 6.1 shows three stages of the law, the stages are:

1. Increasing return
2. Constant returns
3. Diminishing returns

Table 6.1: Total product, Marginal product and Average product

Units Total Marginal Average Remarks

Product Product Product
0 0 - - Stage-Ⅰ
1 6 6 6 Increasing Returns
2 14 8 7
3 27 13 9
4 39 12 9.75
5 50 11 10 Stage-Ⅱ
6 60 10 10 Constant Returns
92

7 60 0 8.57 Stage-Ⅲ
8 58 -2 7.25 Decreasing Returns
9 54 -4 6

Stage Ⅰ: In this stage, AP and MP are increasing, but MP is always greater than AP.
Hence more units of input increase production in greater proportion. In this stage
the input used are so small comparative to the fixed input. For profit maximization,
produce more by using more units of input.

Inflection Point: It is the point where TP curve changes its curvature and at this
point the slope of MP is maximum.

This stage is also called as irrational stage. Because the efficiency of all the
variable inputs keeps on increasing throughout this stage as indicated by increasing
AP (technical efficiency). So, it is not reasonable to stop using an input when its
efficiency is increasing and if we stop, some of the resource will remain unused or
underutilized. Therefore, it is advised that farmer should continue to produce up to
the level where AP is maximum.

Stage Ⅱ: Stage Ⅱ is the relevant stage of production, because the marginal product,
though decreasing is not negative. A point where the optimum value of MP equals
to its price is the condition of profit maximization. In this stage both the variable
input and fixed input are being used in efficient amount relative to each other.

This stage is also called as rational stage because of optimum utilization of inputs
used in the production as remarked by increasing TP (point of congestion). In
between this stage the technical efficiency of variable and fixed inputs is maximum.
In this stage farmers are able to produce maximum output per unit of input. The
objective of full resource use and maximum output is achieved. Therefore, farmers
are advised to produce in this stage only.

Stage Ⅲ: In this stage, total production is decreasing and MP is less than zero. There
is over use of input relative to fixed input. This stage is not profitable for production
as a farmer get less and less product for increasing amounts of input.
 93

This stage is also called as irrational stage because in this zone the TP is
decreasing and MP becomes negative thereby technical efficiency of variable and
fixed resources declines which indicates that additional quantities of inputs reduce
the total output. It means that the inputs were overutilized. So, it is not advisable
to operate in this region even if the additional quantities of inputs are available free
of cost. Therefore, farmer should not operate in this stage otherwise he will have
found reduced production as well as bear unnecessarily additional cost of inputs.

Production Function for input-output relationship (Short-run production function):

Where, Y = Output;

X1 = Variable input;

X2 X3 X4……….Xn = Fixed inputs;

| (Vertical Bar) = It separates variable inputs from fixed inputs.

Reasons for the Operation of the Law of Diminishing Returns in Agriculture

1. Excessive Dependence on Weather: A farmer, however good he is in managing

the farm, may not get the expected yields as he has little control over weather.
A bad weather is just enough to make his expectation go topsy-turvy.

2. Less Scope for Division of Labour: There is no possibility of division of

labour in farming as the farmer himself performs the role of labourer, manager
and capitalist, therefore the advantage of division of labour is not a possibility.
Therefore, the law of diminishing returns sets in quickly in farming.

3. Less Scope for Mechanization: Though mechanization of the farms enhances the
productivity, they stand against using the machines for various farm operations.
Under this limitation, the farmer fails to derive the advantage of mechanization.

4. Cultivation of Inferior Lands: To meet the food requirements of the teeming

millions of populations, even inferior lands are brought under plough, the
productivity of which in general is low.

5. Continuous Cultivation: Continuous cultivation of land drains out the fertility status
94

of the soil, thereby leading to low productivity. It is a fact that no farmer can afford
to keep the land fallow for some period, to allow the land build up its fertility status.

