Production Economics
Definition
Production economics is the application of the principals of micro economics in the field of agriculture. The logic of Production economics is to provide with a frame work for decision making on the farm.
Production economics is the application of science where the principals of choice are applied in use of capital, land, labor and management of resource in farming industry.
Production economics is the study of how farms allocate their scare resources between the alternating uses in the pursuit of certain objective.
The following concept should be kept under consideration in the definition of Production economics.
a. Allocation of resources
b. Concept of scarcity
c. Objectives or goal and how to reach the goal and lastly we should consider the short run and long run of production process.
Objectives of Production economics
a. To analyze the production process and the matters influencing the forces of resource use.
b. To ensure the optimum use of resources.
c. To assess the deviated situation from the optimum resource uses.
d. To introduce guideline how to reach optimum resource condition.
Goals of Production economics
a. To help the farm manager in making the best utilization of resources considering the changing demand of society.
b. To help the policy maker in preserving the rate of production and profit of farms.
c. Evaluate the effect of technological change upon the recourse use of farm regarding agricultural production.
d. To maintain the consistence with personal, social and regional production status considering the changes in economic variable.
Uses of Production Economics
Bangladesh is an agrarian country. Agriculture has been playing a vital role in socio-economic progress and sustainable development by proper resources use and this is the function of production economics. Therefore, study of production economics is very much important. Following are the points in favor of studying production economics-
a. Bangladesh is one of the 3rd world countries. In 3rd world countries resources are not properly used. By studying production economics, we can know how best utilization can be possible.
b. The economy of Bangladesh is mostly agro-based mainly for agricultural development or for over all development, the study of production economics will be helpful for increasing productivity.
c. Production economics helps us by informing of appropriate technology or machinery to be used.
d. The land tenure is most traditional and defective which causes the decrease of production. Study of production economics can solve the problem.
e. The agriculture of Bangladesh is depended on nature. Risk and uncertainty in production is always available which influence the decision making of production. We can minimize risk and uncertainty through studying production economics.
f. Farming size
Appropriate size of farm is an important factor for production. We can choice the type of farm through the study of production economics.
g. Optimum allocation of resources and profit maximization is possible through the study of production economics.
h. Economic efficiency can be increased through the study of production economics.
i. Production can be increased through increasing the management efficiency.
Producer’s Decision
All producers have so many alternative uses of resources use. Producers have to choice which one is to be accepted. So, a producer has to take five decisions in production system-
1. What to produce?
2. How much to produce?
3. What method of production is to be used?
4. When to buy and when to sell?
5. From where to buy and where to sell?
1. What to produce?
A farm can produce different types of products. But due to limited amount of resources the production is also limited. So, the producer is to decide which one is to produce among so many alternatives.
2. How much to produce?
A producer has to take decision how much of the producing items are to produce. Generally, the producer takes decision considering the demand of a particular product. If the demand of a product is high, then higher amount of product is produced. If a product has higher prospect of profit, then the product can be produced at higher rate. The amount which will bear profit must be kept in consideration.
3. What method of production is to be used?
The producer should choice the method of production which will carry maximum production from minimum cost combination.
4. When to buy and when to sell?
The price of product changes in time. So, keeping the quality and weight unchanged agricultural products may be sold in higher price in other seasons. On the other hand, required product can be bought in harvesting period at lower prices.
5. From where to buy and where to sell?
A producer may have so many alternative markets. Prices of a product are differentiated in different markets. The different transportation cost causes the differentiation in prices. So, if distance factor is not kept in consideration in the choice of a market, then a producer can not be profitable.
Consumer Surplus
The father of this concept is professor Marshall.
The consumer is ready to pay the price OD, but he actually gets the product at price OPo, so the consumer surplus is =OD - OPo= PoD
Producer Surplus
Producer Surplus is the difference between the price at which the producer was ready to sell the product and actually he received the price.
The producer was ready to sell his product at price OS, But actually he sells his product at OP. Therefore producer surplus is, PS=OP – OS
=SP
Social benefit = Consumer Surplus + Producer Surplus
SB= SP + PD
Externality
If the activities of a consumer or a farm has the positive or negative effects on the production of another farm and for this reason, that vary consumer or farm has neither to compensate for negative effects nor it gets any benefits for positive effects, then it is called externality.
There are 4 types of externalities as follows-
1. Producer Producer positive externalities
If the productive activities of a particular producer become the cause of increase in another production system and second producer has not to pay for this. Then it is called Producer Producer positive externalities.
For example, if a honey producer brings up bees and these bees enhance the pollination of orange production without any payment for this. So, it may be caused the producer producer positive externalities.
2. Producer Producer Negative Externalities
If the productive activities of a particular producer has a negative effects on another productive system and for this the formal producer has not to compensate for the loss, then it is called producer producer negative externalities.
For example, if in a locality fish production and highbreed yield variety of rice production occurred simultaneously, the insecticide using in rice production affects the fish production system drastically, but insecticide user has not to compensate for the loss
3. Producer Consumer positive Externalities
If the external activities of a Consumer become the cause of increasing production and for these the producer has not to pay for this, then it is called Producer Consumer positive Externalities.
For example, the shallow tube-well of a company ‘A’ has the longevity of 25 years. If the efficient and careful handling of an operator causes the increases up to 30 years, the company has not to pay for it. The company will have good-will and it will be cause of increase in shallow tube-well production.
4. Producer Consumer Negative Externalities
The external activities of a consumer have a negative impact on the production and the consumer has not to compensate for the loss of the producer. Then it is called Producer Consumer Negative Externalities.
For example, the shallow tube-well of a company ‘B’ has the longevity of 25 years. If improper handling of an operator decreases the longevity to 15 years and the consumer has not to compensate for the loss, then the companies will loss his good will and production will also decrease.
Project Appraisal
Pre evaluation of a project before going to action is called Project Appraisal.
