principle of combining enterprises and principle of comparative advantage
- 1. Economics of Farm Business Topic: Principle of Combining Enterprises & Principle of Comparative Advantage Submitted to : Dr. R. Govindasamy Assistant Professor Department of Economics Presented by S. Bhuvanesvari B.A, II M.A Economics
- 2. PRINCIPLE OF COMBINING ENTERPRISES This principle is very important as it describes the product - product relationship. Here, instead of considering the allocation of inputs among enterprises, we discuses enterprise combination or product mix involving product relationship. Algebraically the relationship can be written as under. Y1 = f (Y2) or Y1 = f (Y 2. Y3 ....Yn) There can be various relationships that can exist between enterprises or products. 1. Joint Product: Two or more than two products are produced in the same production process Eg. Paddy and straw (Agricultural products).
- 3. Joint and complementary production
- 4. 2. Complementary Productions: In this case relationship is directly proportionate. With the increase in one product there is also increase in other product. E.g. the cultivation of leguminous crop followed by cereals gives this relationship. 3. Supplementary Productions: In this case, increase in one product does not effect for each other or they are independent and if relationship is there it is supplementary Eg. Crop production and dairy enterprise.
- 5. 4.Competitive Relationships: Here two products are said to be competitive when increase one needed to be reduction in other product e.g. Two cereal crops, tea and coffee. Determination of optimum production combination: Optimum combination of two products can he obtained by following allegoric and graphic method
- 6. 1) Algebraic Method; Algebrical1y, the combination can be determined by calculating MRPS and Price ratio. MRPS : It is marginal rate of product substitution Units of replaced products = ------------------------------------- Units of added products Therefore, optimum combination of two Products for a given level of input can he obtained by equating MRPS with inverse price ratio. i.e. MRPS = Price ratio = Py1/Py2 2) Graphic Method: For obtaining optimum combination of two competitive products, we have to depict two curves by taking added quantities (y1) on horizontal axis and replaced quantities (y2) on vertical axis
- 7. 3) Production Possibility curve: It is a locus of all possible combinations of two products which can be obtained from a given amount of input. Production possibility curve are sometimes called as Iso-resource curve or opportunity curve. 4) Iso-revenue Curve: It is the line which indicates the different combinations of two products which gives the same amount of revenue or income. Principle of combining enterprises the combination two products are produced in the same production process which gives the same amount of revenue or income
- 8. Principle of Comparative Advantage David Ricardo developed the classical theory of comparative advantage in 1817 when one country's workers are more efficient at producing every single good than workers in other countries. I. Resources productivity II.Cost of production of enterprises In the production of farm commodities there are two kinds of economic advantages Absolute advantage Comparative advantage
- 9. Absolute advantage: net return per hectare (Gross income) Ex: Total return – cost of production Comparative advantage: (Cost of production) Refers to relative advantage of growing different crop in a region.
- 10. Absolute Advantage Particulars Region A Region B Groundnut Sunflower Groundnut Sunflower Gross income (Rs./ acre) 5,000 5,010 7,300 2,500 Total costs (Rs./ acre) 4,700 4,320 6,500 2,450 Net income (Rs./ acre) 300 690 800 50 Returns per rupee of investment 1.06 1.16 1.12 1.02 Suppose farmers in region A and region B are producing two farm commodities groundnut and sunflower. Region A has an absolute advantage in Sunflower the size of the margin between the costs and returns is greater then that for region B. Region B has an absolute advantage in groundnut production for the same reason.
- 11. It shows that the two crops growing at two different region
- 12. Comparative Advantage Particulars Region E Region F Red gram Groundnut Red gram Groundnut Gross income (Rs./ acre) 5,600 7,300 2,300 3,300 Total costs (Rs./ acre) 5,200 6,500 2,000 3,100 Net income (Rs./ acre) 400 800 300 250 Returns per rupee of investment 1.08 1.12 1.15 1.06 The Region ‘E’ has a greater absolute advantage in growing both redgram and groundnut then region ‘F’ because, the net income per acre are Rs. 400 and Rs. 800 respectively. In other words respective income are 108 per cent and 112 per cent higher than the costs. Farmers in region ‘E’ can earn profits by growing both the crops. But in order to earn maximum profits, farmers in region ‘E’ should allocate large acre (costs& gain more net income) and under groundnut alone as it is related to comparative advantage.
- 13. Similarly farmers in region ‘F’ can make profits by growing both the crops but they have relative advantage in growing redgram. The farmers can make greatest profits by cultivating redgram as, the percentage of returns over the cost of cultivation being 115 per cent for redgram and 106 percent for groundnut. If cultivator earns the greatest possible returns he should produced those crop in which an their relative advantage greater.
- 14. Conclusion: The specialized or diversified farming depends largely on this principle. This principle used in farming business its helps to farmers to produced more commodities (different agriculture commodities) with short time period and gain more profit.