Farm Management Notes

Farm Management: Economic Principles of Production Levels

Key Decisions in Farm Management

• As a farm or ranch manager, critical decisions include:
• How much of the product to produce?
• What resources to use in the production of the product?

Chapter Outline

• The Production Function: Understanding the relationship between inputs/resources and outputs/products.
• Marginal Analysis: Analyzing incremental changes to maximize profit.

Chapter Objectives

• Explain marginal analysis and its importance in decision-making.
• Illustrate the relationship between variable inputs and outputs using a production function.
• Identify the profit-maximizing point using marginal concepts.

Application of Economic Principles

• Economic principles consist of rules for making decisions that maximize profit, following three steps:

1. Acquire physical and biological data on resources and resulting marketable products.
2. Collect price data for both inputs and outputs.
3. Apply economic decision-making rules to maximize profit.

The Production Function

• Represents the relationship between different input amounts and the resulting output.
• Can be displayed as:
• A table,
• A graph,
• A mathematical function.
• Sometimes referred to as a response curve or yield curve.

Total Cost and Total Revenue

• Total Cost (TC):
• Calculate variable cost by multiplying the quantity of a variable input by its price.
• Add fixed costs to variable costs for TC.
• Total Revenue (TR):
• Derived by multiplying the level of output by the price per unit.
• Accounting Profit:
• The difference between TR and TC.

Marginal Analysis

• The term "marginal" refers to changes at the edge or “margin.” It denotes incremental variations in production and costs.
• Marginal Concepts:
• Profit-maximizing input levels found by examining marginal changes in costs and revenues:
  • Marginal Revenue (MR): Change in total revenue from selling one additional unit (MR = ΔTR/Δoutput).
  • If price is constant, MR equals the output price.
  • Marginal Cost (MC): Change in total cost associated with producing one more unit (MC = ΔCost/Δoutput).

The Decision Rule

• The profit-maximizing condition is met at MR = MC.
• If exact values are not available, utilize the closest approximation but ensure MR does not fall below MC.

Varying Prices and Marginal Concepts

• Output and input prices may vary as production levels change.
• Example: Livestock might command lower prices per pound as they become heavier, affecting marginal revenue.

Summary of Economic Principles

• Economic principles leveraging marginal analysis provide essential guidelines for effective decision-making in farm management.
• Equating MR and MC facilitates the identification of the optimal output level for profit maximization.