Production Function
Quantities of output depend on the quantities of input used. Here, input is independent variable and output is dependent variable. Production Function may be defined as the functional relationship between physical inputs (i.e. factor of production) and physical output (i.e. quantities of good produced).
Thus the Production Function is expressed as the relationship between the quantities of output and the quantities of various input production on a given state of technological knowledge and at a given time. Production Function may be denoted by the following way—
Y=f (x1 x2 --------- xn)
Here,
Y= output , F= Functional relation, (x1 x2 --------- xn)= Different inputs up to (1-n) Serial
There are two types of Production Function—
a. Short Run Production Function
In this type of production function some factors or inputs are fixed i.e. that can be fixed proportion production function.
Y=f (x1 x2 --------- xn)
Here,
x1= Variable
(x2 --------- xn)= Fixed
b. Long Run Production Function
Where all inputs used are variables, it can be termed as variable proportion production functions.
Y=f (x1 x2 --------- xn)
Here,
(x1 x2 --------- xn)= All inputs are variable.
Assumption of Production Function
I. Considering a particular period.
II. Technological state of knowledge will be unchanged.
III. At that time, the farm will adopt the best one of the available production Technologies.
IV. The outputs are divisible in different units.
Concept of Total Product (TP), Average Product (AP), And Marginal Product (MP)
Total Product (TP)
The output earned through the return of variable inputs and fixed inputs is called total product. The output earn from all units of factors at production is called Total Product.
Average Product (AP)
Average Product is the result of total product divided by total inputs.
Average Product (AP) = Total Product (TP) / Total Inputs
Marginal Product (MP)
The extra output earned by using extra unit of variable input, is called Marginal Product.
Stages of Production
Stage 1
I. The total product increases at
II. The elasticity of product is greater
than one (ep>1).
III. MP is greater than average product
IV. Stage one, MP=Maximum
V. It is irrational zone of production.
VI. Stage 2
I. The diminishing rate of increasing total product (TP) is continuing.
II. Here, AP and MP decreased, but AP lies over MP.
III.
IV. At the border Stage 2, MP touches the X-axis, therefore MP=0.
V. Stage 2 is up to MP=0, where TP is maximum.
VI. It is rational zone because MP is diminishing condition and MR (Marginal Return) = MC (Marginal Cost).
Stage 3
I. TP is maximum but diminishing.
II. AP is positive and AP>MP.
III. MP is negative.
IV. ep is less than Zero (ep< style="">
V. Irrational zone of production because MP< style="">
Zone of Rational Action
Rational zone of production is that zone where every rational producer conducts his production. Here, the producer allocates his recourses in such a way that, profit maximization is possible in only that zone. A rational producer uses his inputs in the rational zone, so that MFC (Marginal Factor Cost) = MVP (Marginal Value Product.
The stage 2 starts from the point, where APP (Average Physical Product) is Maximum and it ends with TPP (Total Physical Product). In this stage, TPP increases but APP diminishes and MPP decreases to zero.
After this stage, the producer increases input, yet the output will not be increase, rather it may be decreased. Here, efficiency of both fixed input and variable input will be decreased. On the other hand, A rational producer will not stop his production in the stage 1, because TP increase with the increasing AP. i.e. efficiency of variable input increases with input use. At the same time, the efficiency of fixed input is also increased. Production can not be maximized here.
There fore, the producer will conduct his production with stage 3. Here, TP and MP diminishing and efficiency of both variables are increased and production maximization is possible.
Iso-quant / Iso-product Curve
It is a curve where all points indicate equal level of production through different combination of two inputs.
The following shows different combinations of inputs of an Iso-product Curve.
| Combination | Capital | Labor | Output |
| A | 8 Unit | 1 Unit | 10 Unit |
| B | 5 Unit | 2 Unit | 10 Unit |
| C | 3 Unit | 3 Unit | 10 Unit |
| D | 2 Unit | 4 Unit | 10 Unit |
The above schedule shows that, each of the combination produces 10 unit of output. If the schedule will converted into curve, then it will be a Iso-product Curve.
Connecting the point A, B, C and D indicates the same level of output. This curve may be termed as a Iso-product curve. It is also called Production Indifference Curve, because as the different points of the Iso-product curve gives the same level of output. The production institute will be unbiased to any particular combination of the world.
Marginal Rate of Substitution
From the above mention schedule we can see that, in the combination A, 10 unit of output can be obtained from 8 unit of capital and 1 unit of labor.
In the combination B, 10 unit of output can be obtained from 5 unit of capital and 2 unit of labor.
In the combination C, 10 unit of output can be obtained from 3 unit of capital and 3 unit of labor.
In the combination D, 10 unit of output can be obtained from 2 unit of capital and 4 unit of labor.
Here it is observed that, if the use of an input is decreased with constant levels of output, then the other input is to be increased by a greater way. Thus, remaining the output constant the rate at which the second input is decreased for the increase of a particular input is called Marginal Rate of Technical Substitution of two inputs.
Iso-Prodct Map
All points of a particular iso-product curve shows equal level of output but the right side of an iso-product curve indicates higher level of output incomparism to left side curve.
Characteristics of Iso-Product Map
1. Iso-product curve is downward to right
It means the slop of the curve is negative. Otherwise, iso-product curve is parallel to X-axis or Y-axis. But it is not possible.
If iso-quant, NI is parallel to Y-axis, then products will rise from point A to B. That means quantity of output is increased. But we know that all points of an iso-point indicate the same level of output. So, iso-product curve cannot be parallel to Y-axis.
If an iso-product curve become parallel to X-axis. Than,Capital will be unchanged & labor will be increased. Same as previous, production will be increased from point A to B. But it is not in consistence with an iso product curve. So, an iso- product curve cannot be parallel to X-axis.
So, it is proved that an iso- product curve will be downward to the right.
2. Two Iso-product curves cannot cut each other
If an iso- product curve cross another iso-product curve then upper portion from the cut point will indicate higher level of output & lower portion point of an iso- product curve will indicate lower amount of output. But it is inconsistence with the characteristics of iso- product curve. So, two iso- product curves cannot cut each other.
of changing is known as Marginal Rate of Technical
Substitution.
