CHAPTER TWO: AGRICULTURAL PRODUCTION

1.1 Definition of Production

Production is the process by which inputs are transformed into output in output producing units.

The output producing units include farms and factories.

1.2 Factors of Agricultural Production

Land: Land is the most important resource in agricultural production. Its supply is relatively

fixed except it can be expanded slightly by drainage of swamps, reclamation from sea bodies and

water, and chemical or biological improvement of non-cultivable lands. In Bangladesh land is

scare resource and expensive too. Shrinkage of agricultural land and reduction of soil fertility

are the major obstacles for crop cultivation.

Labor: Labor is the effort of human being that is used in making things happen in the production

process. It is the second most important resource next to land in agricultural production. Labor

availability is a function of the economically active proportion of the population released for

agricultural activities. Farm labor on peasant farms could be from both family or hired sources

depending on the size of the farm and type of operation to be performed, but in large commercial

farms, farm labor is purely hired and categorized as casual, unskilled, semiskilled and skilled

labor. The quality of labor in use is a function of the level of education and training in relevant

agricultural production, that is, the higher the level of training in the cultivation and management

of any crop the higher the productivity and efficiency. Labor is measured in terms of the adult

male equivalents, where one man day is the work done by one adult male in eight hours.

Capital: Capital resources come into farm production in three forms, namely,

Farm machinery, such as, tractors and various farm tools Biological capital such as fertilizers,

pesticides, herbicides, improved seeds and breeding stock Feed for Livestock.
Management: Management or entrepreneur or co-ordination is the most Important factor of

production. In this input resides the decision making power in farm business. It is concerned with

efficient mixing of resources in the production process. An efficient resources planning and

utilization ensures attainment of the objective of the production

Function. Management is therefore concerned with planning, implementation and control of the

farm business.

1.3 Definition of Production Function

Production function is a physical or technical relationship between inputs and output in any

given production processes. It describes the rate at which inputs are transformed into outputs. It

defines the production possibilities open to the farmers. In an implicit form, the production

function is defined as:

Y = f(x).

It states that output Y is a function of input X.

Where Y = output of product, X = input used, f() = functional form.

1.4Types of Production Function

Production functions are classified into two based on time period. They are short run and long

run production functions.

Short run production function: In the short run production function, at least one of the inputs

used can be varied with the others fixed.

The implicit functional form is defined as:

Y = f(X1, X2/ X3, X4… Xn).

Or
Y = f(X1, X2).

It implies that output (Y) is a function of variable inputs X1 and X2 given fixed values of inputs

X3 to Xn.

Long run production function: In the long run production function, all the inputs can be varied.

It is implicitly expressed as;

Y= f(X1, X2, X3… Xn).

1.5 Uses of Agricultural Production Function

 They serve diagnostics purposes to diagnose input and output relationship within sampled

farms.

 They tell us the level of optimum use of inputs.

 Determination of the scale of production.

 They are useful in determination of enterprise combination.

 They guide farmers in decision making.

1.6 Forms of the Production Function

The algebraic forms of the production function are the explicit representations of the production

function. The common algebraic forms of production function are the linear, quadratic, semi-

log, exponential, power or Cobb-Douglas and transcendental functions.

1.7 Stages of the Production Function Curve

There are three stages of the production function.

Stage I

 Total Product (TP) increases at the increasing rate up to the point of inflexion. After that

TP strats increasing at a decreasing rate.

  It is a stage where the marginal product (MP), is greater than the average product (AP).

 Both MP and AP are increasing

 MP is maximum at point of inflexion

 MP equals AP at the boundary of stages 1

 Elasticity of production is greater than or equal to unity

 It is a stage of increasing marginal returns

 It is an irrational zone of production

Stage II

 TP increases at a decreasing rate and TP reaches at maximum point when MP is zero

 It is a stage where the MP is less than AP

 AP is still increasing

 MP is decreasing but positive.

 MP is zero at the boundary of stages 2 or 3

 it is a stage of decreasing positive marginal returns and decreasing returns to scale

 the elasticity of production is between zero and the unity.

 it is a stage of rational production where output and profit are maximized and input use is

optimized.

Stage III

i. AP is greater than MP

ii. AP is positive and greater than zero

iii. MP is less than zero and negative

iv. Both MP and AP are falling

v. Production is not advisable in this stage because increase in input use leads to reduction in

total product.

vi. Elasticity of production is less than zero that is, it is negative.

