Module 6
Agricultural Economics
A study/science which deals with scarce/limited resources and how those resources are used to
meet human wants/demands.
Basic economic principles
There are 4 basic economic problems which an economist seeks to solve. These are:
-What to produce?
-How much to produce?
-How to produce?
-Who gets it?
Economic systems
Economic system is a distinctive way of providing answers to the basic economic problems. There
are 3 economic systems
a) Planned market economic system
b) Free-market economic system
c) Mixed economic system
Planned economic system features
-Government owns production resources
-Socialism is the dominant political ideology
-Production is driven by the need to acquire basic needs or basic goods
-Firms do not produce any commodity of their choice so there is no consumer choice
-System does not encourage competition of production of goods
-Profit obtained are for development of the country
-Price is government regulated through central planning authority which determines it.
-Usually, goods of low standard are produced
-Consumer preferred needs are usually not easily met
Free market economy features
-Resources are privately owned by individuals/companies
-Capitalism is the dominant political ideology
-Production is driven by the need to make profit/ for maximising production of goods
-Firms can produce any commodity of their choice
-The system encourages competition of firms producing the same commodity
-Profit are for individual people or companies to use, as and how they want
-The system is self-regulatory that is market forces determine the price
-Due to competition goods usually of high standards are produced
-Consumer preferred needs are usually met
Mixed economic system features
Shows both feature of planned and free market economic systems
-Some resources are owned by the state, while others are privately owned by individuals/companies
-State firms use profit to develop the country while profit for individual firms is for their to use
-State firms produce goods of low standard while individual privately owned firms produce goods of
high standard
-For state firms consumer preferred needs are not met, and as for privately owned firms consumer
preferred needs are met
-A mixture of socialism and capitalism ideologies
-For state firms price is regulated by state authorities, while for privately owned firms price is self-
regulated
Demand
Demand is the quantity of a product that consumers want and are both willing and able to buy at a
given price.
Determinants of demand
Those factors which can make the demand of a product to be high, low, moderate and nil.
a) Own price- Quantity demanded and price of a commodity are inversely related. As
commodity’s own price increases, other factors remaining constant (ceteris paribus) , the
quantity demanded increases and vice versa.
b) Population- As population increases, quantity demanded of commodities and services
increases because population affects the aggregate or total demand of given goods.
c) Tastes and preferences- If consumers tastes and preferences are such that they tend to
prefer one commodity over another, then the quantity demanded of that commodity will be
high and vice versa.
d) Price expectations- Quantity demanded of a given good increases as its future price is
expected to increase
e) Advertising-Increases the demand of goods and services
f) Price of related goods- If goods A and B are substitutes, a rise in the price of one will cause
arise in the demand of another and vice versa. If good A and B are complements arise in the
price of one will cause a fall in the demand of another and vice versa.
g) Consumers income- For normal goods, demand rises as consumers income rises and vice
versa. For inferior goods, demand falls as income rises, and vice versa.
Law of Demand
The Law of Demand sates that quantity demanded of a commodity change inversely with its
own price, that is, the higher the price, the less the quantity demanded, and the lower the
price, the more the quantity demanded
Graph illustration
Price elasticity of demand/elasticity of demand (ED)
It is a measure of how the demand of a commodity responds to changes in price or income,
usually expressed a percentage.
Formula;
Elasticity of demand = % quantity demanded
% Price
Types of elasticity of demand
1. Elastic: When Elasticity of demand (ED) is greater than 1 (ED>1), which means that
percentage change in quantity demanded is greater than percentage change in
price/income.
2. Inelastic: When ED is less 1 (ED<1), which means percentage change in price/income is
greater than percentage change quantity demanded
3. Unitary: When ED is equal to one (ED=1), which means that price/income and quantity
demanded change by the same percentage
4. Perfectly inelastic: When ED is zero (ED=0), which means that as price or income
changes quantity demanded does not change
5. Perfectly inelastic: When ED is equal to infinity, which means that a small change in
price leads to an infinite (immeasurable) change in quantity demanded
Supply
The quantity of goods that suppliers are willing and able to buy at a given time to produce at a given
price.