Right Side and Upper Iso-product curve Indicates More Output in comparison with Left Side Curve:
It is because that the right side and upper Iso-product curve involved higher level of labor in comparison with left side curve.
Iso-cost Line
The line connecting all the points indicating different combinations of two inputs of some equal cost is called iso-cost Line.
If per unit of labor is 10 TK and per unit of
Capital is 20 TK, then production institute
the point will be indicated by A. If he purchase
30 unit of labor the point will be indicated by B.
The connecting line of the point A and B, will be AB line & all points of the line will indicate equal level of cost and that is TK 300. If the total TK at 400 spend in purchasing capital then 20 unit of capital may be obtained or if the total TK at 400 is spend for purchasing labor may be obtained. The points may be denoted by C & D respectively. The connecting line C & D (CD) is an also iso-cost Line. Every points of the line will indicate equal level of cost. But it will indicate higher level of cost than AB. Similarly, the institute can shifts its total budget from CD to EF which will indicate the total cost of TK 500. If the institute spend total budget in purchasing capital, it may obtain 25 units at capital or it may spend the budget for 50 unit of labor. Then, the points may be denoted by E &F respectively. The connecting line at E &F points will be EF iso-cost Line.
Least Cost Factor Combination
Suppose, the production institute wants to produce 10 units of output. In the above mention figure, in the curve IP1 every point indicates equal level & 10 units of output. But, different points of IP1 incur different level of cost. The point L on the IP1 curve incur the cost of Tk.500 because the point L lies on the iso-curve line EF where all points of the line incur the cost of equal & Tk.500. But, if the producer lies on the points Q in the same iso- product curve, it will incur cost Tk.400 for producing equal level of output. On the other hand, if the producer produces 10 units of output on the point T, it will incur the cost of Tk.500 because T lies on upper position then Q or in comparism with Q. The point Q touches the iso-cost line CD. As the iso- product curve IP1 is convex to the origin, so if it moves left or right from the point Q, it incurs higher level of cost for producing same level of output. Therefore, the point Q is the point where the least cost of labour & capital can be ensure for producing 10 units of output. So, ON capital & OM labour is the least cost combination for producing 10 units of output. The production institute can rich the balance position on the point Q.
Project Appraisal
Pre-evolution of a project before going to action is called project appraisal. Before starting a project, it is to analyze the profit expectation for provability of loss of the project. For example, before under taking a crop production project, consultation with an agronomist is essential regarding the expected yield of the crop & expected cost of production. This type of draft regarding expected benefit before final project is known project analysis appraisal.
Mid Term Review
After starting the project observation of the interim situation is known as mid term review. A project is started with the expectation of profit. Undoubtedly, sometimes the project faces obstacles & unfavorable condition which hampers the profit.
For example, consumer may lose his interest regarding the product. So, mid term review examines whether the product is losing profit or not.
Project Evaluation
After finishing the project analysis of overall situation of the project is known as project evaluation. It is to take decision that whether the project will continue or not. If situation is in favour & social benefit may be ensuring, then project will be continued. Otherwise, the project will be dropped & a new project will be started.
Benefit Cost Ratio (BCR)
The ratio of present worth of gross benefit & present worth of cost is known as benefit cost ratio. It is an important scale of comparism between benefit & cost. The system is used in different economic analysis.
BCR= Present worth of gross benefit / Present worth of gross cost
Benefit cost ratio may be equal to, less than or greater than one. If benefit cost ratio is greater than one (BCR>1), then project will be acceptable. If benefit cost ratio is equal to one (BCR=1), then project will not be profitable. If benefit cost ratio is less than one (BCR<1),>
Net Present Value (NPV)
If the future benefit is converted into present value & the present value of cost is deducted from the present value of benefit then it is called net present value.
NPV= Present worth of benefit – Discounted cost
1. If NPV= 0, then the project may be accepted or may be rejected, i.e. indifferent regarding the project.
2. If NPV> 0, then the project is feasible, i.e. the project will be profitable.
3. If NPV<>
Market
Market is the accumulation of buyer’s & seller’s where competition between buying & selling is established. Traditionally, we think that market is a place where buying & selling is occurred. But in economics, market is not denoted by place.
According to economic theory, market means a commodity market. As for example - Jute market, gold market, fish market etc.
Condition of Market
1. Commodity
2. Buyers & sellers
3. Competition between buyers & sellers regarding buying & selling.
Perfect Market
A market is said to be perfectly competitive, if-
- There are great number of sellers & buyers of the commodity. Sothat, actions of an individual cannot affect the price of the commodity.
- The products of all firms in the industry in the markets are homogeneous.
- There is perfect mobility of resources.
- Consumers, resources owners & firm in the market have perfect knowledge of present & future price & cost.
Monopoly Market
Monopoly means single seller. Pure monopoly in the form of market organization in which there is a single firm selling a commodity for which there are no close substitutes.
Difference between Market & Marketing
| Market | Marketing |
| 1. Market is the accumulation of buyers & sellers with a view to buying & selling. | 1. Marketing is the sum total of activities to reach the products from producer to consumer. |
| 2. Price is determined in the market Through competition between buyers & sellers. | 2. Marketing concerned with changing the ownership of products. |
| 3. Market deals with buyers & sellers. | 3. Marketing deals with the buyers & sellers Concerning with the activities of buying & selling. |
| 4. Market is a place where determination of price is occurred. | 4. Marketing deals with the way of how a person can be profited from marketing of goods. |
| 5. Market is concerned with point of time. | 5. Marketing is concerned with period of time. |
Importance of Modern Market in the Society
If capital is the blood of business then marketing undoubtedly is the life. The ultimate objective of producing a goal is to consume it. If the product cannot reach the consumer then the product is worthless.
According to Peter Ducker, marketing is the most effective engine of economic development. Really, without flourishing the marketing system no country can achieve actual economic development.
