Horti-Business Management (2+0)

Farm Management Principles

Farm management principles guide the farmer or farm manager to take decisions. Details on six basic principles involved in making rational farm management decisions are presented.

a. Principle of variable proportions or laws of returns
b. Cost principle
c. Principle of substitution between inputs
d. Equi-marginal returns principle or opportunity cost principle
e. Principle of substitution between products
f. Principle underlying decisions involving time and uncertainty.

a. Principle of variable proportions or laws of returns

• This principle helps in deciding the optimum amount of an input that needs to be applied for cultivation of a particular crop or enterprise. In agriculture law of diminishing returns will operate.
Diminishing returns

• “If increasing amounts of one input is added to a production process while all other inputs are held constant, the amount of output added per unit of variable input will eventually start decreasing”
b. Cost Principle

• Most of the producers give considerable importance to the cost of production while taking production decisions.
Accounting Periods

• There can be two accounting or planning periods: short-run and long run. Short run is a period of time wherein at least some factors (such as land, buildings,) used in crop cultivation is fixed while others are variable and could be altered to increase the yield. The long run is generally considered to be the period wherein all the factors used for crop cultivation could be varied.
Application of the Fixed and Variable Cost Principle

• In the short run, gross return must cover the variable costs. The maximum net revenue is obtained when marginal cost (MC) equals the price of the product (MR).
• If gross returns are less than total costs (variable + fixed costs) but are still larger than the variable costs, guiding principle should be to keep increasing production as long as added returns (MR) are greater than added costs (MC).
• In the long run, gross return should be more than variable plus fixed costs (total costs).
c. Principle of Factor – Substitution (Least-cost combination)

• In agriculture, various inputs or practices can be substituted in varying degrees for producing a given output. A farmer can meet the nutrient requirement of the crop by applying, farm yard manure, vermicompost, neem coated urea, and other inorganic fertilizers. The inputs should be substitutable. The choice before the farmer is to either use only one particular source (organic / inorganic) to meet the entire nutrient requirement for the crop or choose a combination of sources. It is prudent for the farmer to choose a particular combination of inputs which would be of least cost to produce a given level of output. Cost minimization will not depend only upon the cost of inputs and prices of products but also on the rate of substitution.
d. Law of Equi-Marginal Returns

• The farmer has only limited capital (including own and borrowed) at his disposal and he has to use this money among cultivation of crops and other enterprises that are technically feasible in his farm. The farmer has to make a choice of the crops to be cultivated and the allied enterprises to be undertaken and also the area under the selected crop and size of enterprise, such that it would maximize the net revenue from the farm as a whole. This principle, thus, states that resources should be used in crops or enterprises where they bring not the greatest average returns, but the greatest marginal returns.
e. Opportunity Cost Principle

• The farm resources are always limited and there are more than one alternative use to these resources. When resources are used in one enterprise, some alternative is always foregone. The opportunity cost is the value of the next best alternative foregone. The value of one enterprise sacrificed is the cost of producing another enterprise.
f. Principle of combining enterprises

• To combine the products it is better to know their relationship.