Determinants of supply
a) Price- The higher the market price, the more suppliers will wish to supply and vice versa.
b) Costs of production- If production costs of a commodity are high, its supply will be low.
c)Number of sellers-Many sellers of the same commodity in the same market and time results in
high supply of goods and services.
d) Government policy- Government subsidy to produce a given commodity increases its supply,
whereas taxation imposed decreases its supply.
e) Level of technology-Improved and advanced technology enable firms to produce more with a
given input of resources, and so increase the amount that they are willing to supply at given prices
f) Weather – Favourable weather conditions leads to increased production, hence an increase in
supply and vice versa.
g) Price expectations- The supply of a good will be low if the future price of the same product is
expected to increase
Law of supply
The Law of supply sates that when price increases, other factors remaining constant, quantity
supplied of a commodity also increases and vice versa
Graph illustration;
Price elasticity of supply/elasticity of supply (ES)
This is a measure of how the quantity supplied of a commodity responds to changes in price,
expressed as a percentage.
Formula;
Elasticity of supply = % quantity supplied
% Price
Types of elasticity of supply
1. Elastic when ES > 1
2. Inelastic when ES < 1
3. Unitary When ES=1
4. Perfectly inelastic when ES = 0
5. Perfectly elastic when ES equals infinity
Equilibrium price and its determination
Equilibrium price means the price at which demand, and supply of a given commodity are equal.
Determination
Equilibrium price is sometimes referred to as the market clearing price because at its price there
is neither excess demand nor supply. It results from the interaction between the supply curve
and the demand curve. At equilibrium point, supply and demand are balanced. At lower price,
the quantity demanded exceeds quantity supplied. The competition between consumers for the
limited supply will force the price up towards the equilibrium price. At the higher price, supply
exceeds demand and sellers will compete among themselves to get rid of excess supply. This will
force the price down, again towards the equilibrium price. At equilibrium price quantity
demanded exactly equals quantity supplied, so there is no competition between buyers and
sellers. Buyers purchase all what sellers bring to the market.
Differences between complementary and supplementary goods
Complementary goods
-Good A and B are said to be complementary if an increase in the production of one good cause
a simultaneous increase in the production of another good and vice versa.
-The are goods which are jointly supplied
-They are used together
-Examples tea and sugar, bread and butter, rice and mayonnaise etc
Supplementary goods
-Goods A and B are said to be supplementary if an increase/decrease in the demand of one good
does not cause any change in the demand of another good
-They use same resources at different times
-For example, using the same piece of land to grow maize in summer and spinach in winter
Opportunity cost
means the benefit/value forgone by not using that resource in its best alternative use arising
from the fact that resources are scarce, and the choice between many different alternatives on
how or in which ways to use them has to be made. Opportunity cost allows comparison of the
benefits of different business options in order to decide which choice has the highest benefit to
maximise profit.
For example
Factors of production
[Link]- Refers to all natural resources found on the earth’s surface and underneath, which
includes rivers, forests, minerals and rangelands, so land isa source of raw materials or natural
resources. Land is used to grow crops on it, is also used to construct buildings such as factories,
and farm storage buildings. Land is also used to construct dams on it. Land act as the basis for
transport and determines the total production.
[Link]- Is of two types of capital; capital machinery and capital money. Capital money is used
to buy assets used in the productions such as seeds, fertilizers, acaricides etc. Capital machinery
is used in the production process to carry out ploughing, planting, pest control etc. Capital is also
used to pay labour and purchase land. Provides means for transport and increases productivity.
[Link]- Refers to the physical and mental energy exerted by human beings in the production
of goods and services. Also design assets or machinery used in the production. Other factors of
production need labour to be productive.
[Link]/management
Refers to the decision making about resource allocation. It organises and utilises other factors of
production and increases productive efficiency of the farm. Also enable new products
(innovation)to be developed.
The Law of Diminishing returns
It states that if successive units of variable input are added to a fixed set of resources in a
production process, marginal return eventually declines.