1. Marketing facilities large scale production:
Large scale production depends on the scale of market. If the scale of market is not wider then the mass production is not possible. Industrial products have its own wider range of market, because its marketing process creates demand & thus market is extended.
2. Balance development between agriculture & industry:
Problem of over population can be solved through balanced development between agriculture & industry. It requires rapid intersect oral transfers of wealth. Marketing will help the intersect oral transfer of wealth that is factors of production will be transfer between agriculture & industry.
3. Social well-being:
Every sphere of people in the society requires well marketing facilities. People in a locality can earn by conducting business among them & fulfill their requirements. If marketing develops in their territory, they can be specialized in their own job. Everybody can sell their products & buy their require things.
Marketing Cost
The cost concerned with marketing activities is known as marketing cost. In other words, difference between the price a consumer pays & the price the producer receives is called marketing cost.
Elements of Marketing Cost
1. Wages & salary
The return of the workers involved in marketing activities is a largest portion of marketing cost. Now-a-days, not only in development but also in developing country the wage & salary for marketing are being increasing. Thus, marketing has increased.
2. Transportation Cost
The 2nd biggest cost of marketing cost is the transportation cost. It depends on the type of transportation. The transportation by water is the cheapest. On the other hand, transportation by air is most costly. Moreover, the size of commodity & the nature of commodity are considerable in costing of transportation, because bulky goods are high chargeable to the transportation company. Comparatively, developed countries incur less marketing cost than that of under developed countries.
3. House rent
Marketing institutes have to rent home in order to undergo marketing activities. The retailers have to pay higher house rent than whole sellers, because he has to select his shop in a comparatively important & forward corner.
4. Storage cost
Storage by freezing is higher costly than other types of storage. The storage cost of whole seller is higher than the storage cost retailer.
5. Advertisement cost
It is to do something for creating demand for goods & services, this is called advertisement cost. Producer or middle man has to pay for advertisement. It depends on the degree of competition. For this reason, industrially developed countries have to expend advertisement cost due to higher competition.
6. Taxes
Delivers, whole seller & retailers have to pay taxes according to respective rates. Sell taxes & abgury taxes are included in marketing cost.
Factors Affecting Marketing Cost
1. Risk of depreciation
The good which are perishable became useless within a very short period. Marketing cost of these commodities is very high. For example- vegetable, fish, milk etc. Change of fashion & design can make a product useless.
2. Seasonal demand & supply
The some products are produced in a particular season & are used year round. These are stored for a long period of time. Thus, marketing cost of that product is high. For example-potato.
3. Extend of selling operation
Industrially used goods incur less marketing cost because these are sold to a few customers. But consumption goods are to sell a big number of consumers & it requires sales man as well as advertisement. Thus, marketing cost is increased.
4. Degree of product identification
Known product incurs less marketing cost incomperism with unknown products. Foe newly produced goods producer have to pay higher advertisement cost & thus marketing cost is increased.
5. Ration between bulk & price
Bulky goods incur higher transportation per unit. This is why bulky goods incur higher marketing cost.
Difference between Agril product & Industrial product
1. System of production
Agril products are produced scattardly in the vast field. But industrial products are produced in a concentrated area.
2. Scale of production
Agril products are produced in small scale but industrial products are produced in large scale. For supplying to the consumers product accumulation is necessary in case of agril products. But industrial products produced in a concentrated area so product accumulation is not necessary here.
3. Number of middle man
To extend of marketing activities is wider in case of agril products. So, greater number of middle man is necessary for agril marketing. But extend of marketing activities is not so wider in case of industrial products. Therefore, small number of middle man is needed.
4. Elasticity of supply
It is less in case of agril products from the nature of products because it is time consume. But elasticity of industrial products supply is higher because its production is not time consuming. The production can be increased in a short period of time.
5. Fluxuation
A farmer cannot influence the price of his products, trying his level best. Because, he has the limitation in storage, preservation & quality controlled. But, an industrial producer can influence his products price.
6. Variation in product quality
In agriculture, change in product quality is occurred every year. The quality is controlled by nature. There is no scarcity of product quality. But, this problem is not associated with industrial product.
7. Product perish ability
Almost all agricultural products are perishable. Product is damaged with in a period of time. So, legal price cannot be ensured. But, in case of industrial products are not applicable.
8. Bulkiness
Most of agricultural products are bulky with higher carrying cost. But, industrial products are not so bulky as well as it is less volumetric.
9. Seasonality of production
Agricultural products are not produced all round the year. It is produced seasonality. So, for supplying the products in off-season, time utility is to be created at higher cost. This problem is not related with industrial products.
10. Transportation cost
Agricultural products incur higher transportation cost incomparisn with industrial products. Because, agril products is to be accumulated vastly then it is distributed throughout the country.
11. Storage system
Agril products are seasonally produced. So, storage is essential. The parishable agril products require cold storage. The storage cost of agril products is higher than industrial products.
12. Grading & standardizing
There is differentiation in qualities of agricultural products costs incur for grading & standardizing for agricultural products before exporting. For example- Jute is standard & graded before its export. But industrial products require no grading & standardizing.
13. Sales promotion
It means the advertisement before marketing of the product. Every product is produced in a farmer’s personal level. Advertisement is not done ere. But industrial product can earn profit through advertisement.
Types of Consumer
Every product has two types of consumers, one is final consumer & another is industrial user. But, in case of industrial product, there is only consumer of final goods.
Market for Agricultural Products
There are two types of market for agricultural products- primary market & secondary market.
1. Primary market
These are situated in rural areas. Sometimes, these are called business centre or product assembling centre. The area of these centre are on an average 25square miles.
2. Secondary market
All these markets are established for whole selling in town or city areas. There are two types of centres in this system, one is product assembling centre & another is product distribution centre.
Problems of Agril Marketing in Bangladesh
1. Lack of appropriate cleaning & drying
Appropriate cleaning & drying is essential for appropriate price. But, our farmers are not capable of doing this. Because, they are to sell their product at farm gate for their financial crises. Therefore, products are not properly cleaned or dried.
