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Fertilizer Impact on Farm Profitability

The document discusses the concept of diminishing returns in production and how to maximize profits by determining the optimal level of input usage. It shows how adding increasing amounts of fertilizer to wheat crops initially leads to higher yields but eventually yields start decreasing after a certain point due to diminishing returns. The profit maximizing rule is to add inputs until the value of the marginal product equals the marginal cost of the added input. Applying this rule to the fertilizer example shows the optimal amount is 60 pounds which maximizes profits.

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Rose Ann Historillo
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114 views17 pages

Fertilizer Impact on Farm Profitability

The document discusses the concept of diminishing returns in production and how to maximize profits by determining the optimal level of input usage. It shows how adding increasing amounts of fertilizer to wheat crops initially leads to higher yields but eventually yields start decreasing after a certain point due to diminishing returns. The profit maximizing rule is to add inputs until the value of the marginal product equals the marginal cost of the added input. Applying this rule to the fertilizer example shows the optimal amount is 60 pounds which maximizes profits.

Uploaded by

Rose Ann Historillo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Cost & Return Analysis

Farm & Ranch Business Management


Chapter #5
Production Function
 As inputs are changed, outputs are changed
also
 Example: fertilizing wheat
Where is the maximum profit?
Lbs. Of Fertilizer Yield
0 20
20 25
40 32
60 40
80 45
100 48
120 45
Law of Diminishing Returns
 As an input is added in production, the output
will increase at an increasing rate, then at a
decreasing rate, and finally decline
 English Translation: if you were to increase
the amount of fertilizer on wheat, your yield in
bu./acre would increase dramatically for the
first few units, until you added enough
fertilizer that the rate of yield increase would
slow down, and may even become negative
Law of Diminishing Returns
Lbs. Of Fertilizer Yield Added
0 20 0
20 25 5
40 32 7
60 40 8
80 45 5
100 48 3
120 45 -3
Stages of the Production Function
 Stage #1: increasing average return for each
added unit of input
 Average Product = Total Yield divided by
number of units added
Stage #1 Example
Lbs. Of Fert. Yield Added Avg Prod.
0 20 0 20
20 25 5 25
40 32 7 16
60 40 8 13.3
80 45 5 11.1
100 48 3 9.2
120 45 -3 7.5
Stages of the Production Function
 Stage #2: begins when the marginal product
equals the average product.
 Diminishing returns begin to develop in stage
#2
 Stage #3: begins when the marginal product
becomes 0.
– Total product decreases if input is increased
Stage #3 of the Production Function
Lbs. Of Fert. Yield Added Avg Prod.
0 20 0 20
20 25 5 25
40 32 7 16
60 40 8 13.3
80 45 5 11.1
100 48 3 9.2
120 45 -3 7.5
How much fertilizer?
Lbs. Of Fert. Yield Added Avg Prod.
0 20 0 20
20 25 5 25
40 32 7 16
60 40 8 13.3
80 45 5 11.1
100 48 3 9.2
120 45 -3 7.5
Profit Maximizing Rule
 Add the variable input (fertilizer) to the point
where the value of the marginal product
equals the value of the added input.
Profit Maximizing Rule
Fert. Total Yield
Lbs. Cost Yield Added [Link] Avg Prod.
0 20 0 20
20 $10 25 5 $15 25
40 $10 32 7 $21 16
60 $10 40 8 $24 13.3
80 $10 45 5 $15 11.1
100 $10 48 3 $9 9.2
120 $10 45 -3 $-9 7.5
Profit Maximizing Rule
Fert. Total Yield
Lbs. Cost Yield Added [Link] Avg Prod.
0 20 0 20
20 $15 25 5 $12.50 25
40 $15 32 7 $17.50 16
60 $15 40 8 $20 13.3
80 $15 45 5 $12.50 11.1
100 $15 48 3 $7.50 9.2
120 $15 45 -3 $-7.50 7.5
Fixed Costs
 Not used in profit maximizing rule
 Must be considered to determine if you will
make a profit or not
Opportunity Cost
 Cost of using a resource in one way based on
the return that could be obtained from using
the resource in another way
 Ex: labor, what is your labor worth if not
farming?
 Ex: interest, your money could sit in a bank
and earn interest, or be used to invest in your
business (farm)
Least Cost: Mathematical Approach
 If one input (soybean meal) can be substituted for
another (corn)
 Usually don’t substitute at equal rates
Change in corn = Price of SBM
Change in SBM Price of Corn
 Corn = $.05 and SBM = $.13, ratio = .13/.05 = 2.6
 Now divide changes and find a ratio of 2.6
 Page 5-11

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