Instances of the uses of the Law of Diminishing returns
-Feeding fixed number of dairy cows for milk production with varying amount of feeds
-Use varying units of labour on a fixed unit of land in the production of maize or any field crop
Risks and uncertainty
Risk refers to a situation in which the outcome is not certain but where probabilities of
alternative outcomes are known or can be estimated. Risks are predictable.
Uncertainties refers to situations in which the outcome is certain, and probabilities of alternative
outcomes are not known or cannot be estimated. Risks are not predictable.
Risks Uncertainty
Fire damage Change in demand
Loss due to theft Change in labour, supply, availability of
labour
Crop /animal damage due to
storm/hail/lightning Change in government policy
Liabilities for damages to or by vehicles Earthquakes
Death or sickness Outbreaks of war and coup de tat
Accidents Change in prices of inputs and products
Pests and diseases Breach of contracts and transport liability
Crop yields
FARM MANAGEMENT
Types of costs
Fixed costs- These are input costs that do not change in direct relation to the level of output in
the short run and they have to be met even if nothing is produced. They are unavoidable in the
short run.
Variable costs-These are input costs that change in direct relation to output and do not occur if
nothing is produced.
Total costs- This is the sum of all fixed and a variable cost used in the production of a given
quantity of a product.
Total costs =total fixed costs + total variable costs
Variable costs Fixed costs
Costs of owning fixed assets: depreciation,
Specific casual/temporary labourers licenses, insurances
Raw materials such as seeds, fertilizers, Salaries of permanent labour
chemicals, livestock purchases, stock feeds
Costs of using fixed asset: fuel and repair and
maintenance Loan repayments eg mortgages
Contract hire costs: transport, machinery,
labour Rent and taxes
Veterinary expenses and dip fees Bank charges
Selling costs and levies Interest on existing loans
General overheads: car expenses, licences
Specific production insurance and general insurances, road and other rates
Depreciation- The fall/decrease in the value of fixed assets resulting from age, use (wear and
tear) and obsolescence.
Gross income/total revenue/total returns-Total value of output for given period i.e. the sum of
all income adjusted for valuation changes minus livestock purchases during that period.
Gross margin- Gross income minus variable costs attributable to that enterprise.
Gross margin=Gross income -Total variable costs
Profit and loss account
An account which is about calculating income/sales and expenditures/purchases of an
agricultural enterprise in order to determine whether the business is making
profit/loss/breaking even.
Balance sheet
A financial snapshot which is about assets and liabilities of the business
Terms associated with balanced sheet
Assets: Productive resources owned by a business
Current/liquid assets: Assets that are likely to be converted to cash or used up within one year
duration. Examples include.
-Raw materials -Cash at hand
-Cash at the bank -Work in progress
-Debtors (accounts receivable) -Value of growing crops
-Livestock held at sale -Prepaid expenses
-Cash value of life insurance -Finished goods
Fixed assets: These are assets to be used gainfully in the operation of business for an extended
period of time and they are to be converted into cash within a period more than one year.
Examples
-Land -Buildings
-Machinery -Breeding stock
-Equipment and tools -Furniture and fittings
-Motor vehicles -Plant (industrial equipment)
Liability: An obligation or a debt a business owes to others.
Current liabilities: Liabilities schedule to be paid in a short period of time, usually in one year or
less. Examples are
-Creditors -Bank overdraft
-Interest payable -Tax payable
Long term liabilities: Liabilities scheduled to be paid over periods longer than one year.
Examples include
-Bank loans -Bonds
-Share capital -Mortgage
-Debenture -Reserves
Owners’ equity/net worth: Is the net worth of the business
Owners’ equity= Assets -Liabilities
It represents the amount of money left for the owner of the business should all the assets be sold
and all the liabilities paid on the balance sheet
Working capital: The difference between current assets and current liabilities of a business. It is a
measure of liquidity of a business.
Solvency: Measures whether total assets are greater the total liabilities, if not the business is
insolvent or bankrupt.
