Important
principles of decision making in farm management
p Law of equimarginal returns
“Allocation
of limited resources to optimum choice of enterprises which give maximum
marginal returns i.e. not only the maximum average return, but also maximum
marginal return”. It means that the limited resources like land, labour,
capital etc. are allocated in such a manner that he cannot change the use of
single unit without reducing the income.
p Opportunity
cost
“The
value of next best alternative foregone” or “The value of one enterprise
sacrificed is the cost of producing another enterprise. It deals with resource
allocation where use of scarce resources for a production of a particular
product always means that next best alternative to use these resources is left
out.
“Optimum choice of enterprises depend upon
law of equimarginal return and opportunity cost”
p Principle of substitution
To
understand this concept, let us analyze the following
Condition:
Assume that the level of output from a farm is fixed
Required: What is the least cost combination of resources to
get that fixed level of out put from a farm
Choice: There are
always many alternatives for inputs/farm practices; we have to exercise our
discretion to choose the best possible combination, which is also the least
cost combination
How
to know what is the least cost combinations?
We
have to work out two important ratios
1.
Marginal rate of
substitution
No. of units of replaced resources
MRS =
No. of units of added resources
Price of units of added resources
Price
ration (PR) =
Rice of units of replaced resources
The
point at which MRS = PR, that is the least cost combination for any resource.
However three situations can arise when we look at these tow ratios.
a).
If MRS>PR, then a least cost point can be attained by increasing the added
resources.
b).
If MRS<PR, then a least cost point can be attained by increasing replaced
resources
c).
MRS=PR is the exact point of least cost combination
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