Principles of Farm Economics
Senior 1 · Agriculture
Principles of Farm Economics
Lesson 2 of 5
22 min
Let's begin
A farmer in Kayonza puts fertiliser on her maize for the first time and her harvest jumps. The next season she doubles the fertiliser, expecting another jump, but the extra maize is smaller than before. Her neighbour tells her to double it again. Should she?
The answer comes from one of the most useful rules in agriculture, the law of diminishing returns. It explains why "more" is not always "better", and it helps a farmer decide how much fertiliser, seed, labour or feed to use on a fixed piece of land.
An input (factor of production) is anything used to produce output: land, labour, capital (tools, seed, fertiliser, animals) and management.
The law of diminishing returns states that when more and more units of one variable input are added to a fixed amount of other inputs, the total product rises at first, but beyond a certain point each extra unit of input adds less extra output than the one before. If the farmer keeps adding more, total product eventually stops rising and may even fall.
The law does not say that total output falls straight away. It says that the extra output (the marginal product) gets smaller. It also assumes that the method of production (technology) stays the same.
A farmer tries different rates of fertiliser on one hectare of maize, keeping everything else the same (illustrative figures).
| Fertiliser (kg per ha) | Maize yield, TP (kg per ha) | Extra maize from the last 50 kg of fertiliser, MP (kg) |
|---|---|---|
| 0 | 1,500 | – |
| 50 | 2,100 | 600 |
| 100 | 2,900 | 800 |
| 150 | 3,500 | 600 |
| 200 | 3,800 | 300 |
| 250 | 3,900 | 100 |
| 300 | 3,850 | −50 |
| Stage | What happens | Should the farmer stay here? |
|---|---|---|
| I. Increasing returns | MP rising; every extra unit gives more than the last | No: adding more input is still very rewarding, so keep going |
| II. Diminishing returns | MP falling but still positive; TP rising more slowly | Yes: the best rate is somewhere in this stage |
| III. Negative returns | MP below zero; TP falling | Never: the farmer pays for input that reduces output |
Suppose each 50 kg of fertiliser costs 45,000 Frw and maize sells at 400 Frw per kg (illustrative prices). The rule is: keep adding input while the value of the extra output is at least the cost of the extra input.
| Step | Extra maize (kg) | Value of extra maize (Frw) | Cost of extra fertiliser (Frw) | Worth it? |
|---|---|---|---|---|
| 0 → 50 kg | 600 | 240,000 | 45,000 | Yes |
| 50 → 100 kg | 800 | 320,000 | 45,000 | Yes |
| 100 → 150 kg | 600 | 240,000 | 45,000 | Yes |
| 150 → 200 kg | 300 | 120,000 | 45,000 | Yes |
| 200 → 250 kg | 100 | 40,000 | 45,000 | No |
Each value is the extra maize × 400 Frw. The last worthwhile step ends at 200 kg per ha. Going to 250 kg would raise the harvest by 100 kg but lose 45,000 − 40,000 = 5,000 Frw on that step. So the highest yield (250 kg of fertiliser) is not the most profitable rate.
Tip
Memory hook: "The first spoon of sugar in your tea makes a big difference; the tenth hardly any." That is diminishing returns.
Exam technique: to find where diminishing returns begin, work out the marginal product (the extra output) for each step and find where it starts to fall. Do not look for where total product falls: that is negative returns.
State the law of diminishing returns.
Solution: When successive units of a variable input are added to fixed inputs, output rises at first, but after a certain point each additional unit of input adds less to total output than the previous unit.
A group hires workers to weed and harvest a fixed 0.5 ha bean plot. Total output (kg) with 1 to 6 workers is: 400, 1,000, 1,500, 1,800, 1,950, 1,950. Work out the marginal product of each worker and say where diminishing returns begin.
Solution: MP: 400, 600, 500, 300, 150, 0. The MP rises up to the 2nd worker, then falls from the 3rd worker onward, so diminishing returns begin with the 3rd worker.
In question 2, what is the average product with 4 workers?
Solution: AP = 1,800 ÷ 4 = 450 kg per worker.
Why is the input used in Stage III of production always wasted?
Solution: In Stage III the marginal product is negative, so each extra unit of input reduces total output. The farmer pays more and harvests less.
An extra 50 kg of fertiliser costs 45,000 Frw and would add 150 kg of maize selling at 400 Frw per kg. Should the farmer apply it?
Solution: Value of extra maize = 150 × 400 = 60,000 Frw, which is more than the 45,000 Frw cost. Yes: it adds 15,000 Frw of profit.
Summary
Sources and credits
The Rwandan examples, worked examples and practice questions are written by Ganzaa.
This lesson adapts CC BY-SA material and is shared under CC BY-SA 4.0.
