Transcript here - Department of Real Estate and Construction

LECTURE VI
PROFIT MAXIMIZATION
Profit Maximization
 Revenue
is
 Viewed from the standpoint of either
input or output.
 Income to the producer is
 Measured in terms of either revenue
per unit of input or revenue per unit of
output.
 Profit is maximized when total revenue
exceeds total costs
Profit Maximization

Total revenue = Amount of product sold X
product price.
 If there are too many farmers, no one
producer can influence the product price
appreciably.
 This means that the only way individual
farmers can increase their total revenue
without changing quality of product is to
increase their total production.
 This revenue relationship is referred to as a
linear one, i.e. a straight-line relationship.
Profit Maximization

Profits are maximized when the total revenue
from the sale of the last unit of output just
equals the costs necessary to produce it.
 At this point, marginal costs equal marginal
revenue (MC=MR).
 This is the least cost point of production.
 Net profit is determined by total revenue (TR)
minus total costs (TC).
 Net profit is greatest when the difference
between TR and TC is greatest.
Selecting and Combining
Enterprises
 Most
farmers grow a variety of crops
and may keep some livestock.

Mixtures of crops are grown on the same plot
in the same season, a practice known as
mixed-cropping or inter-cropping.
 The
types of plant and animal
enterprises that are profitable for any
farmer/manager are determined to a
large degree by the law of comparative
advantage.
Selecting and Combining
Enterprises

Farmers must
 Determine/develop the cropping system.
 Develop the livestock programme.
 The choice of enterprise(s) depends in part



On the farmer’s personal preferences and family
goals
Upon the farm manager’s ability to apply technical
expertise and economic reasoning,
Upon the resources with which the managers
must work.
Selecting and Combining
Enterprises
 Choices
of products are t made based
various considerations including:
 Production
possibilities of the products
 Constraints and Feasible area
 Maximization of returns
 Subjective Preferences
 Food versus Cash Crops
 Specialization versus diversification
Production possibilities of the
products
 Where
two crops are competitive the
expansion of one has a “cost” in terms
of the amount of the alternative
foregone.
 This
is a measure of opportunity cost.
 Resources
of land, labour and
homemade capital has opportunity
costs though they may not have a
market price.
Production possibilities of the
products
 Production
possibility boundaries may
be drawn for any pair of alternative
products, crop or livestock.
 The slope of the curve of a possibility
curve will measure of the rate at which
one product can replace another and is
known as the rate of product
transformation (RPT).
Constraints and Feasible area

Limitations of space, soil moisture and
various plant nutrients are constraints on crop
growth, but the crops compete at different
rates for them.
 Mixed cropping is one of the ways to
overcome these constraints as it:



Increases the utilization of environmental factors
such as light, water and nutrients as different
crops have different water and nutrient
requirements and different rooting habits.
Enhances better control of weeds, pests and
diseases.
Enhances soil protection
Maximization of returns


Assuming that the objective of the
farmer is to maximize returns, he/she
endavour to produce at the level
where he/she has the least-cost
combination.
He/she will produce at the point of
economic optimum.
Subjective Preferences

It is not always that a farmer produces for
the mere objective of maximizing financial
gains.
Farmer could be concerned with


Finding a single, best combination or
maximizing anything so long as he/she can meet
his/her minimum goals.

Ranking objectives in order of priority to
meet family objectives.
Maximizing utility

Food versus Cash Crops

Assuming that the farmer, though not
committed to mixed cropping, is endowed
with limited resources, he/she must choose
between competing uses of these resources.


For example he/she must choose whether to grow
maize for food or coffee for cash.
In practice, there are choices to be made not
simply between cash production and food
production but between a whole range of
consumption goods and a large array of
production processes
Specialization versus
diversification
 Depending
on whether the farmer is a
large scale or small-scale producer,
there are advantages in specialization
and devoting all available resources to
that activity where economies of scale
exist.
 However, diversification into more than
one productive activity has several
potential advantages.
Advantages of Diversification

Given that some inputs are fixed, marginal
returns are likely to diminish as more and
more are devoted to a single product.


Higher marginal returns and hence more total
product are obtained by devoting some of the
inputs to an alternative crop or livestock activity.
Complementary and supplementary
relationships between alternative products
means that the combined output of both from
a given set of resource is greater that that of
either one on its own.
Advantages of Diversification

Exploiting available resources up to their
limits can increase total production, which
means making the constraints effective.


This then will involve a combination of productive
activities.
Where subjective choice is involved, as in
choosing what crops to grow for home
consumption, a variety of products are likely
to be preferred over a single one.
 Risk may be reduced by diversification.