Horti-Business Management (2+0)

Law of equi-marginal returns

• The farmer has limited resources which have alternative uses. He has to allocate these resources effectively among various alternative crops / allied enterprises so as to earn higher net income from the farm. The equi-marginal principle guides the farmer in selecting crops / allied enterprises such that the net income from the farm could be maximized.
• If a farmer has unlimited capital he can take up any number of activities as long as they are technically feasible. Under such circumstances the farmer can keep on investing in activities as long as the added returns are equal to the added cost. Generally, the farmers have limited resources, eg: capital, and he can use them only on few crops or enterprises. He can select an optimum combination of enterprises based on the principle of Equi-marginal returns.
• The law of equimarginal return states that profit from a limited amount of variable input is maximized when that input is used in such as way that marginal return from that input is equal in all the enterprises.
• Symbolically,
VMPx1 = VMPx2 = …… = VMPxn

• Suppose a farmer has 5 units of capital (X), he will allocate each successive unit of X to the enterprise in which VMP is the largest.
Returns from various enterprises




(PY1= 2, PY2 = 1 and PY3 =2)

• First unit of X can earn 20 in Y1, 18 in Y2 and 14 in Y3. So first unit is applied to Y1 since, it has got largest VMP.
• Second unit of X can earn 16 in Y1, 18 in Y2 and 14 in Y3, so second unit is applied to Y2 (largest VMP). Allocation of remaining three units of capital must be done in a similar manner.



• All the five units will earn Rs.81 No other combination of the three enterprises will earn more than Rs.81.