Every farmer, every farm, every firm, every society, every organization and every country carry out production activities to get more income and profit. However, many of them do not succeed in their goals, simply because they do not have sufficient knowledge of economic principles underlying production of any commodity or service, although all the production activities operate in an economic environment and all the farmers, farms, organizations, and businesses have economic and financial principles operating behind them. Unlike the manufacturing industries which operate within the framework of economic principles, the farmers engaged in food production are only poorly informed about the economic principles and marketing concepts, which ultimately bring them only less than the desirable output. That is the reason why, the farmers, mostly of poor and vulnerable downtrodden, are unable to eke out a living of their less sustainable farming. With little knowledge on what to produce, how to produce and how much to produce, not only small farmers, but also the big farmers are unable to make viable economic decisions to run their farm businesses profitably. Economics is not just concerned with concepts, formula, laws and graphs. Instead, rather it is an array of knowledge and procedures that allow the farmers to learn and implement the processes of production more effectively. Hence, everyone, who is engaged in teaching and learning of farming activities, will need to have a sufficient working knowledge of economics and marketing to pass on the principles and applications of economics and marketing to the farmers, so as to help them to produce effectively and market efficiently. The world today is engaged in more intensive and semi-intensive farming systems and hence, a better knowledge of economics is all the more important than ever before. Thus, understanding the principles of economics and marketing has become crucial these days, especially for the students, teachers, researchers, and decision makers of the farming sector. That is the reason why, there is and there will be a high demand for skills in economics and marketing in a wide variety of areas - colleges, universities, research labs, industry, training centres, etc. of the farm sector. This book, written with the basic objective of infusing the knowledge of farm economics and marketing into the mainstay of all the stakeholders in the farm business, is expected to provide the basics and applications of economics and marketing in all the farm businesses, viz., agriculture, livestock, poultry, fisheries, horticulture, farm engineering, etc.
Dr. M. Thirunavukkarasu is the former Professor and Head, Dept. of Livestock Business Management, Madras Veterinary College, Tamil Nadu Veterinary and Animal Sciences University (TANUVAS), Chennai, Tamil Nadu (India). He is graduated from Madras Veterinary College in the year 1986, did his post-graduation in Agricultural Economics at Tamil Nadu Agricultural University (1987-90), Coimbatore and doctorate in Animal Husbandry Economics (1993-96) at TANUVAS, Chennai. He joined the TANUVAS, Chennai in 1989 as an Assistant Professor and was promoted as an Associate Professor in 1997. He was elevated as the Professor of Animal Husbandry Statistics and Computer Applications in 2000. Considering his eminent achievements in education, research, extension, administration and institution building, he was then raised up as the Professor(Higher Grade) in 2011. His laudable accomplishments have also enabled him to hold the coveted posts of the Controller of Examinations, TANUVAS during 2012-15 and the Dean, Veterinary College and Research Institute, Tirunelveli (2016-18), besides holding the post of the Registrar, TANUVAS for a brief period from April to August, 2018. He underwent advanced training programmes on Livestock Economics and Planning and Quantitative Methods in Livestock Health and Production at the University of Reading, UK, in 1998 and training on Instructional Technology – eLearning guidelines, standards and protocols at Michigan State University, USA in 2009. He has also visited Uganda and Malawi for research and consultancy works. He has published 117 research papers in International and National journals, organised 3 international conferences, presented more than 65 research papers (including 5 lead/invited papers) in International & National Conferences/ Seminars, edited 11 books and authored 18 books, teaching manuals and booklets. He has been bestowed with 19 awards including the Best PG Student Award, Best Teacher Award, Best Scientist Award and Lifetime Achievement Award in his professional career spanning more than 33 years. He has implemented 21 Research Projects funded by National and International agencies including ICAR, NAIP, FAO, USDA, GoI, GoTN, AWBI, etc. He has started four new post-graduate programmes – M.V.Sc., M.F.Sc. and M.Sc. in Biostatistics (2011-12) and PG Diploma in Animal Health Economics (2019-20). He has contributed significantly in the areas of Livestock Economics, Animal Health Economics, Bio-statistics, IT Applications in Animal Sciences and Development of e-Courses for Veterinary Education.
