Dept.

of Veterinary & Animal Husbandry Extension Education,

College of Veterinary and Animal Sciences, Udgir

Livestock Economics, Marketing

and Business Management
LECTURE NOTES

Dr. N. V. Khode, Assistant Professor

4/30/2014
INDEX
S. No. Title of the topic Page
No.
1 Economics: Introduction, definition and scope (production, consumption, 3-8
exchange and distribution) of economic principles as applied to livestock
2 Common terms – wants, goods, wealth, utility, price, value, real and money 9-12
income
3 Important features of land, labour, capital and organization 13-18
4 Livestock produce and products, Livestock contributions to national 19-26
economy, Demand projections of livestock produce
5 Theory of consumer behaviour: law of diminishing marginal utility and 27-31
indifference curve analysis
6 Theory of Demand 32-35
7 Individual and market demand, elasticity’s of demand and factors affecting 36-42
demand
8 Laws and types of supply, Elasticity of supply 43-46
9 Cost – concepts 47-53
10 Theory of production 54-58
11 Economics of animal disease and disease losses 59-61
12 Livestock business and Marketable livestock commodities 62-63
13 Concept of market: meaning and classification of market 64-70
14 Market price and normal price, Price determination 71-73
15 Marketing of livestock- methods, Perishable and non-perishable livestock 74-77
products- meaning, Livestock marketing problems
16 Merchandising – product planning and development 78
17 Marketing functions: Exchange functions 79-80
18 Marketing functions: Physical functions 81-82
19 Marketing functions: Facilitative function 83-84
20 Market opportunities 85-86
21 Import and export of animal and animal products 87-97
22 GATT, WTO and AGRICULTURE 98-99
23 Resource management 100-102
24 Break even analysis 103-106
25 Personnel (Labour) Management, Identification of work and work (job) 107-111
analysis / Division of labour
26 Accounting: Common terms 112-113
27 Different systems of book keeping – single and double entry system 114-115
28 Various types of account books: Journal, ledger, cashbook 116-119
29 Classification of account and rules of debit and credit 120-121
30 Recording of business transactions 122-124
31 Analysis of financial accounts, Income and expenditure accounts 125-129
32 Trading account, Profit and Loss accounts 130-132
References 132
 -LECTURE NOTES-
TOPIC -1
Economics: Introduction, definition and scope (production, consumption,
exchange and distribution) of economic principles as applied to livestock
Introduction:
The term “Economics” is derived from the Greek words ‘OIKOS’ and ‘NOMAS’.
‘OIKOS’ means household and ‘NOMAS’ means management. So in its original sense economics
means household management i.e. satisfying as many wants of the house hold or family as
possible by allocating the limited resources at the disposal of the family wisely among different
wants. Economics means management of day to day problems arising from unlimited wants and
limited resources by wisely allocating limited resources to satisfy maximum wants. In other words
economics is the study of how man manages his limited resources as it satisfies as many wants as
possible. Economics is the science that studies as to how people choose to use scarce productive
resources to produce various goods and to distribute these goods to various members of society for
their consumption.
Need:-
Among social sciences the subject of economics is more scientific and exact. Economists
world over are more respected lot and outstanding contributors in the field of economics are also
recognised and honoured by way of Nobel Prize and other awards. All economic activities are
interdependent and these activities are aimed at satisfying human wants for the ultimate welfare of
mankind. Economics as a subject tries to find out the basic principles and law behind these
activities, which are a part of human behaviour. When grossly viewed the magnitude of various
economics activities not only appears to be of mammoth proportion but also appears to be highly
intricate and complicated. Nevertheless, behind these seemingly complicated activities there lies
certain tendencies and general patterns which can be stated in the form of economic laws whose
reliability can be subjected to scrutiny through scientific methods. All these give an excellent
mental discipline to one who pursues the study of the subjects of economics. With proper
understanding of the various laws of economics one can predict the economic behaviour that is
likely to emerge at a future date. Its study helps producers, traders, consumers, labourers, labour
leaders, statesmen and common persons in the society as all these are involved in one or other
economic activity. The study of economics helps in solving many national and international
problems arising out of improper distribution of resources.
Present status of economics:-
Livestock is an integral part of the agricultural production system in India and plays an
important role in national economy as well as in socio-economic development of millions of rural
households. Livestock is an important source of animal protein for farm families through the
consumption of milk, dairy products, eggs, and meat. In addition to their use as source of food,
livestock are also used for draught power in agriculture and transport, and their dung is used to
help enrich soil fertility. Sales of livestock and livestock products make up a considerable
proportion of the rural farmer's cash income.
India with its more than 120 crore population and about more than 70 per cent of them
