AGRICULTURE O LEVEL(FORM TWO) NOTES – FARMING BUSINESS ECONOMICS AND AGRICULTURAL EXTENSION

THEME 4: FARMING BUSINESS ECONOMICS AND AGRICULTURAL EXTENSION

PRICE AND ITS DETERMINANTS (PRICE THEORY)

This is a branch of economics that describes the relationship between supply, demand, and price of goods and services.

DEMAND

This refers to the quantity of goods and services that consumers are willing to buy at a particular price and continue buying within a given period.

PRESENTATION/REPRESENTATION: Demand Schedule

This is a list of the quantities of a commodity (good) or service that are bought at different prices.

Such a schedule must clearly show the situation it refers to, including the people involved, time, place, and any other conditions that distinguish it from other demand schedules.

Example: DEMAND SCHEDULE FOR GREEN MAIZE AT MIKUMI MARKETING 2004

Demand curve

This is the graphical presentation of the demand schedule. After plotting the data above, one obtains a demand curve.

The price-demand quantity demanded relationship

The law of Demand

States that as the price of a commodity or service rises, it is always followed by a reduction in quantity demanded, and a fall in price is always followed by an increase in quantity demanded, while other factors/conditions of demand remain constant.

Usually, this law is illustrated by the downward slope of the demand curve.

Change in Demand

A change in demand means that at each price, a different quantity is purchased than before. This can be an increase or decrease in demand. When demand increases, the whole curve shifts to the right; when demand decreases, the whole curve shifts to the left.

Example: Demand Schedule for oranges at Kisanga Market in March, June, and December 2004

Demand curves for oranges at Kisanga Market in March, June, and December 2004

FACTORS WHICH CAUSE CHANGES IN DEMAND

1. Changes in tastes and habits of consumers: When tastes and habits change in favor of a commodity, demand increases. When the opposite occurs, demand decreases.
2. Changes in consumer income: When income rises, demand for some products may rise or fall. For some products, increased income leads to higher demand; for others, it may decrease demand.
3. Changes in the price of the good: Generally, when the price rises, demand decreases, and vice versa.
4. Changes in the price of other goods (Complementary goods): When the price of other goods rises, consumers tend to buy more of the relatively cheaper good, especially complementary goods, e.g., maize flour and rice.
5. Changes in population: An increase in population may lead to increased demand for agricultural products, e.g., food.

Elasticity of Demand (Ed)

This measures how the quantity demanded of a good or service changes when its price changes.

It is expressed as:

Ed = % change in Quantity of a good / % change in price

Categories of Elasticity of Demand (Ed)

1. Elastic demand occurs when Ed is greater than one (Ed > 1).
2. Inelastic demand occurs when Ed is less than one (Ed < 1).
3. Unitary elastic demand occurs when Ed equals one (Ed = 1).

Example: Demand Schedule for tomato sauce

Question:

When prices fall from 160/= to 140/=, demand extends from 1000 bottles to 2000 bottles.

Ed = ((2000 – 1000) × 100) / 100 = 100

Hence Ed = -8, indicating inelastic demand.

Question:

When prices fall from 40/= to 20/=, demand expands from 16000 to 2000 bottles.

Ed = ((16000 – 2000) × 100) / 16000 = 40

Hence Ed = 0.5, indicating inelastic demand.

FACTORS WHICH DETERMINE ELASTICITY OF DEMAND OF GOODS

1. Goods with many close substitutes have more elastic demand than those with few or no close substitutes.
2. Demand for essential commodities is usually inelastic, e.g., salt, matchboxes.
3. Demand for luxury goods and services is usually more elastic than for necessity goods and services.

SUPPLY

This is the quantity of a given commodity or service that producers are able and willing to offer for sale at a given price.

PRESENTATION

i) Supply Schedule.

This is a list or table showing the quantities of a commodity or service offered for sale at different prices.

Example: Supply schedule for maize by peasants at Mikumi Market 2005

SUPPLY CURVE

This is the graphical presentation of the supply schedule.

Law of supply

As the market price increases, the quantity supplied of commodities increases, while a decrease in price results in a decrease in quantity supplied.

Factors causing changes in Supply

1. Climatic factors (weather): Good weather results in high yield and greater supply.
2. Occurrence of pests and diseases: This reduces yields of agricultural commodities.
3. Changes in the price of the commodity: As price increases, quantity supplied increases and vice versa.
4. Change in production cost: When production costs rise, production decreases, leading to low supply, and vice versa.
5. Change in technology used in production.
6. New production technology may increase production and supply.
7. Occurrence of war or other hazards: This may disrupt production, leading to low supply.
8. Government regulation, e.g., taxation: High taxes on a commodity reduce production and supply.
9. Change in taste and habit: Changes may stimulate farmers to produce more of one commodity, increasing its supply.

Change of supply

A change in supply means that at each price, a different quantity is supplied than before. A decrease in supply shifts the supply curve to the left; an increase shifts it to the right.

Example: Supply schedule for mango by peasants at Kariakoo market in March, June, and December 2006

Elasticity of supply (Es)

This measures how the quantity supplied of a good or service changes when its price changes.

