Basic Economic Principles applied in Agriculture

CONTENT

• Basic economic concepts
• Principle of demand and supply
• Effects of demand and supply
• Law of diminishing return

BASIC ECONOMIC CONCEPTS

The following economic concept explains the behavior of consumers of agricultural goods. These concepts or elements includes

1. Wants: this is the desire or needs of man to own goods and services that give satisfaction. These wants are insatiable because the resources needed to cater for them are limited (in short supply). The basic need or wants of man are food, clothing and shelter.
2. Scarcity: this refers to the limited supply of resources needed to meet (satisfy) wants.
3. Choice: this is the system employed in selecting one need to satisfy out of a number of alternatives.
4. Scale of preference: is a list of unsatisfied wants in order of importance. This is relative to the individual
5. Opportunity cost: is the satisfaction of one want or need at the expense of another. It is expressed in terms of the value or worth of forgone alternative. It is also referred to as the true or real cost while money cost is the amount spent in order to acquire a particular good or service.

PRINCIPLES OF DEMAND AND SUPPLY

Demand: Demand may be defined as the quality of goods a consumer is willing and ready to buy at a given price over a given period of time. Demand is effective when willingness to buy is backed with the ability to pay.

LAW OF DEMAND

The law of demand states that the higher the price, the lower the quantity of goods that will be demanded or the lower the price, the higher the quantity of goods that will be demanded.

DEMAND SCHEDULE

This is a table showing the relationship between the price and quantity of that commodity demanded. This table below obeys the law of demand.

DEMAND CURVE

Demand Curve is a graph showing the relationship between price and quantity of that commodity demanded. This curve derived from demand schedule.

Demand Curve:

FACTORS AFFECTING DEMAND

1. Price of good
2. The price of other commodities
3. Income of the consumer
4. Changes in taste of consumer
5. Population
6. Periods of festivals
7. Expectation of changes in prices
8. Taxation

EVALUATION

1. What is demand?
2. List five factors affecting demand

SUPPLY

Supply may be defined as the quantity of goods which a producer is willing and ready to offer for sale at a given price over a given period of time. Quantity of goods offered for sale in the market is referred to as effective supply.

LAW OF SUPPLY

The law of supply states that the higher the price, the higher the quantity of produce that will be supplied or the lower the price, the lower the quantity of produce that will be offered for sale.\

SUPPLY SCHEDULE

Supply Schedule is the table which shows the relationship between price and quality of commodity supplied. See the table below.

SUPPLY CURVE

Supply Curve is a graph showing the relationship between price and quantity of goods supplied or offered for sale. The supply schedule is used to draw the supply curve as shown below.

Supply Curve:

FACTORS AFFECTING SUPPLY

1. Price of good
2. Level of Technology
3. Cost of production
4. Government Policy
5. Weather condition
6. Taxation
7. Price of other commodities
8. Number of producers
9. Natural disasters

EVALUATION

1. What is supply?
2. State the law of supply.

LAW OF DIMINISHING RETURN

The law states that as successive amount of a variable factor are applied to one or more fixed factors, output might increase a lot at first, but there comes a point at which the use of an additional amount of the variable factor will add less to output than the proceeding amount.

In other words, it state that as more and more units of a variable factor of a production are added to fixed factor, after a certain point, the marginal product diminishes or declines.

Diminishing returns is caused by poor/inexperienced management resulting in the use of more than required amount of one or more factors of production thereby making them less effective.

IMPORTANCE OF LAW OF DIMINISHING RETURNS IN AGRICULTURE

1. It enables managers effectively combine factors of production to attain optimal output.
2. It minimizes wastage on unproductive input.

DEFINITION OF TERMS

1. Fixed factors: these are assets or resources whose value does not change in the short run e.g Land
2. Variable factor: these are assets or resources whose value changes in the short run e.g capital, labour
3. Total product (TP or Q): is the overall quantity of output or yield produced by the farm.

Average product (AP): is the overall quantity of output or yield produced by the farm per variable input.

1. Marginal product (MP): is the change in quantity produced resulting from change in variable input.

This can be represented in the table below;

CLASS ACTIVITY (WAEC PQ)

1. State the law of diminishing returns.
2. Using the table below, make an input-output graph and describe the relationship between fertilizer used and maize yield.