2. Principle of Equi-Marginal Returns

In the previous principle, under the condition of unlimited resources, law of
diminishing returns operates in determining the most profitable level of resource
use but farmers have the limited resources i.e., limited land, limited capital, limited
irrigation facilities. Even the labour which is considered to be surplus becomes
scarce during peak sowing, weeding and harvesting periods. Under such resource
limitations, farmers must decide how a limited amount of input should be allocated
or divided among many possible uses or alternatives.

The equi-marginal principle provides guidelines for the rational allocation of

scare resources in such a way that profit is maximized from each unit of input.

The principle says that returns from the limited resources will be maximum if
each unit of the resource should be used where it brings greatest marginal returns. OR

A limited input should be allocated among alternative uses in such a way that
the marginal value products (MVP or additional returns) of the last unit are equal
in all its uses.

The law states that profits are maximized by using a limited resource in such a
way, that the marginal returns from that resource are equal in all cases.

Table 6.2: Example- A farmer has Rs.5000 and wants to grow sugarcane, wheat
and cotton that are suitable for his farm situation. What combination of amount of
money should be spent on each enterprise to obtain highest profit?

MVP
Units of Amount Amount of money Sugarcane Wheat Cotton
spend spent (Rs.) (Rs.) (Rs.) (Rs.)
1 st
1000 2000 1900 2100
2nd 1000 1900 1800 1900
3rd 1000 1500 1500 1500
4th 1000 1200 1100 1200
5th 1000 1000 900 1100
Total returns (Rs.) 5000 7600 7200 7800
Net profit (Rs.) 2600 2200 2800
 95

It is observed from the table that, when the entire amount was invented in
any one crop, net profit from sugarcane, wheat and cotton is obtained as Rs. 2000,
1900 and 2100 respectively.

Table 6.3: However, if the same amount is spent according to principle of equi-
marginal returns, total net profit will be as shown in the table given below;

Units of Amount Amount (Rs.) Crop Marginal Return

spend
1st 1000 Cotton 2100
2nd 1000 Cotton 1900
3rd 1000 Sugarcane 2000
4th 1000 Sugarcane 1900
5th 1000 Wheat 1900
Total (Rs.) 5000 9800
Net profit (Rs.) 4800

It is observed from the table 6.3 that, the farmer is getting total net profit of
Rs.4800 which is more than profit from any single crop. Thus, for maximum net profit
farmer should invest Rs.2000 in cotton, Rs.2000 in sugarcane and Rs.1000 in wheat.

Marginal return from all the three enterprises is equal i.e., Rs.1900. Thus, it
can be invested in such a way that marginal returns should be in all the alternatives.

3. Principle of Opportunity Cost

An opportunity cost is the earning from the next best alternative sacrificed. Opportunity
cost is the income from an input, which is used in a production process and at that
particular time it has no alternative use. This means that the input will be losing from
the alternative use and this income foregone by this input from its alternative use.

“Opportunity cost is the income that could be received, if the input had been used in
its most profitable use.”

Whatever must be given up to obtain some item is called opportunity cost. The
opportunity cost is referred to as the real cost or true cost or alternate cost of an
input. This, principle guides the farmer/manager that, if the returns from the current
use of the input are less than its opportunity cost, then the decision is to be changed.

Example: If a farmer has Rs.1000 at his disposal, he has three alternatives i.e.,
96

investing on sugarcane, wheat and cotton. As given in table 6.2 Rs. 1000 is spent
on sugarcane which is giving an MVP of Rs.2000. The farmer is forgoing the other
two options by spending on cotton. Between the two, sugarcane is giving higher
MVP than wheat. The farmer is sacrificing Rs.2000 from sugarcane, which is next
best alternative to cotton, which is the opportunity cost.

4. Principle of Factor Substitution (Least Cost Combination)

This economic principle explains one of the basic production relationships viz.,
factor-factor relationship. It guides in the determination of least cost combination of
resources. It helps in making a management decision of how to produce. It implies
the choice of methods of production or technology or the type of combination of
resources given the constant output. This principle guides the farmer/manager in
choosing the most appropriate combination of inputs that produces a given quantity
of output with least cost. Substitution describes replacement of the process of
production, exchange and consumption from less efficient to more efficient.