2. Lack of proper transportation
Transportation by road is comparatively costly. So, farmers prefer transportation by water for its cheapness. But it is time consuming. The quality of product is detoriated & the price is also decreased.
3. Lack of organized storage
Agricultural products are handed over for several times due to the involved of maximum number of middle man. On an average, there are several types of middle man in the marketing channels of agricultural product. There is no storage system in agril marketing. So, traditional storage system is not satisfactory for maintenance the quality of agricultural products.
4. Multiplicity of intermediary
The more involvement of middle man, the more is the cost or marketing margin. The more is the marketing margin, more is the marketing inefficiency.
5. Lack of grading & standardizing
Maximum agricultural products are sold by producers without grading & standardizing. It is due to the inappropriate price of agricultural products. Only jute, tea, leather are graded & standardized for exporting. So, agricultural products are deprived of appropriate price.
6. Lacking of common weight system
Differentiation of weight, different charges create great problem in agricultural market. Agricultural products are locally produced & local weight systems are followed for product marketing. So, a common & standard weight system should be practiced.
7. Market information
Appropriate market information is necessary for taking decision of producer. For lacking of correct information regarding product market the agricultural producers suffer from inappropriate price of their products. Most of the producers are ignorance about international & domestic market situation.
8. Lack of co-operative market
There is world wide provision of co-operative marketing regarding agril products.
But, unfortunately in Bangladesh, co-operative marketing still has not been developed. So, agricultural marketing is not smooth here.
9. Financial difficulties
The poor farmers suffer from wants of fund. They cannot take any plan for credit crisis & for want of financial facilities. So, government initiatives should come forward for financing report farmers.
MARKETING CHANNEL
The Marketing Channel is the accumulation of buyers, sellers and middleman who are involved in reaching the product from producer to consumer.
Channel of distribution consist of the sequential linkage of organization and the relationship through which a product flows from producer to consumer.
The Examples of Trade Channel
A .
1. If the product is directly sold to the consumer,
Producer Consumer
2. If the producer sells his product through a single middleman,
Consumer Producer Middleman
3. If the producer sells his product through more than one middleman,
Producer Whole seller Retailer Producer
Producer Industrial User Whole Seller Sells Representative Production Cell
2. If the product is handled over more than four times,
a.
Whole seller Or Contactors Retailer Broker Sells Representative Purchase Representative Local Purchaser Consumer
Broker Commission Merchant Whole seller
Contactors Retailer Consumer Producer Sells Representative importer Broker Whole seller Producer Retailer Producer Local Purchaser
c.
Factors to Be Consider In Selecting Middleman
Producer should consider these points in selecting middleman in order to sell his goods.
i. Number of Consumer
If the number of consumer is big, then direct sell is possible. But if the numbers of consumer are scattered available then direct sell is not possible.
ii. Area of Market
If the area of a product is smaller and the sell is little, then direct sell will not be is possible, because over head cost will be higher without extending the area of market.
iii. Regularness of Market
The number of purchase should be reasonable, and then the producer can sell his product by his own shop. Even if the amount of product is lower.
iv. Amount of purchase
The amount of purchase and choice of consumer influence the middleman performance. If the amount is lower the producer can appoint commission merchant.
v. Nature of Market
If the product can be sold in consumer goods market then direct sell can be possible. If the product is suitable for industrial product market, then agent should be appointed.
vi. Unit Price
If the unit price is higher, but number of producer is small, then the product can be sold by the own sells man.
vii. Sequinness of Purchaser
If the Purchasers are clustered in a particular point, then own sells man is enough, otherwise middleman is necessary.
viii. Consumer Purchasing Habit
It should be consider that, Purchasing Habit of consumer is highly preferable, if the consumers are habituated to purchase from middleman, then middleman is to be appointed. Otherwise middleman is not necessary.
Marketing Channel of Rice
Government sells Center Consumer Ration Shop Producer Rice Mill Ration Consumer
Rice Mill Faria, Bepari, Village Merchant Retailer Aratdar / Store house owner Bakari of sells zone Retailer
Fig: Marketing Channel of Rice
Faria, Bepari, and Village Merchant: These middlemen are termed on different ways in different places. The assemble rice from door to door of rice producer farmers or from local markets. They fix up prices of rice by negotiations. Now-a-days the beparies of surplus area rice to sell the Beparies of deficit areas and thus make a relationship between defile and surplus areas.
Aratdar / Store house owner: They are the second middlemen of rice marketing channel. The business area of Aratdar or Store house owner is comparatively widened than that of Faria and Bepari. The Aratdar has to take risk bearing program. They act as broken and have commission from both buyer and seller.
The Retailer: In rice business the retailer is the last step of middleman. They buy rice from Bepari and Aratdar as sell it to the consumer. They also buy rice from general producer. In rice marketing channel retailer has the most important role. For rationing program government has selected buying center of rice in surplus areas of the country. These buying centers are involved in buying rice in selling price. It is not a wide program. Only ration cardholders can buy rice from rationing rice.
At present no association of Beparies and Retailers but in some other places there is association of Aratdar.
MARKETING CHANNELE OF JUTE
Producer Bangladesh Jute Corporation Bapari/Faria Aratdar/Broker Kacha Baler Pacca baler Exporting agent Jute Mill Bangladesh Jute Mill Corporation Foreign Purchaser Bangladesh Jute Export Corporation
Fig: MARKETING CHANNELE OF JUTE
Bapari/Faria: These types of middleman are biggest in number. They move from door to door for collecting jut from producer. They also collect jut from village market. In jut marketing those middleman are the first linkage. They busy loose jut and sell those products to Kacha baler or Aratdar or directly to jute mills.