3. Explain the main cause of diminishing returns in agricultural production.

GENERAL EVALUATION

1. What is demand?
2. State the law of demand
3. What is supply?
4. State the law of supply
5. State the law of diminishing return
6. Differentiate between total product, marginal product and average product.

READING ASSIGNMENT

• Essential Agricultural Science for senior Secondary School by O.A. Iwena Chapter 35 pages 343 – 347 and Chapter 37 pages 353 – 362,.
• Answer the following questions from WAEC PAQ 2007 theory question 9, 2008 theory question 9 & 10, 2012 theory question 9 & 10, 2014 theory question 5, 2017 theory question 6, 2000 theory question 9, 1994 theory question 9 and 1991 theory question 9

WEEKEND ASSIGNMENT

1. The higher the price, the ____ the quantity demanded A. higher B. lower C. up D. down
2. Increase in population will lead to _____ demand A. high B. low C. medium D. long
3. The real cost of an item is the ____ A. cost of forgone alternative B. amount spent to acquire the item C. cost of substitute item D. money cost of the item
4. Short run in production refers to ____ A. a period in which there is at least one fixed factor of production B. a period in which there is at least one variable factor of production C. a period in which there is no fixed factor of production D. a period in which there is variable factor of production
5. An example of variable input in poultry production is? A. Land B. Feed C. Fertilizer or manure D. Incubator

THEORY

Complete this table

WEEK SEVEN AND EIGHT

TOPIC: FARM RECORD AND FARM ACCOUNT

CONTENT

• Meaning of Farm Accounts/Farm records
• Importance of Farm Account / farm records
• Types of Farm Record
• Types of Farm Account

MEANING OF FARM ACCOUNTS AND RECORDS

FARM ACCOUNT

Farm Accounts are statements of money paid out or received for goods and services used in a farming business.

FARM RECORD

Farm Records are written documents, showing major activities going on in the farming business

IMPORTANCE OF FARM ACCOUNTS/RECORDS

1. It enables the farmer to monitor the changes in prices of product brought or sold.
2. It shows the financial position of the farm
3. It helps to determine profit
4. Detection fraudulent decisions
5. For taking informed management decision
6. For procurement of loans
7. For determination of annual tax
8. Determining the actual worth of the farm
9. For comparing management efficiency
10. To evaluate performance of an enterprise
11. To estimate future farm returns.
12. It provides basis for conducting research.
13. To monitor health status of crops and animals.

EVALUATION

1. What is farm record and account?
2. List five importance of keeping farm records and account.

TYPES OF FARM RECORD

1. Farm Diary: This is the record of daily activities
2. Farm Inventory: This is the list of all assets on the farm and their money worth or value
3. Sales and purchase record: record of revenue and expenses made by the farm business.
4. Yield or production record: it contain the information on output of crops and animal product
5. Payroll or labour record: It shows the amount and types of labour hired or employed to work on the farm and rate at which their  wages are paid
6. Farm Input Utilization Record: It shows the input required, utilized and their level of input application.

TYPES OF FARM ACCOUNT

1. Sales Account: Sales Account is also known as sales and receipt account. This shows data of farm produce, the quantity, date sold, to whom and at what price.
2. Purchase Account: It is also known as purchased for use on the farm.
3. Farm Valuation: This is the value of the farm at the beginning and end of production. At the beginning it is called opening valuation while at the end, it is called closing valuation.
4. Cash Analysis Account: It shows the details of the income and expenditure of a farm over a given period of time
5. Farm Income Statement: It comprises of all the farm receipts (sales) and expenses came out on the farm over  a period of time as shown below;

INCOME STATEMENT OF AKANDE FARMS FOR OCTOBER, 1995

• Balance Sheet or Networth Statement: The balance sheet shows the capital or financial position of the farm at the end of the accounting period usually a year.
• Profit and Loss account: This is the type of account prepared at the end of the business period, usually a year. By farmer with the purpose of knowing weather his business is making profit or loss.

In this account, all expenses and purchases are listed on the left hand side i.e. debit side and all receipts on sales are recorded on the right hand i.e. credit side. Closing valuation is also put on the right while opening valuation is put on the left.

IMPORTANCE OF PROFIT AND LOSS ACCOUNT

1. It helps to detect if the farm is making profit or a loss
2. It helps to determine the overall performance of the farm at the end of the account period
3. It aids future planning of the farm for better results.