The principle of factor substitution says that it is economical to substitute one

resource (add resource) to another resource (replaced resource), as long as the reduction in
the cost, resulting from decrease use of replaced resource is more than the increase in the
cost due to increased use of added resource.

In other words, the principle of factor substitution says that go on adding a

resource so long as the cost of resource being added is less than the saving in cost
from the resource being replaced. The principle of least cost combination of two
inputs with a given level of output says that the marginal rate of substitution between
inputs and inverse price ratio should be equal.

Production Function (Short-run production function):

Y* = f (X1,X2 | X3,X4,……….Xn)

Where, Y*= Constant Output level;

X1 and X2 = Variable input;
X3,X4,……….Xn = Fixed inputs;
| (Vertical Bar) = It separates variable inputs from fixed inputs.
To find out least cost combination of resources:
Decrease in cost>Increase in cost
 97

1. Marginal rate of substitution (MRTSX1X2):

∆X2
∆X1

∆X2 = Number of units of replaced resource

∆X1 = Number of units of added resource

2. Inverse Price ratio (PR):

PX1
PX2
PX2 = Cost per unit replaced resource

PX1= Cost per unit added resource

Point where the substitution ratios and price ratios are equal:

∆X2 = PX1
∆X1 PX2

Whether, X1 substitutes for X2 or X2 substitutes for X1, the profit rules:

1. If MRTS>PR (substitution ratio is more than inverse price ratio), one can reduce
the costs by using more of “added” resource.

2. If MRTS<PR (substitution ratio is less than inverse price ratio), cost can be
reduced by using more of “replaced” resource.

3. If the MRTS=PR (substitution ratio is equal to inverse price ratio), it is the

point of least cost.
98

Example: Suppose there are six combinations of inputs. Find out the least cost
combination.

Table 6.4: Tabular method

Combination X1 X2 MRTSX1X2 Inverse Price Ratio

A 75 325 4.34 2.25
B 75 169 2.25 2.25
C 75 125 1.67 2.25
D 75 122 1.62 2.25
E 75 90 1.20 2.25
F 75 85 1.13 2.25

From above combination, 75 units of X1 and 169 units of X2 is the least cost
combination of inputs.

Table 6.5: Algebraic method

Combination X1 X2 ∆X1 ∆X2 MRTSX1X2 PRX1X2 (Inverse) =

A 1 220 - - - 40
B 2 151 1 69 69 40
C 3 111 1 40 40 40
D 4 75 1 35 35 40
E 5 50 1 25 25 40
F 6 35 1 15 15 40
G 7 15 1 20 20 40

At Combination “C”, = MRTSX1X2 = PR is observed. So, this combination is the

least cost combination.

Graphic method

Iso-quant curve: The curve representing all possible combinations of two inputs (X1
and X2) that produce the equal quantity of output is called an iso-quant.

Iso-cost line: the line represents all possible combinations of two inputs that can be
purchased with the given amount of fund or outlay.
 99

The intersection of Iso-quant curve with the iso-cost line is very important in
the determination of the least cost combination of two inputs.

Combination “C” is found to be least cost because at this level Iso-quant curve and
Iso-cost line intersects to each other.

5. Principle of Product Substitution

This principle involves product-product relationship which is associated with farmer’s
decision about what to produce? while, the objective of this principle is profit
maximization.

This principle guides the producer in the determination of optimum combination

of enterprises that maximize profits. If the inputs are constant, it is economical
to substitute one product for the other, if the returns from first are more that of
second. To apply this principle there is a need to understand the following product
relationships:

1. Complementary Enterprise: Two products are complementary, when

increase output of one also results in an increase in the output of the other,
with resources held constant.

2. Supplementary Enterprise: Two products are supplementary, when an

100

increase or decrease in the output of one product does not affect the output
of the other.

3. Competitive Enterprise: Two products are competitive, if output of one

product can be increased only through a sacrifice in the output of the other.

The principle of product substitution says that we should go on increasing the output
of a product so long as decrease in the returns from the product being replaced is less than
the increase in the returns from the product being added.