residing in over 6 lakh villages with agriculture as major vocation has adopted livestock
production as one of the major allied agriculture economic activity. India possesses more than
187.38 million head of cattle, about 97.92 million head of buffaloes and approximately 124.36
million goats and is ranked number one in the world in all these three domestic species of
livestock. With its 61.47 million sheep and about 176 million layers it is ranked 3 rd in the world. It
has about 13.52 million pigs and about 330 million broiler chickens. In terms of broiler production
it ranks 5th in the world. Milk production being around 86.15 million metric tons, India is able to
provide only about 230 grams per capita availability per day. The per capita availability of eggs is
around 44 per year where as the per capita availability of meat is around 2 kg per year. According
to one estimate India contributed more than 502 crores per day to its gross domestic product from
livestock sector alone.
A careful perusal of investment pattern in Agriculture and Animal Husbandry by
Government of India in its five year plans reveals that an investment of 11.7 to 14.8 per cent of
total plan outlay was made to Agriculture. However, a meagre 4.6 to 6 per cent of what was
invested on Agriculture was invested on Animal Husbandry and dairying. These figures reveal
that with investment being almost constant over various five year plans the contribution made by
livestock sector towards India’s GDP actually rose from 13.88 per cent to 26.19 per cent (between
1981 to 2003) of the total share of Agriculture output.
Animal rearing has its origins in the transition of societies to settled farming communities
rather than hunter-gatherer lifestyles. Animals are domesticated when their breeding and living
conditions are controlled by humans. Over time, the collective behaviour, life cycle, and
physiology of livestock have changed radically. Livestock production has played a key role in the
development of human civilization. Development of animal rearing techniques has steadily
increased the productivity. A remarkable shift in livestock production practices has occurred over
the past century in response to new technologies. Many governments have subsidised livestock
sector to ensure an adequate food supply.
Livestock economics, or the application of economic methods to optimizing the decisions
made by livestock producers, grew to prominence around the turn of the 20th century. It focused
on maximising the yield of live-stocks while maintaining a good ecosystem. Throughout the last
century, the discipline expanded and the current scope of the discipline is much broader. Livestock
economics today includes a variety of applied areas, having considerable overlap with
conventional economics. It combines the technical aspects of livestock production with the
business aspects of management, marketing and finance.
“Slow agricultural growth is a concern for policymakers as some two-thirds of India’s
people depend on rural employment for a living. Current agricultural practices are neither
economically nor environmentally sustainable and India's yields for many agricultural
commodities are low. Poorly maintained irrigation systems and almost universal lack of good
extension services are among the factors responsible. Farmers' access to markets is hampered by
poor roads, rudimentary market infrastructure, and excessive regulation.”- World Bank: "India
Country Overview 2008.
Definition of economics:
There are many definitions which may be grouped under four different categories:
1. Classical or wealth definition
2. Neoclassical or welfare definition
3. Scarcity definition
4. Modern or growth oriented definition
1. Classical or wealth definition: Adam Smith who is considered as ‘father of economics’
was the first to give a systematic definition in his book “Wealth of nations” (1776). Later
on other economists like J.B.Say, J.S.Mill and F.A.Walker also defined economics on the
similar lines as that of Adam Smith. They are as follows: (a)Adam Smith : Economics is
an “enquiry into nature and causes of wealth” or economics is the science of wealth. (b)
J.B.Say: Economics is the science which treats wealth. (c) J.S.Mill: Economics is the
practical science of production and distribution of wealth. (d) F.A.Walker: Economics is
that body of knowledge which relates to wealth. According to these definitions the main
object of human activity is to acquire wealth and the study of how wealth is produced,
distributed and exchanged for human consumption.
Defects of wealth definition: The stress in the wealth definition is only on acquiring
wealth. But in reality the human life and activity consists of other considerations like love,
affection, charity, social obligation, family obligation etc. Wealth is only a means and not
an end to human activity. Wealth definition did not include the services of various
professional like teachers, doctors, veterinarians, lawyers etc. These definitions strongly
criticised by some philosophers saying it as “selfish science”
2. Neoclassical or welfare definition: Prof. Alfred Marshall in his book “Principles of
economics” (1980) defined economics as “the study of mankind in the ordinary
business of life.” It examines that part of the individual and social action which is mostly
connected with the attainment and use of material requisites of well-being. Thus it is on the
one side, a study of wealth and on the other and more important side a part of the study of
man.