Example: The supply of salt falls from 50kg to 20kg as the price per kg increases from 10/= to 20/= per kg. Calculate elasticity of supply.

Note: Like elasticity of demand, elasticity of supply has three categories:

1. When Es < 1, supply is inelastic.
2. When Es > 1, supply is elastic.
3. When Es = 1, supply is unitary elastic.

PRICE

This is a measure of value (work per unit of agricultural good or service).

Functions of price

1. Price informs producers what and how much to produce.
2. Price helps consumers decide what and how much to buy.
3. Price is a measure of value per unit of a good or service.
4. Price helps allocate scarce resources such as factors of production.
5. Price distributes goods and services among consumers according to supply and demand.
6. Price helps determine the amount of investments and earnings (profit or loss).
7. Price guides goods and services to be available at the right place and time when wanted by consumers.

Types of Agricultural price

There are four main types of agricultural prices:

1. Market price: Represents the actual value of goods and services.
   • Determined by the forces of demand and supply.
   • Categories of market price:
     1. Farm gate price (producer price): Prices farmers receive when selling products at the farm boundaries.
     2. Wholesale price: Prices traders pay when buying goods in large quantities; such traders are wholesalers.
     3. Retail price: Prices retail traders receive when selling goods to consumers.

   Note: Retail traders (O2 retailers) are middlemen who buy goods from wholesalers and sell them at retail price.

2. Shadow prices: The opportunity cost of a commodity as a good; prices existing under pure and perfect competition.
3. Price at factor cost: Prices determined by the factors of production used in producing the good.
4. Import or export parity prices: Prices paid by importers when importing a given good or commodity.

Price fluctuation

The price of agricultural products normally moves up and down over time in cycles. This rising and falling of price over time is called price fluctuation.

Types of price fluctuation

1. Short term price fluctuation: Price changes occurring from year to year, month to month, week to week, hour to hour, etc., caused by temporary changes in supply and demand.
   • Most commodities are perishable, e.g., milk, eggs, vegetables.
2. Long term price fluctuation: Fluctuations occurring over generations due to long-term changes in demand and supply.
   • Caused by changes in population, technology, and real incomes of consumers.
3. Amount price fluctuations: Year-to-year fluctuations caused by changes in yields and production levels due to weather and other factors.
4. Seasonal price fluctuations: Fluctuations caused by annual crop production; during planting and weeding, supply is low and prices high; during harvesting, supply is high and prices decrease.
5. Cyclical price fluctuations: Fluctuations occurring in regular patterns during production of perennial crops, e.g., coffee, and some livestock, e.g., pigs and poultry.
   • These are caused by cycles in production levels where production decisions are made cyclically. For example, high prices for pigs this year may increase production next year, but due to long production periods, output increases may be delayed, causing future price decreases.

Assignment

Read and write other causes of price fluctuation. Ref: Basic Agro economics (K Sibuga) pg 35-36

1. Problems caused by price fluctuation (pg 36)
2. Price control stabilization

MARKETING

This refers to the movement of raw agricultural products from the farm to the ultimate consumer.

This includes storage, transportation, grading, standardizing, processing, packaging, labeling, advertising, etc.

Equilibrium price

This is a market condition where quantity supplied equals quantity demanded at the marketplace.

Example: Demand and supply schedule related price

FACTORS OF PRODUCTION

Ref chapter 4: When a farm wants to produce any farm products, it has to use inputs or sources known as factors of production. These are divided into four groups.

These factors include:

• Land
• Labour
• Capital
• Entrepreneurship (management)

Land includes all natural resources found in a particular place such as soil and its minerals, rivers, lakes, vegetation, climate, etc.

Characteristics of land as a factor of production

• The quantity and quality of land determine the type of farming possible in that place.
• Different areas have different types of land suitable for different farming types.
• The amount and distribution of rainfall are main factors limiting land use.

Importance of land

• Source of raw materials such as coal, oil for power, rivers for hydroelectric power, which can be used domestically or exported.
• Source of food and agricultural materials necessary for domestic consumption and export.

Land Tenure systems

This refers to possession of rights to use land. Forms adapted in Tanzania include:

1. Individual land tenure systems:
   • Individual owner-operator system: Farming on land where the individual has rights and freedom to choose production plans. Common in highly populated areas like Kilimanjaro.
   • Landlordism/tenancy tenure system: Land owned by few individuals or relatives, operated by tenants for rent.
   • Estate/plantation land tenure system: Estates or plantations owned by individuals, foreigners, or joint ventures, often producing single commodities like sisal, tea, tobacco, coffee, sugarcane.
2. Collective land tenure system:
   • Communal tenure system: Rights over land held by the whole community; individuals use land without incentives to conserve or improve it. Common in pastoral and mixed farming areas.
   • Cooperative tenure system: Collective arrangements under government or other authority; farmers may own land individually but operate cooperatively, e.g., ujamaa farmers in Tanzania.

Land reform

Organized actions designed to improve land tenure and use.

Aim: To achieve the most efficient use of agricultural resources.