Liquidity: The ability of the business to generate cash needed to meet cash obligations without
seriously disrupting the production activities of the business
Skills needed to start an agribusiness enterprise
-Leadership skills -Marketing skills
-Financial management skills -Communication skills
-Technical skills -Managerial skills
-Information technology skills -Information resourcing skills
-Problem solving skills -Time and stress management skills
Forms of business organisation
[Link] proprietorship
This is an unincorporated (unregistered) business organisation formed, owned and run and
controlled by one person. Th e owner is called sole proprietor/proprietor
Features/characteristics of sole proprietorship
-Formation, ownership running, and control is by one person
-The business has unlimited liability for debts of the business and the owner receives all the
profits and losses of the business
-Capital to run the business is provided by the proprietor and business properties belongs to him
-The business is easy to start
-Business income is taxed as a personal income
-Proprietorship is terminated upon the death of owner/retirement of the owner
Advantages
-The business is easy to form as there are no complex procedure to follow and only a small
amount of money is required
-The proprietor receives all the profits from the business
-The proprietor enjoys independence in running the business and there is quick decision making
as only one person is involved
Disadvantages
-There is unlimited liability of the business debts as well as limited sources of finance for
expansion
-No legal distinction between the proprietor and the business
-Upon death of owner of the business /retirement business terminates
-It has limited capacity to grow and develop into large business
-Success of the business depends on the managerial and leadership skills of the proprietor
[Link]
This is an unincorporated business entity owned and by 2 or more persons.
Features/characteristics of partnership business
-Two-twenty partners jointly own and manage the business
-There should be partnership deed (written agreement) signed by all partners
-Partners have unlimited liability for the debts of the business
-Profits and losses are shared among partners according to an agreed formula
-Properties of the business belongs jointly to all partners, but can be owned in the partnership
name
-Management decisions are in accordance with the partnership deed
-Capital for the business comes from partners personal funds/ from money borrowed by
partnership
-Decision of the partner on behalf of the partnership binds them all
-When one partner dies or withdraws a new partnership must be formed
-Each partner is taxed on his/her share of the business income at the personal income tax
Advantages
-It is easy to form to form as there are no complex procedure to follow as the case with
accompany
-Division of the profits are according to the partnership agreement
-The partners skills usually complement each other
-It promotes larger, more efficient business than sole proprietorship and has a capacity to grow
into aa large business
-There is very little government regulation in this form of ownership
Disadvantages
-There is limited capital for expansion as sources of finance are limited to partners and their
friends and relatives
-There can be delayed decision making as several people are involved
-It has unlimited liability for debts
-There is lack of continuity of the business if a partner dies or withdraws
[Link] company
An incorporated business organisation owned by shareholders, who have limited liability, who
employ one or more directors to run the business on their behalf
Features/characteristics of a company
-It is a separate legal entity distinct from shareholders
-Owned by shareholders, according to or in proportion of shares owned/held
-Capital is obtained by selling of shares in the ownership of the business
- Management is in the hands of one or more directors elected by shareholders
-Shareholders have limited liability for debts of the business
-There is memorandum of association which defines the aims for which a company is formed
and sets limits of its powers, and Article of Association which sets out details of provisions and
procedures on how the affairs of the company are to be run and managed.
-Shareholders pay separate tax on their income and the company exist also as a separate
taxpayer as corporate tax
Advantages
-Shareholders have limited liability for debts of the company
-It has greater ease of attracting funds for growth
-It provides greater chance of reducing total tax liability
-The business is subject to government and legal regulations which help to safeguard interests of
shareholders, people and organisations who deal with the company.
Disadvantages
-It is difficult to form as there are many complex procedures to follow
-There is no privacy as the company is required by law to submit annual returns which are open
to the public for scrutiny
-Limited companies are subjected to complicated government regulations
-Difficulty in getting credit arising from Limited liability
-Accountants charge high prices for preparing accounts for companies as accounts must be
audited.
[Link]
A cooperative society is a registered association of 10 or more people with common economic
needs who have come together to own and control a business enterprise for the satisfaction of
their needs in accordance with cooperative principle.