Decrease in returns < increase in returns

1. Marginal Rate of Product Substitution (MRPSY1Y2):

∆Y2
∆Y1

∆Y2 = quantity of output lost

∆Y1 = quantity of output gained

2. Inverse Price ratio (PR):

PY1
PY2

PY2 = price per unit of replaced product

PY1= price per unit of added product

Point where the substitution ratios and price ratios are equal:

∆Y2 = PY1
∆Y1 PY2

Whether, product Y1 substitutes for Y2 or Y2 substitutes for Y1. The profit rules:

1. If MRPS<PR (substitution ratio is less than inverse price ratio), Profits can be
increased by producing more of added product.
 101

2. If MRPS>PR (substitution ratio is more than inverse price ratio), Profits can
be increased by producing more of replaced product.

3. If the MRPS=PR (substitution ratio is equal to inverse price ratio), it is the

point of profit maximizing combination.

Table 6.6: Example: Selecting an optimum combination of enterprises.

(PY1 = Rs. 280/quintal; PY2 = Rs. 400/quintal)

Decrease
Increase
Y1 Y2 in return
Combination ∆Y1 ∆Y2 MRPSY1,Y2 PR in return
(Qtls) (Qtls) (∆Y2×PY2)
(∆Y1×PY1)

A 0 60 - - - - - -
B 20 56 20 4 0.20 0.70 1600 5600
C 40 50 20 6 0.30 0.70 2400 5600
D 60 41 20 9 0.45 0.70 3600 5600
E 80 30 20 11 0.55 0.70 4400 5600
F 100 16 20 14 0.70 0.70 5600 5600
G 120 0 20 16 0.80 0.70 6400 5600

It can be seen from the Table 6.6 that up to E combination MRS is less than PR.
But at the F combination MRPS is equal to PR. Therefore, the sixth combination
which produces 100 quintals of corn Y1 and 16 quintals of wheat Y2 is the optimum
or profit maximizing combination.

6. Principle of Cost or Principle of Minimum Loss

In any business activity the detailed of cost and returns provide an idea about
profitability of business. The word cost refers to the expenses on goods and services.
Costs are broadly classifying as variable cost and fixed cost. Sum of these costs called
total costs. In short-run production activity costs are divided into fixed and variable cost.
102

Different Costs in farm production

1. Fixed Cost (FC): Fixed costs are incurred even in absence of production and it
does not vary with the level of output. Fixed costs curve is horizontal straight line
parallel to X-axis. The sum of all fixed costs called Total fixed costs (TFC). Fixed
cost includes depreciation, rental value of land, interest on fixed capital, land revenue,
insurance premium, wages attached to permanent servants, family labour wages, etc.

2. Variable costs (VC): Variable costs vary with the level of output or there is no
production no variable cost. The sum of variable costs called Total variable costs
(TVC). Graphically TVC has inverse ‘S’ shape. Variable costs include cost of inputs,
customs hiring, wages of casual labour, interest on working capital, electricity charges,
etc. Variable costs are very important in decision-making in short-run as the objective
of farmer is to recover these costs.

3. Total Costs (TC): Total costs are the sum of Total variable costs and total fixed
costs. Its shape is similar to that of total variable costs. Total Costs= TVC+TFC

4. Marginal costs (MC): Marginal cost is the additional cost need to produce one
more unit of output. It is the change in the total cost due to the change in output.
MC= Change in Total Cost /Change in Output

5. Average Variable Cost (AVC): Average variable cost is the amount spent on the
variable inputs to produce a unit of output. Average Variable Cost= Total Variable
Cost/ Output

6. Average Fixed Cost (AFC): Average fixed cost is the cost of fixed resources to
require for producing one unit of output. Average Fixed Cost= Total Fixed Cost /
Output

7. Average Total Cost (ATC): An average total cost refers to the total costs divided
by output. Average Total Cost= Total Cost / Output = (TFC+TVC)/ Output.

The farmers sometimes incur loss instead of profit when price of farm produce
goes down. Then they should continue the farming with an objective of minimizing
losses. Thus, this principle explains, as to how, the producer minimizes losses under
adverse price environment.