Measures under land reforms include:

1. Redistribution of land: Taking land from few large owners and reallocating to tenants, e.g., transferring ownership from wealthy Europeans to poor citizens.
2. Consolidation and registration of holdings: Combining fragmented land ownership and issuing title deeds.
3. Land use and conservation control: Government intervention to prevent overstocking, over-cultivation, and soil deterioration.
4. Planned transfer of population: Moving people from sparsely populated areas to regions like Lindi and Morogoro.

LAND CAPABILITY CLASSES

• Land must be used without degradation. Its suitable use depends on capabilities and limitations.
• Capabilities include good drainage, fertile soil, moderate pH, sufficient depth, good climate, water holding capacity, and low erosion risk.
• Limitations include steep slopes, poor drainage, toxic substances, rocks, poor climate, and extreme pH.
• Land is classified according to these factors:

Land Class I

Soil with very few limitations.

• Almost level land.
• Deep, well-drained soil.
• Naturally fertile or responds well to manure.
• High water holding capacity.
• Good yields with minimal husbandry.

Land Class II

Soil with some limitations preventing certain crops.

• Gentle slope.
• Inadequate soil depth and restricted drainage.
• Light to moderate alkalinity and salinity.
• Moderate erosion.
• Variable soil structure and workability.

Note: Requires better management and crop rotation.

Land Class III

Soil with serious limitations allowing few crops.

• Shallow soil depth.
• Low water permeability.
• Very low fertility.
• Moderately alkaline soils.
• Moderate steep slopes encouraging erosion.

Note: Requires more management than Class I.

Land Class IV

Soil suitable for only a few crops; row crops unsuitable due to erosion risk; close-spaced crops preferred.

• Low water holding capacity.
• Steep slopes prone to erosion.
• Shallow soil.
• Poor drainage.
• High salt content (too alkaline or acidic).

Note: Requires intensive management; few crops can be grown.

Land Class V

Not suitable for crop cultivation due to serious limitations.

• Stony and rocky soil.
• Poor drainage.
• Short rainy season unsuitable for crops.
• Flood risk from rivers and streams.

Note: Suitable only for permanent pasture development.

Land Class VI

Soils unsuitable for cultivation with more serious limitations than Class V.

Best used for pasture range management or left as woodland.

Land Class VII

Soils with limitations so severe that even pasture improvement is impossible; suitable for wildlife or woodland.

Land Class VIII

Soils mainly rock, sand, beaches; completely unsuitable for crops; suitable for wildlife, catchment areas, recreation.

II. LABOUR

Human physical and mental services used in production. Labour varies in skill levels.

Measured in man-hours or man-days, representing average work input per hour or day.

Characteristics of labour as a factor of production

• Supplied only by living beings, mainly humans; involves social issues.
• Not transferable between people; ability to work cannot be transferred.
• Humans can choose what and how long to work; may refuse work if unsatisfied or tired.

Categories of labour

Two main groups:

1. Family labour: Members of a family organized by the head; tasks assigned by age and ability.
2. Hired labour: Two types:
   1. Casual labour: Supplements family and permanent labour during peak work; hired on agreed terms.
   2. Permanent labour: Needed depending on farm nature and size.

Methods of improving labour productivity

1. Training through centers, field days, shows, workshops, seminars.
2. Providing proper tools and equipment, e.g., tractors, milking machines, sprayers.
3. Providing living incentives like salaries, medical facilities, housing, security, rewards.

IV. CAPITAL

Man-made assets used to produce goods or assist other factors like land and labour, increasing productivity.

Characteristics of capital as a factor of production

• Results from accumulated assets through saving.
• Largely man-made using labour and natural resources.

Note: Farm assets include buildings, machinery, livestock, crop produce, etc.

Depreciation

Wearing out of farm assets over time, requiring replacement.

Investment

Using savings from agriculture to acquire production assets.

Categories of capital

1. Long-term (fixed capital): Long-life assets like machinery, buildings.
2. Medium-term (working capital): Assets used up in production like feeds, seeds, fertilizer, pesticides.
3. Short-term (liquid capital): Easily convertible to money, e.g., cash, bank deposits, debts payable.

Ways of capital investment

1. By saving income during production.
2. By purchasing assets like buildings or machinery.
3. Through individual physical effort and hard work.

IV. MANAGEMENT (Entrepreneurship)

Planning and decision-making in organizing other factors to minimize loss and maximize profit in production.

Factors of management or entrepreneurship

Management involves combining and organizing resources appropriately. The manager helps with:

1. Short term planning: Quick decisions for urgent operations, e.g., disease outbreaks.
2. Long term planning: Decisions linked to future plans, e.g., building fences, buying machinery.
3. Information gathering: Collecting data on prices, market trends, production techniques, constraints, weather, diseases, soil, labour.
4. Keeping farm records up to date and using them in daily management.
5. Risk evaluation and bearing: Managing risks from decisions, e.g., fire, asset loss.

Management process

Important steps in decision-making:

1. Recognition/identification of the problem.
2. Observation and collection of relevant facts (data collection).
3. Analysis and specification of alternatives.
4. Choice of alternative (risk bearing).