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 3. Scarcity definition: Prof. Lionel Robbins in his book “The nature and significance of
economic science”, defined economics as a science which studies human behaviour as a
relationship between ends and scarce means, which have alternative uses. Human
wants (ends) are unlimited. The resources (means) are limited and can be used for
alternative purposes. Hence there are problems. These problems are solved by people by
adjusting their limited resources which can be put to alternative uses to their unlimited
wants. They choose most urgent ones first and sacrifice the less urgent ones.
However, scarcity definition has not taken into account the possibility of improving
resources due to scientific and technological development. This definition is silent about
the role of resources towards human welfare. Problems can arise not necessarily due to
scarcity of resources but also due to abundance.
4. Modern or Growth oriented definition: (a) Keynes: “Economics is a study of the
administration of scarce resources and of the determinants of employment and national
income.” (b) Samuelson: “Economics is the study of how men and society choose with or
without the use of money to employ scarce producing resources which will have
alternative uses, to produce various commodities over time and distribute them for
consumption now and in the future among the various people and groups of society.” (c)
Benham : “Economics is the study of the factors affecting the size, distribution and
stability of a country’s national income.” (d) M.L.Jhingham: “Economics is a social
science concerned with the proper uses and allocation of resources for the
achievement and maintenance of growth with stability. The definitions given by Prof.
Samuelson and Jhingham are very close to the ideal definition of economics.
Livestock economics:
In the light of definitions discussed above, the term livestock economics may be defined as “the
study of how people in a country or peoples of different countries of the world employ the
scarcely available resources towards the production of livestock and their products for the
best advantage of mankind of the present and of the future”.
Scope of economics
While discussing the nature and scope of economics, we may consider
a) Subject matter of economics
b) Whether economics is a science or an art?
c) Whether it is a positive science or normative science?
d) Whether it is a social science? and
e) Whether it can solve practical problems?
a)Subject matter of economics:
It is the subject matter of economics. It refers to boundaries within which the subject
matter of economics is studied.
The field of economics keeps on going as long as the human race exists on the earth with
their toiling to satisfy their ever-new and ever-emerging wants and satisfying the same through
their efforts. Thus the field of economic constitutes wants, efforts and satisfaction. The subject
matter when examined further reveals the participation of two different economic agents viz.
Consumers and producers in the economic activity. Consumers, given their income levels would
attempt to satisfy their wants which have been short-listed based on the degree of urgency from
unlimited wants. Producers employ all the necessary factors of production and bring out goods
required by the consumers.
The scope of economics is very wide which include following aspects:
a. What is the subject matter of economics?
b. What type of science is it?
c. Is economics, a science or art or both?
d. Is economics a positive science or a normative science or both?
Approach to study the subject matter of economics
1. Traditional approach:
Traditionally, the subject matter of economics can be studied under four divisions. These are
consumption, production, exchange and distribution.
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 Consumption: It means the use of wealth to satisfy innumerable wants. It also means the
destruction of utility. All the goods that are produced are consumed immediately or sometime
in future. Through the consumption activity, we use utilities hence consumption represents
using up of utilities.
Production: It is an activity that helps to create utility. Hence production is defined as the
creation of utility. In the economic sense mere creation of utilities is not treated as production,
and in fact the goods that are produced should have value too.
Exchange: The word exchange of goods implies transfer of goods from one person to the
other. Exchange of goods takes place among groups of individuals, countries, markets, regions
and so on. The exchange of goods leads to an increase in the welfare of the individuals through
creation of higher utilities for goods and services.
Distribution: It refers to the sharing of wealth produced by the community among the agents
of production. Proper distribution of wealth and resources leads to growth and economic
welfare of the people in the nation.
2. Modern approach
Through the modern approach economics is studies under subheads viz. microeconomics and
macroeconomics.
Microeconomics: It is otherwise known as ‘price theory’. It focuses on price determination.
Price theory explains the composition, or allocation, of total production – why more of some
things is produced than of others. Microeconomics fundamentally deals with economic
behaviour of individual economic units such as consumers, resource owners and business
firms. It is concerned with the flow of goods and services from resource owners to business
firms. Microeconomics covers theory of consumer behaviour, theory of value (product pricing
and factor pricing) and theory of economic welfare. It is somewhat abstract does not include
all the economic activities of real world.
