SS2 Lesson Note on the Basic Economic Principles and Factors Of Production

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CLASS: SS 2

TOPIC: BASIC ECONOMIC PRINCIPLES AND FACTORS OF PRODUCTION

CONTENT:

1. BASIC ECONOMIC PRINCIPLES
2. FACTORS OF PRODUCTION

SUB TOPIC 1: BASIC ECONOMIC PRINCIPLES

Economics is a social science which studies human behavior as a relationship between ends and scarce means which have alternative uses. It deals with production, distribution, exchange (marketing) and consumption of agricultural goods. Basic Economics principles include:

• wants
• scarcity
• choice
• scale of preference
• opportunity cost
• law of diminishing return

1. WANTS: These are goods and services desired after the basic needs have been satisfied. In agriculture, the wants includes inputs needed for production services eg planting materials, fertilizers, chemicals, tools and implements, land for cultivation, livestock feeds etc
2. SCARCITY: It is a term used to express that an available commodity or service is limited in supply or not enough for those who demand for it. The limited nature of resources affects the production of crops and animals. This makes the farmers to make use of what they have.
3. CHOICE: Choice arises because of scarcity of resources and is guided by economic decision. This is the point where farmer takes a decision on what to buy, how much to buy, where to buy, what to produce, where to plant etc. Every decision is a choice between alternative.
4. SCALE OF PREFERENCE: It is a list or arrangement of human wants in order of their relative importance. The farmer has to choose from the list of his unlimited wants since resources to satisfy them are limited.
5. OPPORTUNITY COST: When a man is faced with two alternatives, he will satisfy one and forgo the other, the one forgone is the opportunity cost of the one satisfied. The price of the one he enjoys is the one he fails to enjoy. This helps the farmer to allocate his scarce resources in deciding what to produce and which methods to adopt in producing it.

LAW OF DIMINISHING RETURN: It states that an increase in the supply of variable factor (fertilizer) of production to a fixed factor (land) is to have marginal product (output) increase to a point where increase in the amount of variable factor will bring about decrease in marginal product. For example, if fertilizer application to a crop growing on a fixed area of land is increasing, the yield will increase at first. But it will reach a point when further addition of fertilizer will be increasing the yield at a diminishing rate.

A TABLE SHOWING DIMINISHING RETURN

Fixed  Factor	Variable Factor	Total Product	Marginal Product	Average Product
10	1	10	10	10
10	2	30	20	15
10	3	60	30	20
10	4	100	40	25
10	5	120	20	24
10	6	132	12	22
10	7	140	8	20
10	8	146	6	18

Importance of the Law of Diminishing Return

1. It helps the farmers to minimize costs and maximize profits
2. It helps in decision making
3. It helps the famers to know the best production each factor should be combined with
4. It helps the farmers to know when the combination of the factor is profitable or not.
5. It helps the farmers to reduce cost of production

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