Aratdar amd Dalal: This type of middlemen helps to find out purchaser of jute on behalf of producer, Faria or Bapari. Before selling the product it is to be kept under the custody of Aratdar. Arotdar’s function is fallible. He acts on commission. Some times he himself sells jute. His principle function is to make contact between seller & purchaser. The Dalal is engaged in the transaction of loose jutes. He receives commission from both seller and puncher. The rate of commission depends on the situation of market.
Kacha baler: This type of middlemen purchase loose jute, make bales of it. These bales can not export before turning it to pakka baler. So domestic seller and purchases are occurs in Kacha baler, pakka baler condition. The kacha balers sells these to shiper , Pakka balers and local mill.
Bale brokers: They are quite different type of broker. They deal with bale jutes. They are found in only some selected place like Narayngang & Kulna .They make linkage between Kacha balers, pakka baler shipper, and some time inland mill. They make assessment of saleable amount and their expected price & tentative purchasers are also selected by them.
Pakka baler/shipper: In most cases of shiper & pakka baler is the same person or institution. Their important selles centers are situated in near assembling center. They turn kacha balers into pakka balers in Narayngang, kulna & Chittagong.
Broker in baled jutes: This type of middlemen are engaged in linking (written) contact of selling baled jutes both un bossiness performances in Narayngang, kulna & Chittagong terminals.
CREDIT
Credit: Credit is a kind of loan for interest.
Rural credit: The credit which is used for the development of rural people is called rural credit.
Agricultural credit: The credit which is concerned with the development of agriculture is called agricultural credit.
Problems of Agricultural credit:
1. Inadequate supply of institutional loan:
Only 15%-20% loan is institutionally supplied. The rest is supplied from the non-institutional sources, that is, village money lenders which is for the higher rate of interest.
2. For want of close supervision agricultural credit is being used in unproductive activities.
3. For permanent poverty of farmers, they are exploited by the rural money lenders.
4. Institutional credit sanctioning is complicated. So the farmers are not interested to take loan from credit institutions like nationalized banks.
5. In loan sanctioning, loan security is a great problem. For want of land farmers cannot take loan ensuring loan security.
6. The credit institutes are usually urban based for which the rural farmers are different to communicate with those credit-institutions.
7. Unfair means, the illegal activities of credit officials are the major problem of agricultural credit.
8. Expense of loan: Expense of loan is so high for the poor borrower that they cannot avail institutional loan.
Solutions
1. The government should take initiatives to institutional loan.
2. The authority should regulate the non institutional credit policy regarding the rate of interest.
3. For rehabilitation in ownership of land “ Rin Shalishi Board ” should be established.
4. Provision of close supervision of loan should be ensured following the recovery policy of Garmin Bank.
5. Credit should be supplied for easy terms and conditions.
6. The sanctioning of agricultural loan should be without land security for helping the poor.
7. The branches of nationalized banks should be opened in particularly rural areas.
8. The concerned credit officials should be perished for their illegal action in connection of sanctioning agricultural credit.
Function of Bangladesh Krishi Bank (BKB)
BKB has an important role in disbursing agricultural credit in Bangladesh.
1. BKB provides loan to different types of project both individual and collective.
2. BKB sanction loan for the farmers for-
Short Term: Short term loans are seed, fertilizer, insecticide, loans & crop loans.
Medium Term: Medium term loans are product storage, product marketing loans.
Long Term: Long term loans are land reform & land development loan.
3. BKB sanction loan for agricultural development activities & agricultural diversification programmes.
4. For agro-based industry & handicrafts development BKB has the provision of technical support against its loan.
5. BKB sanction loan for importing mechanical equipment.
6. BKB provides training to the farmers for the development of their skillness.
7. For different types of loans, different projects are approved by BKB.
In consistence with the policy of government BKB awarded some projects which are as follows-
a) Special loan project of taka 100 crore.
b) Contact farmers project of BADC.
c) Potato storage project of BADC.
d) Potato cultivation project of BADC.
e) Tea production project.
f) Taddle pump project.
g) Shallow-tube well project.
h) Deep tube well project.
i) Deep tube well project of IFAD.
j) Experimental project of rural credit.
Co-operative
Co-operative is a form of organization where in person’s voluntarily associate together as human being on the basis of equality for the promotion of economics interest of themselves.
According to Horance Plunkett – “Self-help made effective organization”
Characteristics of Co-operative
1. Open or Voluntary Membership
Irrespective of caste, community & status not less than ten members. Voluntarily can form a Co-operative society. Membership is always open as well as voluntary. Membership would be confined to only those who are sympathizes & co-operative to each other.
2. Democratic Functioning and Control
It follows one member one vote system. Primary objective of the society is to earn profit. The share purchasing by an individual is controlled through some rules. Every member in the co-operative has the equal controlling & equal management power. Nobody can be dominant by capturing more power.
3. Services at cost & distribution of surplus income to members in proportion to transactions. The income from collective effort should be distributed equally among the members. 25% of profit should be kept undistributed in reserve fund & the rest 75% should be divided among the sectors.
4. Services Is the Primary Object
Profit is not considered as a primary object. The benefit from the earning will not depend on the number of share purchased by a member, but it will depend on the loyalty to society on the member.
Condition to be successful for a Co-operative in Bangladesh.
1. Only government initiatives of government officials are not enough. The people should have voluntary participation & they have to bear the mentality of contribution towards the society.
2. Large size business initiative by Co-operative can earn profit as well as it can establish flow of work among the member. It creates self reliance among the members.
3. Ideological movement & joint venture may be successful through this society. Therefore the members should be morally developed for being successful of a Co-operative society.
4. Progressive leadership should be developed in our country. It should come out of Co-operative society, so that the society members can adept themselves with newly in difficult situation. It would be the creativity of progressive leadership.
5. For Bangladesh situation Co-operative should be free from political and religious biasness. All activities should be free from the ideology of religious & political.
6. For consumer’s Co-operative society, every transaction should be cash transaction.
7. Educational programmed should be attached with Co-operative.
The Role of Co-operative in Agricultural Development
Before knowing the role of co-operative in agricultural development, we should determine the contribution of agriculture to the nation economy. Then we can understand hoe agriculture can be developed. Then the question will arise to prevent the obstacles on the way of agricultural development. The Co-operative society can act as save guard of agricultural development activities.