The farmer should continue the farming till the loss is less than fixed costs. If
loss is more than fixed cost then the production should be stopped temporarily, to
minimize the loss. In the long run if selling price is less than ATC, continuous losses
are incurred. In this situation, the producer should stop the production permanently.
 103

Profit or Decision Rules

a) Short Run:

1. If expected selling price is greater than minimum average total cost (ATC), profit
is expected and is maximized by producing where MR = MC.

2. If expected selling price is less than minimum average total cost (ATC) but greater
than minimum average variable cost (AVC), a loss is expected but the loss is less
than TFC and is minimized by producing where MR = MC.

3. If expected selling price is less than minimum average variable cost (AVC), a
loss is expected but can be minimized by not producing anything. The loss will be
equal to TFC.

b) Long Run:

1. Production should continue in the long run when the expected selling price is
greater than minimum average total cost (ATC).

2. Expected selling price which is less than minimum ATC result in continuous
losses. In this case, the fixed assets should be sold and money invested in more
profitable alternative.

The following example illustrates the operation of cost principle.

Table 6.7: Example: Costs and returns in groundnut cultivation

Year 1st 2nd 3rd

Groundnut price
3500 2500 1700
(Rs./Qtl)
TFC (Rs./ha) 9000 9000 9000
TVC (Rs./ha) 18000 18000 18000
TC (Rs./ha) 27000 27000 27000
Production (Qtl/ha) 10 10 10
Gross Return (Rs./ha) 35000 25000 17000
ATC (Rs./ha) 2700 2700 2700
Net Profit (Rs./ha) 8000 -2000 -10000
Decision whether to cultivate groundnut or not? (On the basis of Minimum Loss
Principle)
104

Loss if cultivated No loss 2000 10000

Loss if don’t cultivate 9000 9000 9000
Should be Should be Should not be
cultivated cultivated cultivated
Because there Because loss is Because loss is
Decision
is no loss <TFC >TFC
Should be permanently stopped if
Price>ATC
Price<ATC over the years

7. Principle of Comparative Advantage

A farmer wants to produce those commodities that maximize their net income. He
tries to include cropping system as large an area possible of the most profitable crops.
The determination of type of farming is based upon the principle of comparative
advantage.

The principle states, Individuals or regions will tend to specialize in the production
of those commodities for which their resources give them a relative or comparative
advantage. This principle explains regional specialization in the production of crops
and livestock enterprises. In farm production there are two types of advantage;

1. Absolute advantage: The size of margin between cost and return from using
productive resources represents the absolute advantage. If margin is larger
for one farm commodity in one region compared to another, first region
has absolute advantage in producing that commodity.

2. Relative/comparative advantage: The return per rupees of investment from

the production represents the relative advantage. This is determined by
comparing the two related enterprises present in the region.

Table 6.8: Absolute advantage: Net return per hectare

Crop Particular Region A Region B

Wheat Total income 18000 13000
Total expenditure 11000 9000
Net return per hectare 6000 4000
Return per rupee 1.63 1.45
 105

Sugarcane Total income 23000 27000

Total expenditure 15000 15000
Net return per hectare 8000 14000
Return per rupee 1.54 1.80

Table 6.8 shows that, two crops wheat and sugarcane are considered, from the table
it can be seen that region A has an absolute advantage in wheat and region B has an
absolute advantage in sugarcane because they give net return per hectare of Rs.6000
and Rs.14000, respectively.

Table 6.9: Relative/ Comparative advantage: Return per rupee of investment

Particular Region A Region C

Groundnut Groundnut Wheat
Total income 15000 13500 7000
Total expenditure 8000 8000 5000
Net return per hectare 7000 3500 2000
Return per rupee of investment 1.87 1.68 1.40

Table 6.9 shows that between two crops groundnut and wheat, region A has
relative advantage over that wheat of region C because of highest return per rupee
of investment (187% of income). But farmers in region C can make more profit by
having largest possible area under groundnut relative to that wheat, that income from
groundnut is 168 per cent higher than its cost. Thus, the principle of comparative
advantage directs a farmer in the selection of those crop and livestock enterprises
in the production of which available resources have the greatest relative and not
absolute advantage.