1. INTRODUCTION ........................................................................... 1
1.1 Definitions of Economics ....................................................... 1
1.2 Need for the Subject of Economics ...................................... 2
1.3 Approaches to the Study of Economics .............................. 3
1.4 Economics as Positive Science and Normative Science ... 4
1.5 Wants ........................................................................................ 4
1.5.1 Classification of wants .............................................. 5
1.5.2 Characteristics of wants ............................................ 5
1.6 Goods ........................................................................................ 6
1.7 Important Terminologies used in Economics .................... 6
1.8 Factors of Production ............................................................. 7
1.8.1 Land .............................................................................. 8
1.8.2 Labour .......................................................................... 8
1.8.3 Capital .......................................................................... 9
1.8.4 Organization (Entrepreneurship)............................ 9
1.8.4.1 Types of Organizations ............................................. 9
2. THEORY OF CONSUMER BEHAVIOUR.............................. 11
2.1 Marginal Utility Analysis .................................................... 11
2.1.1 Law of Diminishing Marginal Utility ................... 13
2.1.2 Assumptions in the Law of Diminishing Marginal Utility ........................................................ 13
2.1.3 Importance of the Law of Diminishing Marginal Utility ........................................................ 13
2.1.4 Consumer’s Surplus ................................................. 14
2.2 Indifference Curve Analysis ............................................... 15
2.2.1 Assumptions in Indifference Curve Analysis ...... 15
2.2.2 Indifference Schedule .............................................. 15
2.2.3 Indifference Curve.................................................... 16
2.2.4 Indifference Map ...................................................... 16
2.2.5 Properties of Indifference Curves .......................... 17
2.2.6 Consumer Equilibrium in Indifference Curve Analysis .......................................................... 18
2.2.6.1 Graphical Method.................................................... 18
2.2.6.2 Algebraic Method .................................................... 18
2.2.6.3 Income Effect ............................................................ 20
2.2.6.4 Price Effect ................................................................ 20
3. THEORY OF DEMAND .............................................................. 23
3.1 Demand Schedule................................................................. 23
3.2 Types of Demand.................................................................. 23
3.3 Demand Curve ...................................................................... 24
3.4 Law of Demand .................................................................... 24
3.4.1 Reasons for Inverse Relationship between Price and Quantity Demanded .............................. 25
3.5 Exceptional Demand Curve ............................................... 25
3.6 Types of Demand.................................................................. 26
3.7 Changes in Demand............................................................. 26
3.8 Elasticity of Demand ............................................................ 27
3.8.1 Price Elasticity of Demand...................................... 27
3.8.2 Income Elasticity of Demand ................................. 28
3.8.3 Cross Elasticity of Demand..................................... 29
3.8.4 Magnitudes of Demand Elasticity ......................... 29
3.8.5 Factors Affecting Elasticity of Demand................ 31
3.8.6 Uses of Elasticity of Demand.................................. 32
3.8.7 Factors affecting Demand for a Good .................. 32
3.8.8 Income – Consumption Line or Curve ................. 33
3.8.9 Engel’s Law and Curve ........................................... 35
4. THEORY OF SUPPLY................................................................... 39
4.1 Supply ..................................................................................... 39
4.1.1 Supply Schedule ....................................................... 39
4.1.2 Supply Curve............................................................. 39
4.1.3 Law of Supply ........................................................... 40
4.2 Characteristics of Supply .................................................... 40
4.3 Types of Supply..................................................................... 40
4.4 Determinants of Supply....................................................... 40
4.5 Extension and Contraction of Supply Vs. Increase and Decrease in Supply ....................................................... 41
4.6 Elasticity of Supply ............................................................... 42
4.6.1 Price Elasticity of Supply ......................................... 42
4.6.2 Cross Elasticity of Supply........................................ 43
4.6.3 Magnitudes of Supply Elasticity ............................ 43
4.6.4 Factors affecting Elasticity of Supply .................... 44
4.6.5 Uses of Elasticity of Supply..................................... 46
4.7. Consumer Equilibrium......................................................... 46
4.7.1 Equilibrium Price ...................................................... 46
4.7.2 Changes in Equilibrium Price ................................. 47
5. THEORY OF PRODUCTION .................................................... 49
5.1 Meaning of Production ........................................................ 49
5.2 Factors of Production ........................................................... 49
5.3 Important Concepts used in Production .......................... 50
5.4 Characteristic Features of Farm Production .................... 50
5.5 Production Relationships .................................................... 51
5.5.1 How much to produce? (Factor - Product or Input – Output Relationship) ................................. 52
5.5.1.1 Constant Returns Factor-Product Relationship ............................................................... 52