Village is the center of Bangladesh economy. Due to under developed agriculture in Bangladesh the rational development is hampered. This is the age of struggles for survival. In this situation, Co-operative is the best for agriculture as well as the overall development of the century. In our country the lands are subdivided & fragmented. The land summation & joint cultivation is possible only through Co-operative.
Different types Co-operative can increase agricultural production improvise agricultural marketing system, enhance credit facilities.
1) Production Co-operative Society
Ø It can solve various problems of agriculture.
Ø It can provide with tractors, power tillers, shallow & deep tube wells which are essential for agricultural development.
Ø It can undertake different irrigation projects which will ensure increases production.
Ø It can enrich technical knowledge & establish procedurement centre.
2) Purchase Co-operative Society
This type of Co-operative can consume collective purchase of agricultural inputs & decrease production cost. It can make summaries all individual demands of agricultural input & reduce input cost. The collective purchase of consumption goods will also reduce the consumption cost.
3) Credit Co-operative Society
By ensuring credit in easy terms & condition this type of Co-operative can finance the farmers & encourage the agricultural development.
4) Saving Co-operative Society
Reaching waste of money & making savings can make fund & this fund can create agricultural development program. This to be done by co-operative.
5) Marketing Co-operative Society
The marketing activities of agricultural products are to be performed by Co-operative & it can ensure the legal price of products & it will enrich & develop agriculture.
6) Insurance Co-operative Society
Our agriculture always faces risk & uncertainty. Therefore insurance program through Co-operative can reduce risk bearing.
INTERNATIONAL TRADE
International trade is the trade among different countries or trade across the political function. International trade classes with business transactions that take place between the citizens to different countries.
Adam smith argued that a country could certainly gain by trading with other nations. Just as a tailor does not make his own shoe but exchanges a suit for shoe, and hence both the tailor and the shoe maker gain by trading. According to Adam smith, if one country has absolute advantage over another in one line of production and the other country has absolute advantage over the first country in another line of production, then both the countries will gain by trading.
For example, if it takes 10 units of labour to produce one unit of good X in country A, but 20 units of labour to produce the same good in country B. And by if 20 units of labour to produce one unit of good Y in country A and 10 unit of labour to produce same good in country B then both of the country will gain by trading.
After the opening of trade, country A will be specialized in the production of good X and Country B will be specialized in the production of good Y.
The theory of comparative cost Ricardo agreed with the analysis but he went farther and advocated that comparative advantage in greater in respect of one good than is that of other. In other words when comparative difference in cost.
Comparative difference in cost
When the comparative advantage in different trade will arise and it will continue.
In country A
In country B
In this case country B can produce both wheat and cotton cheaper than country A. But the Comparative advantage is higher in the production of cotton than that of wheat. A has a Comparative disadvantage in production of both the Comparatives but disadvantage is lower for wheat than for cotton.
Gain with comparative difference in costs:
In this previous discuss in surplus arises with specialization.
Without specialization:
A= 1 quintal of wheat + .5 quintal of cotton
A+B= 2 quintals of wheat+1.21 quintals of cotton
With specialization: A is producing wheat & B is producing cotton only.
A= 2 quintals of wheat
A+B= 2 quintals of wheat+1.42 quintals of cotton
The surplus = 0.21 quintals of cotton. This is the gain from trade.
Cost ratio:
Country A : 1qtl of wheat =1/2qtl of cotton 1:2
Country B : 1qtl of wheat =5/7 or 0.71qtl of cotton 1:1-2/5
Country A may be specialized in production of wheat and B in cotton
.
Causes of International Trade
1. Product specialization
International trade is originated from product specialization. All products are not possible to be produced in all countries. Therefore, in order to fulfill the need every country produced its convenient products. The products which is not possible to be produced within the country that is imported from other countries. Thus international trade is formed.
2. Availability of factors of production
The factor which is available within the country of production is less costly. These certain type of products may be efficiently produced. So this country may make the best utilization of those factors of production & and surplus production is possible in that country. Product can be exported from the country. Thus International trade is possible.
3. Geographical Convenience
For this type of Convenience different socioeconomic conditions prevail in different countries. For example, due to hilly area Nepal can’t produce so many agricultural products. For plain land Bangladesh can produce so many agricultural products. Therefore, trade between Nepal & Bangladesh is possible.
4. Availability of Natural Wealth
Natural wealth such as coal, oil, iron, gas are available in many countries. The countries which are rich with natural wealth are in good position of International trade. But, the countries which are poor in natural wealth are to depend upon the rich countries. So, international trade is possible between naturally poor & rich countries.
5. Climatic Differentiation
Some products are suitable to be produced in certain climate. Surplus products are also possible in suitable climate. The surplus products can be exported & thus international trade is possible.
6. Mobility of Factors of Production
Land can’t be mobile. Sometimes, labour is also difficult to move. According to Adam Smith, of all sorted of luggage man is most difficult to be transported. So, internationally product transportation is so much difficult. The surplus product of a particular country is exported to the country which is deficit in that product.
7. Lacking of Capital Goods
The rich countries posses more capital & capital goods but, the poor countries suffer from those. The rich countries can produce higher amount of & higher quality of goods. But, the poor countries are deprived of producing these goods. So, the poor countries are to import goods form rich countries.
8. The Scale of Development in Human Resources
The people of different countries are not equally developed. The differentiations of efficiency in different countries become the cause of differentiation in product quality. Therefore, quality products are to be imported from other countries & thus international trade is occurred.
Characteristics of International Trade
1. Two countries are involved in this type of trade.
2. There are two principal parties involved here. One is importer & another is exporter.
3. Both the parties have to follow the rules of international trade.
4. In generally a deficit country imports products from surplus country.
5. International trade is the combination of two types of business. One is import business the neat is export business.
6. Any person or any company can’t be evolved in this business according to his / its own will. But the approval of his respect owns state is essential for this business.
