People, involved in any economic activity ether Farm management or International trade, for gaining success must know and apply the most important elements of economic theory. These are:
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Principle of Consumer Behaviour
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Principle of Comparative Advantage;
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Principle of Marginal Diminishing Physical and Economic Returns;
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Principle of Substitution;
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Principle of Opportunity Cost; and
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Principle of Enterprise Choice.
We will briefly discuss these principles in few simple words.
The first principle is that consumers always seek the highest level of satisfaction (or utility) from what they buy. Therefore, because of the major economic problem of scarcity, people usually choose the alternative that provides the most benefits with the least cost.
The principle of comparative advantage means that, for example, various crops and livestock, with their different requirements, should be produced in those areas or in those farms where the physical and other resources are economically best suited to their production. Thus, even the poorest farmer may have some comparative advantage in some product or products.
The third principle establishes that if quantities of a variable input are applied in increasing amounts to a fixed factor, the additional contribution of a unit of the variable input to production will eventually decrease.
The principle of substitution is in substituting one method for another, be certain that the savings in the mehod replaced is not less and preferably greater than the cost of the technique added.
Principle of Opportunity Cost says that the cost of any choice is given by the value of the best alternative use foregone. For example, if a farmer can earn a profit of $75 from a field of wheat and $95 by planting it for pulses, the opportunity cost of planting the field for wheat is $95. Since this value exceeds the potential profit from wheat, the farmer should plant pulses.
The Principle of Enterprise Choice maintains that enterprises can enter the farm plan once heir expected contributions to net farm income exceed the opportunitycosts of the resources they use.