Example

Prepare a profit and loss account for Segun Farms for the year which ended 31/12/17, using the following data;

1. Cost of feed                                  N500
2. Cost of drugs                                N 200
3. Sales of Eggs                                N 2000
4. Eggs for domestic use                   N 200
5. Loss due to mortality                    N 300
6. Value of stick left             N 600
7. Farm wages                                   N 400
8. Sales of spent layers                      N 1000
9. Transportation cost                       N 300
10. Depreciation                                  N 200
11. Electricity bill                               N 300
12. Net profit                          N 1600

SOLUTION

SEGUN FARMS PROFIT AND LOSS ACCOUNT AS AT 31^ST DECEMBER, 2017

EVALUATION

1. a. List five types of farm record

b. Explain any two of record mentioned

2. a. List five types of farm account

b. Explain profit and loss account

DEFINITION OF SOME ACCOUNTING TERMS

1. Farm Asset: This is anything of value in the possession of a farm business, There are two types;
2. Fixed Assets: These are assets which are not used up during production. Examples are; landed property, farm building, motor vehicles, tools and implements, incubator and milking machine
3. Current Assets: These are assets which are used up during the process of production eg water, feed, drugs, chemical, fertilizers, seeds and cash in bank.
4. Cost: these are expenses made during production. There are two types fixed and variable cost
5. Fixed Cost: This is the component of the total of production cost which does not vary with the level of production e.g. cost of buildings, equipment, machineries, farm structures (Silo, barn e.t.c)
6. Variable Cost: This is the other component of the total cost which varies directly with the level of production e.g wages, salaries, cost of seeds, cost of fertilizer, cost of agrochemical e.t.c
7. Liabilities: This is the money owed to external persons or corporate bodies e.g. loan to banks. The two types are;
8. Current or short term liabilities: These are debts that must be paid back within one accounting year
9. Long term liabilities: These are debts that cannot be paid within an accounting year
10. Net Capital, Net worth or owner equity: This is the total amount of money supplied by the owner of the farm business.

Asset – Liability = Owner’s Equity or Capital

• Liquidity: is the ability of a farm business to meet its financial obligations as they fall due. It is the ease at which farm asset can be covered to cash.
• Solvency: This is the ability of the farm business to cover its liquidation of the asset. A business is solvent if the sale of its assets would be sufficient to pay off all debts
• Appreciation: This is the increase in the value or worth of an asset as the asset is being used over time. Examples of assets that can appreciate are; growing animals, cash crops, land etc.
• Depreciation: Depreciation refers to the loss or reduction in the value or worth of an asset as the asset is being used over time
• Salvage Value: This is the amount at which an asset is sold off when it is no longer economical to keep, or when the cost of maintenance is too high
• Useful life Span: This means the number of years a piece of farm equipment can effectively serve the farmer.

EVALUATION

1. Define the following: (i) Appreciation (ii) Solvency (iii) Liquidity

Distinguish between fixed assets and variable assets.

CLASS ACTIVITY

Answer  questions 3, 4, 6 and 9 from Essential Agricultural science on Page 448.

GENERAL EVALUATION

1. What are farm records and account?
2. List five importance of keeping farm records and accounts.
3. List five types of farm account.
4. Distinguish between fixed and variable cost.

READING ASSIGNMENT

• Essential  Agricultural Science for senior Secondary School by O.A. Iwena Chapter 48 pages 440-449
• Answer the following questions from WAEC PAQ 1989 theory question 10, 1993 theory question 10, 1996 theory question 10, 1997 theory question 10, 1998 theory question 10, 2013 theory question 9 & 10, 2009 theory question 9 & 10, 1999 theory question 9, 2006 theory question 9 and 2007 theory question 9

WEEKEND ASSIGNMENT

1. In profit and loss account, opening valuation is put on the _____ A. credit side B. debit side C. and side D. all sides
2. Ability of farm to meet its financial commitment as the falls due is _____ A. solvency B. liquidity C. depreciation D. appreciation
3. The amount at which an asset is sold off when the cost maintaining it is high is called ____ A. useful life B. lifespan C. salvage value D. asset
4. Day to day activities on the farm are recorded in _____ A. register B. diary C. payroll D. inventory
5. Farm assets are recorded in _____ A. diary B. register C. inventory  D. labour

THEORY

1. a. What is profit and lost account

b. List five types of farm records

2. a. What is farm asset

b. Distinguish between credit and subsidy