Macroeconomics: It is also called as ‘income theory’. Income theory explains the level of
total production and why the level rises and falls. It treats the economic system as a whole,
rather than treating the individual economic units of which it is composed. Macroeconomics is
concerned with the value of the overall flow of goods and the value of the overall flow of
resources. Thus, it covers, theory of income and employment, theory of money and prices,
banking, theory of economic growth, macro theory of distribution, general equilibrium
analysis, policy formulation and analysis, etc. In macroeconomics, we study, as it were, the
forest, whereas in microeconomics we study the trees.
Thus the subject matter of economics includes price theory (microeconomics), Income and
employment theory (macroeconomics) and growth theory. Hence, broadly speaking,
economics may be described as a study of the economic system under which men work and
live. It deals with decisions regarding the commodities to be produced and services to be
rendered in the economy, how to produce them most economically, distribute them properly
and to provide for the growth of the economy.
b) Economics – a social science: Economics studies human beings as members of the society
participating in the economic activities. It does not study humans as isolated individuals. Thus
economics is a social science.
c) Both a science and an art: Economic is not only a science but also an art. It is a science in its
methodology and an art in its application. By definition ‘science’ is a systematized body of
knowledge having an empirical correspondence. Analogous to science, an art is also systematized
body of knowledge. It tells us how to do a thing. The scientific experiments are conducted under
laboratory conditions, while economic theories are subjected to several causal factors that
influence human behaviour. This indicates the fact that the degree of precision of economics as a
science is less, when compared with the pure science, but nonetheless economics is a science. As
an art, economics shows solutions to the problems. For example, it advocates how to maximize the
profits of a firm given the resource constraints. The field of economics guides us to solve the
same. Thus, the field of economics has the attributes of science and art.
d) Economics-Positive science or Normative science: Positive economics is completely
objective and is limited to the cause and effect relationship of economic activity. It is simply
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concerned with the way the economic relationships are present in different economic activities
(what they are). Normative economics studies the way that economic relations ought to be.
Normative economics evaluates. Policy making, a conscious intervention in the economy for the
welfare of the people is essentially a normative in character.
METHODOLOGY OF ECONOMICS:-
 Economics has certain method for discovery of laws and theories.
 There are two methods of investigation available to economics i.e. Deductive & Inductive
method
Deductive method (Analytical or Apriori method)
o It descends from "generals" to "particulars".
o This method starts with the few indisputable facts about human nature and draw inferences
about concrete individual cases.
Inductive method (Realistic or Historical)
o It goes up from "Particulars" to "generals".
o This method insists on the examination of facts and then laying down general principles.
 Modern economists use both methods and consider that induction and deduction are both
needed for scientific thought as the right and left foot are needed for walking. Which of
the two methods is to be used in particular situation depends upon the nature of inquiry
the material on hand and stage at which inquiry has reached.
 The deductive method seems to be more suitable in the field of pure theory and inductive
method for formulating practical policies.
ECONOMIC SYSTEMS:-
o Each economy is a system in which the production and distribution of goods are organised
around people's wants.
o There are three important alternative economic systems functioning in the world.
o They are, Capitalist, Socialist and Mixed economy
Capitalist economy
 The prominent characteristics of a capitalist economy are
o Right to private property.
o Prevalence of free enterprise commonly known as laissez faire that is, free play of price
mechanism in determining economic activity.
o Absence of government controls and of central economic planning.
o Profit motive being the moving force behind any economic activity.
o Full freedom for the consumer in the choice of consumption, which is popularly, referred to
by the expression Consumer sovereignty.
o USA and UK follow this system.
Socialist economy
 The cardinal characteristics of a socialist economy are bound to be the opposite of capitalism.
o All means of production and natural resources are socially owned.
o There is centralised economic planning.
o There are rigours controls, directing the entire gamut of trade (internal and international) and
production.
o This also means that there is no scope for free play of price mechanism or market forces. In
brief, it is a command economy.
o Consumer sovereignty is severely restricted by means of predetermined allotment of
consumer goods and rationing.
o Welfare is the main goal, all other factors becoming matter of less importance.
o This system took place in western countries after industrial revolution.
Mixed economy
 The features of mixed economy are
o Both private sector and public sector co-exist: supplementing efforts of each other in attaining
targeted economic goals.
o While the market forces are free, prices may still be administered by state intervention.