8. Time Comparison and Uncertainty Principle

Time is the very important factor in farm decisions. For example, a farmer has to
decide between a cereal crop which would be harvested after four months or an
orchard which would start giving returns after three years. These decisions involve
time and initial capital investment taken by compounding and discounting.

This principle is associated with the investment made on capital assets or fixed assets
viz., land, farm buildings, machinery etc. Since, capital expenditure involves cash
and benefits over time, it is necessary to adjust for the time value of money which is
made through compounding and discounting. Money has time value because money
106

possess earning power, purchasing power which varies inversely with the price level
and investment which deals with future and future is uncertain.

Note here: time value of money

1. Compounding cost: The application of this principle involves a process by which

the present costs are made to grow with time to make it comparable with future
returns.

A=P (1+r)n

Where, P is present cost, which grows with the time at compound interest. A is the
compound vale of the present cost P invested for ‘n’ years and ‘r’ is the rate of the
compound interest per rupee.

Example 1: if present cost is 5000 at 10% rate of interest for 4 years, calculate the
future value of present investment.

A=P(1+r)n
=50000 × (1+10/100)4
=73205

Example 2: A farmer invested Rs.5000 in establishing the orchard and Rs. 500 each
in the beginning of 3 years. At the end of 4 years, he gets a return of Rs. 10000. Find
out if this investment of at the rate of 10% per annum compound interest is? The
total amount of money which he will have to pay at the end of 5 years:

If C1,C2,C3,……………..Cn refers to the values paid at the end of the 1st,2nd,3rd,………

nth year respectively, the total cost A for the input will be given by:

A= C1 (1+r)+C2(1+r)2+………+Cn(1+r)n

=5000(1+10/100)4+500(1+10/100)3+500(1+10/100)2+500(1+10/100)
=9120

Since at the end of 4 years he has to pay Rs. 9120 and he gets 10000, it is profitable
to invest this sum.

2. Discounting Cost: Discounting cost helps to compare the present worth of

the future revenue with the present investments. If the present worth of the future
revenue is less than the investment, it would be loss to invest the money in resource
services now to get the future revenue at the end of a certain number of years.
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Where, PW is present worth of future money,

P= Money value in future
i= Rate of interest
t=years.

Conclusion
Farm management, includes making and implementing of the decisions involved
in organizing and operating a farm for maximum production and profit. Farm
management draws on agricultural economics (fall under microeconomics) for
information on prices, markets, agricultural policy, and economic institutions such
as leasing and credit. Principles of farm management thus provide the farmer to find
the practical solution of farm related problems such as production, marketing as well
as management of on farm resources. Along with efficient resource management
these principles guide to achieve profit maximization level at farm. In this chapter
we studied about eight principles of farm management viz., comparative advantage,
opportunity cost, theory of cost, product substitution, factor substitution, diminishing
marginal return, equi-marginal returns and time comparison. Thus, farm management
tools help farmer in solving managerial problems for successful farm business.

References
Bradford, L.A. and Johnson, G.L. (1953). Farm Management Analysis. New York:
John Wiley and Sons.

Chaturvedi, D.D. & Gupta, S.L. (2013), Business Economics: Theory and Applications,
International Book House.

Dean, Joel (1976), Managerial Economics, Prentice Hall of India.

Dhondyal, S.P. (1985). Farm Management: An Economic Analysis. Friends Publications.

Raju, V.T., and Rao, D.V.S. (2015). Economics of Farm Production and Management.
CBS Publisher & Distributers.

Reddy, S.S., Ram, P.R., Sastry, T.V.N., and Devi, I.B. (2020). Agricultural Economics.
Oxford & IBH Publishing.
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Website:

1. http://ecoursesonline.iasri.res.in/mod/page/view.php?id=16795

2. https://www.egyankosh.ac.in/bitstream/123456789/88392/2/Block-1.pdf

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