5.5.1.2 Increasing Returns Factor-Product Relationship ............................................................... 54
5.5.1.3 Decreasing Returns Factor-Product Relationship ............................................................... 55
5.5.1.4 Classical Production Function or Relationship ............................................................... 56
5.5.2 How to Produce? Factor - Factor (Input - Input) Relationship.................................... 65
5.5.2.1 Isoquant ..................................................................... 65
5.5.2.2 Characteristic Features of Isoquant...................... 66
5.5.2.3 Marginal Rate of (Factor) Substitution (MRFS or MRS) ........................................................ 66
5.5.2.4 Different Forms of Factor or Input Substitution ................................................................ 67
5.5.2.5 Isoquant Map ........................................................... 70
5.5.2.6 Finding the Least-Cost Combination of Inputs in Factor – Factor Relationship.................. 70
5.5.2.7 Isocline, Ridgeline and Expansion Path .............. 73
5.5.3 What to Produce? Product – Product (Output - Output) Relationship ............................. 74
5.5.3.1 Types of Product – Product Relationships .......... 76
5.5.3.2 Iso-Revenue Line ...................................................... 79
5.5.3.3 Optimum Product Combination in Product – Product Relationship .............................................. 80
5.5.3.4 Isocline, Ridgeline and Expansion Path .............. 82
5.5.3.5 Returns to Scale........................................................ 83
5.5.3.6 Economy of Scale or Economy of Large-Scale Production ........................................... 84
5.5.3.7 Concept of Short and Long Run Periods ............ 84
6. COST CONCEPTS AND COST CURVES .............................. 85
6.1 Types of Costs ........................................................................ 85
6.2 Opportunity Cost.................................................................. 86
6.3 Total Cost, Average Cost and Marginal Cost.................. 86
6.4 Cost Curves ............................................................................ 88
6.5 Determining Economical Optimum Production using Cost Curves ................................................................. 90
6.6 Returns to Scale ..................................................................... 92
6.7 Economy of Scale or Economy of Large-Scale Production.............................................................................. 92
6.8 Concept of Short and Long Run Periods ......................... 93
7. FARM FINANCIAL MANAGEMENT .................................... 95
7.1 Introduction ........................................................................... 95
7.2 Project Appraisal .................................................................. 95
7.2.1 Undiscounted Measures .......................................... 96
7.2.1.1 Ranking by Inspection ............................................ 96
7.2.1.2 Payback Period......................................................... 96
7.2.1.3 Proceeds per unit Outlay........................................ 97
7.2.1.4 Average Annual Proceeds per Unit Rupee of Outlay............................................... 97
7.2.2 Discounted Measures ............................................... 97
7.2.2.1 Net Present Value (NPV) or Net Present Worth (NPW) ........................................................... 98
7.2.2.2 Benefit – Cost Ratio (BCR) ..................................... 98
7.2.2.3 Internal Rate of Return (IRR) ................................ 99
7.2.3 Measures of Financial Performances of Farm Businesses ......................................................105
7.2.3.1 Income Statement ..................................................105
7.2.3.2 Cash Flow Statement ............................................106
7.2.3.3 Balance Sheet..........................................................109
7.2.4 Farm Loan Repayment ..........................................114
7.2.4.1 Straight End Repayment (or) Lumpsum Repayment ...............................................................115
7.2.4.2 Partial Repayment or Variable Repayment ......115
7.2.4.3 Amortized Even Repayment ...............................115
7.2.4.4 Amortized Decreasing Repayment ....................116
8. LINEAR PROGRAMMING – A TOOL FOR OPTIMUM PRODUCTION ..........................117
8.1 History ..................................................................................117
8.2 Applications .........................................................................118
8.3 Advantages of Linear Programming...............................118
8.4 Disadvantages of Linear Programming..........................119
8.5 Components of a Linear Programming Problem ..........119
8.6 Formulating a Linear Programming Problem – An Example .........................................................................120
8.7 General Form of the Linear Programming Problem.....121
8.8 Solving Linear Programming Problems ..........................123
8.8.1 Steps in Graphical Method of Finding Solution to LP Problem ..........................................124
8.8.2 Finding the Optimal Solution Point for Objective Function..................................................127
8.8.3 Simplex Method of Solution of Linear Programming Problems .........................................131
8.8.4 Properties or Characteristics of Simplex Procedure .................................................................134
8.8.5 Properties of the Tableau ......................................136
8.8.6 Initial Basic Feasible Solution Tableau ................137
8.8.7 Criterion for Selection of Non-basic Variable to become Basic Variable .......................................137
8.9 Interpretation of Results Obtained through Simplex Algorithm..............................................................141
8.10 Minimization Problems ......................................................142
8.11 Duality in Linear Programming.......................................146
8.11.1 Primal-Dual Relationship......................................146
8.11.2 Primal Problem........................................................146
8.11.3 Corresponding Dual Problem ..............................146
8.11.4 Diagrammatic Representation of Primal – Dual Relationship ...................................................151
9. THEORY OF MACROECONOMICS.....................................153