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o Certain industries (especially monopolies) may be nationalised, areas such as agriculture may
be left in the hands of private enterprise.
o Again, works and services whose benefits are indivisible between different sections of the
society (for instance, the benefits of an army to the country as a whole) are taken care of by
the government, while operations in which cost-price relationship is straight and simple, are
left in the hands of private entrepreneurs.
o After independence, we follow this system with inclusion of public and private sectors.
------------------------------------------------------------------------------------------------------

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 TOPIC -2
Common terms – wants, goods, wealth, utility, price, value, real and money income
Human Wants:
Human wants refer to person’s desires for commodities or goods and services. World is at work,
the farmers plough their land; factory workers control machines, feed them with raw materials and
transform into manufacture goods. Buyers and sellers are busy, thus economic activities are
circling around. People want to earn money. They need money to satisfy their wants relating to
food, clothing, shelter and other necessities and luxuries. Thus wants make people to work, i.e.
wants give rise to various kinds of economic activities. This is the starting point of all economic
activities for the existence of human wants. Goods and services that satisfy our wants are to be
produced. They are produced with the help of available resources in nature. The resources that can
be used for the production of goods and services are not available in plenty. They are scarce.
Hence the economic problems arise.
The responsible factors for emergence of economic problems are
 The existence of human wants
 Scarcity of available resources
Thus the sign of economics wonders around wants, efforts, and satisfaction.
Definition:
In general, wants may be defined as desires of consumers to obtain and use various goods and
services, which give pleasure and satisfaction. However, more wish or desire to have goods and
services in the economic sense is not a want.
Therefore, wants can be defined as those effective desires for goods and services which are
associated with the following three essentials.
o Desire to acquire goods or service.
o Ability to pay for the desired goods and
o Willingness to pay for those goods.
Importance of the study:
Human wants are the main cause of all economic activities like agriculture, livestock production,
trading etc. Wants are satisfied through consumption of commodities and services. It is from the
characteristics of wants several economic laws or theories are developed. The following are some
of them.
a. Law of demand
b. Law of substitution
c. Law of family expenditure
d. Law of diminishing marginal utility.
Origin of wants:
 The wants originate from one of the following sources
 Desire of the minimum of goods required for existence. Eg. Food, Clothes etc.
 Desire to maintain the standard of living, giving rise to conventional necessaries. E.g.
Well equipped house, membership of a club etc.
 Desire of distinction and excellence. Eg. Latest model of a car, dress of latest design etc.
The basic need of humans i.e. food is the most obvious reason for the origination of wants. Wants
arise due to various desires which include desire for security, affection, recognition, necessities,
comforts, luxuries, and to satisfy certain customs and cultural wants. Differences in age of the
individuals, individual habits, taste, climate, education, social position etc. will give rise to a
variety of wants. Finally the satisfaction of existing wants results in the generation of new wants.
Classification of wants:
Wants are broadly divided into three categories viz. Necessaries, comforts and luxuries.
1. Necessaries: Necessaries are goods that are essential for human existence and to maintain our
efficiency. It must be satisfied. The goods which are used to satisfy basic needs of humans are
called necessaries. They are further classified as