7. Every medium of exchange can be used for the transaction of the business, but particular international currencies are used for the transaction.
8. The system of international trade must be followed here.
The Areas Regarding International Trade
Absolute Advantage Theory
According to Adam Smith, this theory functions through division of labour & absolute advantage is possible for a country through division of labour.
International trade can expand the market of a particular product & best utilization of productive capacity of a country can be ensured. According to this theory, a country which posses the absolute cost benefit of a product will produce that product, because it will be profitable to that country. The country which has not absolute benefit will import that product from other country.
Assumption
1. There is open trade in every country of the world. That is there is no restriction on international product transaction.
2. The product price is determined by the labour cost of the product.
3. There is mobility of labour within the country, but there is no mobility of labour outside the country.
4. The change in the quality of product will not be the cause of changing marginal cost. i.e. fixed cost system will be prevailed.
5. The transportation cost of the product will be ignored.
6. The full employment of labour is ensured.
Example: Bangladesh can produce 50 mds. of jute & 20 mds. of cotton by a certain number of labour. Egypt can produce 10 mds. of jute & 20 mds. of cotton by the same number of labour. So, Bangladesh more amount of jute with same level of labour in comparison with Egypt. Similarly Egypt can produce more amount of cotton with same level of labour in comparison with Bangladesh.
If Bangladesh produces only jute & Egypt produces only cotton then both countries will be benefitted, because Bangladesh has absolute benefit in producing jute & Egypt has absolute benefit in producing cotton.
Criticisms
1. This theory fails to indicate the nature of international trade.
2. No explanation regarding the objectives of international trade is available here.
3. Assumption regarding transportation cost is unrealistic.
4. Immobility of labour internationally & mobility of labour within the country is also unrealistic.
5. “Limitation of open market is caused by international trade” this statement is not true.
6. In modern world absolute open trade is unite absent.
7. According to the theory, full employment is to be ensured. But no country in the world can ensure this.
8. Here unchangeable production cost is assumed, but production cost is always changeable.
THE INDICATORS OF MARKETING EFFICIENCY
It marketing cost can be reduced without any change in the quality of goods and services then we can say that there is efficiency of marketing
The following are the indicators of marketing efficiency
marketing margin
Consumers price
Availability of external benefits in the marketing
Market competition
Marketing Margin
marketing margin is the difference between the price a consumer pays and the price producer receives.
In other words MM=Product price – Product cost = Pp – Pc
We should remember that higher marketing margin indicates efficiency
Middlemen. The greater marketing margin will not indicate the efficiency of marketing in the following cases.
a) If the production cost of any area is very low the marketing margin of that area will naturally be higher.
b) For geographical advantages if the place utility is higher than the transportation cost will be higher and marketing margin will be increased.
c) In the developed countries form utility is naturally higher. The demand of agril. Products are in the field product form. So the marketing margin is higher.
The compounds of marketing margin
1. Cost portion
2. Profit portion
1. Cost portion
a) Transportation cost
b) Advertisement cost
c) Depreciation cost
d) House rent cost
e) Packaging cost
f) Processing cost
g) Interest cost
h) Repairing cost
i) Labour cost
j) Loss of product during distribution
2. Profit portion
a) Cost of comparation in consistence with other developed countries.
b) Rendering services for creating time, place and form utilities.
c) For avoiding risk cost of stepo taking by the middlemen.
d) The cost of support for the farmer.
e) The cost of entertainment of businessmen.
f) The cost of product damage.
g) The cost of other purposes
Consumer’s Price
The price that consumer pays is called Consumer’s price. It is an important indicator of marketing efficiency .If the efficiency of marketing is present than the consumers price must be sustainable. Consumer’s price also indicates the market efficiency. The price of any product is the function of these elements:
a) The income of a consumer
b) The supply of money
c) The supply of in response to the demand.
d) The price of supplementary and complimentary goods
e) Marketing margin and product distribution system.
f) Govt. policy regarding business
g) General Price level.
If the middlemen create artificially crisio in the market for their own interest then the price of a particular commodity will be increased.
3. Availability of external benefits in the marketing
External benefits are those which are outside of marketing activities. Transportation facilities storage facilities, processing facilities are the example of external benefits.
The absence of those facilities will be decrease the efficiency of marketing and presence of these facilities will increase the efficiency of marketing.
In developing countries like Bangladesh small for seasonal impact of product and subdivision and fragmentation of land make the marketing of product very costly.
4. Market competition
The more is the competition the market the more is the efficiency of marketing. Otherwise the inefficiency will be must. But there is no scale of measuring the competition.
There may have two types of competition.
Competition from the view point of price determination. Price will be more reasonable through the presence of competition rather than illegal pricing.
Competition from the view point of quality control. We can say that when different farm appears in the competition among them then the product quality will be in the satisfactory level.
Causes Of Inefficiency Of Marketing
1. Lacking in the marketing management
2. Lacking in the external facilities
3. Lacking in the grading and standardizing of product
4. Due to the presence of unwanted middlemen
5. ……… of commodity without computation
6. Lacking in coordination among marketing activities
7. Insufficient information regarding market.
How to recover the inefficiency of marketing
1. To turn the substance forms in to commodities farms
2. The farmers are to motivate for grading and standardizing of their products.
3. The correct and suitable information regarding market should be broadcasted among the people.
4.The Transportation cost must be reduced for improving the inefficiency of marketing.
5.efficient storage system should be developed.
6.the producer of product should be the member of the institute of that industry.
Marketing Of Agricultural Products:
Agril. Products are those which come from agril. Activities These are also called from products. There are two types of Agril. Products
Consumer farm products: These products are those which are consumed at the form in which it is handed over at farm gate. For example:–egg, milk or vegetable.
Industrial farm product: These products are those which are used in the industry as raw materials. For example:– jut, cotton, tobacco etc.