1.7 Linear Homogeneous Production Function

When all the inputs are increased in the same proportion, the production function is said to be

homogeneous. The degree of production function is equal to one. This is known as linear

homogeneous production function. Mathematically, this form of production function is expressed

as:

nQ = f (nL, nK)

This production function also implies constant returns to scale. That is if L and К are increased

by n-fold, the output Q also increases by n-fold.

1.8 Cobb-Douglas Production Function

Charles W. Cobb and Paul H. Douglas studied the relationship of inputs and outputs and formed

an empirical production function, popularly known as Cobb-Douglas production function. The

basic form of the Cobb-Douglas production function is as follows:

Q = A Lα K β

Where:

Q is the quantity of products.

L is the quantity of labor.

K is the quantity of capital.

A is a positive constant.

α and β are constants between 0 and 1.

1.9 Merits of C-D Production Function

 It suits to the nature of all industries

 It is convenient in international and inter-industry comparisons

 It is the most commonly used function in the field of econometrics

 It can be fitted to time series analysis and cross section analysis

 The function can be generalized in the case of ‘n’ factors of production

 It becomes linear function in logarithm

1.10 Limitations of C-D Production Function

 The function includes only two factors and neglects other inputs.

 The function assumes constant returns to scale.

 There is the problem of measurement of capital which takes only the quantity of capital

available for production.

 The function assumes perfect competition in the factor market which is unrealistic.

 It is based on the substitutability of factors and neglects complementarities of factors.

 The parameters cannot give proper and correct economic implication.

1.11 Marginal Product

Marginal product is the change in total production, when there is an infinitesimal change in the

inputs. Marginal product is the first derivative of the production function with respect to

an input. In the case of the Cobb-Douglas production function:

MPL = ∂Q/∂L = ∞ A L(α-1) Kβ

MPk = ∂Q/∂K= βA Lα K(β-1)

1.12 Elasticity of the C -D Function

(∂Q/Q) / (∂L/L) = (∂Q/∂L) / (Q/L)

If output elasticity is greater than 1, the production function is elastic and vice versa.

Elasticity of Labor:

(∂Q/Q) / (∂L/L) = (∂Q/∂L) / (Q/L)

= [ Aα L(α-1) Kβ ] / [ A Lα Kβ/ L ]

= [ Aβ L(β-1) Kα ] / [ A L(α-1) Kβ]

=α

Elasticity of Capital:

(∂Q/Q) / (∂K/K) = (∂Q/∂K) / (Q/K)

= [ Aβ Lα K(β -1) / [ A Lα Kβ/ K ]

= [ Aβ Lα K(β -1) / [ A Lα Kβ/ K ]

=β

1.13 Properties of C-D Production Function:

 There are constant returns to scale.

 Elasticity of substitution is equal to one.

 α and β represent the labor and capital shares of output respectively

 α and β are the elasticities of output with respect to labor and capital respectively

 If one of the inputs is zero, output will also be zero.

  The expansion path generated by C-D function is linear and it passes through the origin

 The ratio α /β measures factor intensity. The higher this ratio, the more labor intensive is

the technique and the lower is this ratio and the more capital intensive is the technique of

production.

1.14 Proof of the Properties of C-D Functions

A.

Q = A (cL)β (cK)α

= A cβ L β c α L α

= cβ cα A Lβ Kα

= c (α+β) Q

= cQ

If α + β =1, the production function has constant returns to scale.

B. Total product is exhausted by its distribution among the factors of production

Q = A Lα K β

∂Q/∂L = ∞ A L(α-1) Kβ

[∂Q/∂L] L = ∞ A L(α-1) Kβ (L)

[∂Q/∂L] L = ∞ A Kβ L α -1+ 1)

[∂Q/∂L] L = ∞ A Kβ L

[∂Q/∂L] L = ∞ Q [ Since: Q= A L∞ Kβ ] … (1)

Q = A Lα K β

∂Q/∂K = β A Lα K (β – 1)
[∂Q/∂K] K = β A Lα K (β – 1) (K)

[∂Q/∂K] K = β A Lα K( β – 1 + 1)

[∂Q/∂K] K = β A Lα Kβ

[∂Q/∂K] K = β Q … (2)

Euler’s Theorem: Q = [∂Q/∂L] L + [∂Q/∂K] K

R. H. S = [∂Q/∂L] L + [∂Q/∂K] K

R. H. S = ∞ Q + β Q … [From equation (1) and equation (2)]

R. H. S = Q (α + β)

R.H. S = Q = L. H. S [Since, α + β = 1]