9.1 Definition of Macroeconomics .........................................153
9.2 National Income Measures ...............................................153
9.2.1 Gross National Product (GNP).............................154
9.2.2 Gross Domestic Product at Market Prices (GDPMP) ....................................................................155
9.2.3 Net Domestic Product (NDP) ...............................155
9.2.4 Nominal National Income.....................................155
9.2.4.1 Measurement of National Income ......................155
9.3 Inflation and Deflation ......................................................157
9.4 Price Indices .........................................................................157
9.4.1 Consumer Price Index ...........................................157
9.4.2 Wholesale Price Index............................................157
9.5 Interest Rate .........................................................................158
9.6 Human Development Index .............................................158
9.6.1 Calculating Human Development Index ...........158
9.7 Investment - Savings (IS) and Liquidity preference - Money supply (LM) .....................................159
9.7.1 Characteristics of IS-LM Graph ...........................160
9.8 Money Market .....................................................................160
9.9 Monetary Policy and Fiscal Policy ...................................161
9.9.1 Monetary Policy in India .......................................162
9.9.2 Fiscal Policy in India ..............................................162
9.9.2.1Main Objectives of the Fiscal Policy in India .....163
9.10 International Macroeconomics .........................................163
9.10.1 New International Economic Order (NIEO) .....164
9.10.2 Balance of Payments (BoP) ...................................165
9.10.3 Foreign Exchange Reserves ...................................168
9.10.4 Devaluation and Revaluation ..............................168
10. CONCEPT OF MARKET AND MARKETING ...................169
10.1 Market and Marketing .......................................................169
10.2 Importance and Significance of Farm Products Marketing .............................................................................169
10.3 Market Structure .................................................................170
10.3.1 Features of market structure ................................170
10.4 Type of Market Structure ..................................................170
10.4.1 Market Structures on the Seller Side ...................170
10.4.2 Market Structures on the Buyer Side ..................171
10.5 Market Price and Normal Price .......................................172
10.6 Classification of Markets ...................................................172
10.6.1 On the Basis of Operation .....................................172
10.6.2 On the Basis of Area/Coverage ...........................173
10.6.3 On the Basis of Time Span ....................................173
10.6.4 On the Basis of Volumes of Transactions ...........174
10.6.5 On the Basis of Nature of Transactions ..............174
10.6.6 On the Basis of Number of Commodities Transacted ...............................................................174
10.6.7 On the Basis of Nature of Commodities .............175
10.6.8 On the Basis of Stage of Marketing .....................176
10.6.9 On the Basis of Extent of Public Intervention ...176
10.6.10 On the Basis of Type of Population Served......177
10.7 Approaches to the Study of Marketing ..........................177
10.7.1 Functional Approach.............................................177
10.7.2 Institutional Approach ..........................................178
10.7.3 Commodity Approach ..........................................179
10.7.4 Behavioural Systems or Decision-making or Management Approach ...................................179
10.7.5 Institutional Approach to Marketing .................180
10.8 Creation of Utilities in the Marketing Process ...............181
10.9 Marketing Channel ............................................................182
10.9.1 Types of Marketing Channels ..............................182
10.9.2 Unique Qualities of Farm Products .....................182
10.9.3 Role of Market Channels and Middlemen .........182
10.9.4 Selection of a Market Channel .............................183
10.9.5 Factors Affecting the Marketing Channel .........184
10.10 Marketing Cost....................................................................188
10.10.1 Factors affecting the marketing cost of farm products........................................................188
10.10.2 Importance of Studying Marketing Cost..........189
10.11 Marketing Efficiency ..........................................................189
10.11.1 Price Spread ...........................................................189
10.12 Marketable Surplus and Marketed Surplus ...................191
10.12.1 Importance of Marketable Surplus ....................191
10.12.2 Marketed Surplus .................................................192
10.12.2.1 Why the Marketable Surplus often equals Marketed Surplus? .................................................192
10.13 Marketing Information ......................................................193
10.14 Problems in Farm Products Marketing ...........................193
11. EXPORT AND IMPORT OF FARM PRODUCTS IN INDIA ....................................................................................197
11.1 Export and Import of Farm Products in India ..............197
11.1.1 India’s Agricultural Exports and Imports ..........199
11.1.2 Imports of Agricultural Products ........................201
11.1.3 Facts about India’s Agricultural Exports ...........201
11.2 Export Destinations ............................................................202
11.3 Export of Livestock Products ............................................203
11.4 Demand and Supply Projections of Livestock and Poultry Products .........................................................203
11.5 Changing Pattern of Livestock Products International Trade in India .............................................208
11.5.1 Dairy Products Trade ............................................216
11.5.2 Poultry Products Trade .........................................212
11.5.3 Processed Meat Trade ............................................213
11.5.4 Buffalo Meat Trade ................................................214