Features/characteristics of a cooperative business
-Association is for self-help or mutual help, so common economic need is the basis of association
-Control is by democratic principle of one man, one vote regardless of shareholding
-Surplus or savings are distributed in a manner as would avoid one member gaining at the
expense of others
-All members in a general meeting decide upon bye laws, rules, and procedures for running a
cooperative business
-Admits anyone who needs its services without any discrimination, so it observes the principle
voluntary and open membership.
-Members are paid limited interests on their share capital.
-Makes provision for education of its members, officers, and employees and of general public in
the principles and techniques of cooperation both economic and democratic.
Advantages
-Promotes spirit of self-help and mutual help which results in economic upliftment of co-
operators/members
-Caters for members of society with limited means and are service focused for members rather
than profit.
-There is free education and training for cooperative members.
-Members have easy access for savings, credit, and loan facilities at the cooperative banks.
Disadvantages
-People are unlikely to work hard as for cooperatives as for themselves.
-There is a conflict between the cooperation ideal of all members having equal say and the
practical need for one competent decision maker.
-Needs skilled management which is often scarce in developing countries
Organisational structure of a business
Shows a hierarchy of authority and responsibility of a business organisation, the basic agreement
of roles in an organisation within which personnel will be allocated the tasks of a business.
Example of an organisational structure:
Marketing
Marketing refers to all business activities involved in the flow of goods and services from the
point of initial production until they reach the ultimate consumers.
Marketing functions
Physical functions of marketing
Storage-Holding and preservation of goods from the time they are produced to the time they
needed. Because there is a time gap between production and consumption of goods. Storage
function also protects products against damage or deterioration.
Transportation- carrying goods from one place to another, from where they are available to
where they are needed.
Warehousing- Storing throughout the year and releasing them as and when they are needed
Exchange functions of marketing
Buying and assembling It involves determination of ones needs and finding out the sources of
supply, assembling means merely putting together of goods to secure larger lots of shipment, for
sale.
Selling-It involves the actual transfer of a title from the producer to the consumers using price. It
also involves physical presentations of products, advertising, and other promotional devices.
Processing-It involves changing the basic form of products to the form actually desired by
consumers. In agriculture processing functions could take the form of milling, slaughtering,
canning, drying, baking, brewing etc
Facilitating functions of marketing
Standardisation-means establishment of certain standards based on intrinsic qualities of a
commodity. The quality may be determined on the basis of various factors like size, colour, taste
appearance.
Grading -is the sorting of products into classes based on standard criteria or parameters.
Financing-Provides money that finance marketing activities from the initial buying of the
produce to its sale to final consumers.
Risk bearing-There is a possibility of loss in the marketing process and that is the source of the
risk. Risk bearing is covered by most market agents by insurance.
Market intelligence-This function involves collecting, interpreting, and disseminating a large
variety of data necessary to the smooth operation of the marketing process. Branding- means
giving a name or symbol to a product in order to differentiate it from competitive products
Pricing-The most important function as it determines the success or failure of business.
Packaging and packing- involve enclosing individual product units in individual small packages eg
boxes, cartoons, bottles, cans that are then packed into master containers. Standardisation
facilitates buying and selling. Packing means wrapping and crating goods, with the aim of
protecting the product against damage, theft, adulteration on its way to the market.
Importance of market research
-determine competitors
-determine new or more business opportunities
-understand the target markets
-determine the price of product
-enable development/boosting of new and effective strategies and investigate expansion
opportunities
-enable researcher to meet demands of customers
-Identify consumer problems etc
Effective marketing research process involves:
[Link] the problems and research objectives
[Link] a situational analysis and an informal investigation
[Link] the research plan, deciding on which secondary and primary sources of data to use
4. Collecting data
5. Analysing data into useful information
[Link] or reporting the findings to management
Reasons why businesses advertise
-To increase sales and demand
-To build customer awareness of business and brand
-To gain an advantage over your competitors
-To communicate information about your business
-To increase customer needs
-To promote the benefits of your products or services