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 (a) Necessaries of existence: These are the necessaries which are essential for living. eg.
Food, water, clothes, shelter etc.
(b) Necessaries of efficiency: These are not as essential as those of necessaries of existence,
but at the same time essential in improving the efficiency of an individual. eg. Class room with
good ventilation, table and chair to a student etc.
(c) Conventional necessaries: These are the necessaries, which arise out of customs or habits.
eg. Tea, Coffee etc.
2. Comforts: Comforts are goods that lead to easy living and make our life pleasant. It falls
between necessaries and luxuries. Man is not satisfied with fulfilling necessaries only. They
also improve our efficiency, but improvement in efficiency is not in a proportion to the money
spending on them .eg. Car, Refrigerator etc.
3. Luxuries: are those which satisfy superfluous wants of individuals. Luxuries are goods and
services, which are generally non- essential and very expensive. These are neither essential for
life nor increase the efficiency. Luxuries represent wasteful expenditure of the individuals. It is
just meant for increasing the prestige of a person. Luxuries are further classified into (a)
Harmless luxuries (b) harmful luxuries and defence luxuries. Harmless luxuries are those, the
expenditure on which will not cause any harm to the individuals. eg.well furnished bungalow,
expensive food habits etc. Harmful luxuries on the other hand are injurious to the health of the
users. eg. Alcohol, smoking etc. Defence luxuries are those which protect the users during the
period of crisis. eg. Gold, Diamond ornaments etc.
Though demarcation is made among necessary for an individual may turn out to be a
comfort for another person and luxury for someone else. Air travel is a luxury for a common
man but an absolutely necessary for a busy business executive. Due to development of
economy the wants and desires may change over time. eg. TV & telephone were once
considered as luxuries, now we are using them as necessary goods.
Characteristics of wants:
1. Wants are unlimited: Wants are continuously cropping up in the minds of the humans. If
one want is satisfied, immediately another want emerges. They go on multiplying. There is
no end to human desires, hence unlimited.
2. Wants recur: If one want is satisfied at a point of time, the same want again repeats in the
future. Wants like hunger need to be satisfied time and again because of their recurrence.
3. A given want is satiable: Though human wants are unlimited, a given want at particular
point of time can be completely satisfied. If a person is hungry he can satisfy his want fully
by taking sufficient amount of food.
4. Wants are complimentary: There are certain commodities or goods which cannot be put
to their intended uses unless they are complemented with their closely connected goods.
Eg. The fountain pen cannot be used for writing without ink or a ball point pen without
refill.
5. Want are alternative: There are always alternative means or ways by which a particular
want can be satisfied. Eg. Breakfast can be made with milk and bread, eggs only, eggs in
the form of omelets, dosas, samosa etc. Similarly a drink can be satisfied with a cup of tea,
coffee, milk or fruit juice etc.
6. Wants are competitive: Wants are unlimited but means to satisfy them are limited.
Wants compete among themselves and hence given preference. One chooses the most
urgent wants keeping in view of the limited income. For a hungry person wants for food is
more urgent than anything else. The most urgent wants takes the first position with
satisfaction and the less follows.
7. Wants vary in intensity or urgency: Some wants like drinking water are satisfied more
urgently compared to owning a house or motor car.
8. Wants vary with person, place and time: Non-vegetarian loves to eat meat preparation
compared to vegetarian whose love will naturally be for vegetarian food. Clothing
requirements of a cold country are different from warm countries. Wants of present day
people are different from old times.

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 9. Wants may change into habits: Drinking a cup of coffee or tea in the morning or
smoking a cigarette after food etc.when such wants are fulfilled regularly they tend to
become habits later on.
Goods:
Anything that satisfies a human want is called good. Goods in the ordinary language
means material things like cement, building materials, land equipments, food grains etc. But in
economics goods refer to commodities which have physical existence (tangible) and also
services (intangible) like the services of a veterinarian, dentist, teacher, lawyer etc.
Service: A service is any act or performance that one party can offer to another i.e. essentially
intangible and does not result in the ownership of anything. Services are intangible, non-
material, inseparable, variable and perishable.
Goods are classified as below:
(a) Free goods and Economic goods:
Free goods are gifts of nature which are available in plenty and freely in nature without paying
a price eg. Air, sunshine, water etc.
Economic goods are the goods which can be obtained only by paying a price. These goods are
scarce in relation to demand. eg. Milk, meat, food, clothes, car etc.
However, there is no rigid line between free goods and economic goods. Because, what is free
in one place, may be an economic goods elsewhere. eg. Water may be free by the riverside but
the same water when supplied through bottles, it becomes economic goods.
(b) Consumer goods and producer goods: Consumer goods are the goods which are
consumed directly by the user and they satisfy the human wants directly. eg.food, books etc.
Producer goods are investment goods which are not directly consumed by the consumers but
they are used for production of some other goods. eg. Coal, machines, factory building etc.
Even the above classification is also not rigid. eg. Milk, eggs, meat when used as food they are
consumer goods but when used for producing milk products, powder, meat products, become
producer goods.
(c) Single use (perishable) goods and durable use goods: Single use goods are those which
get used up in a single act of consumption. Once they used they disappear altogether or change
their form. eg. Eggs, seeds, fuels etc. Durable use goods are those which can be used again and
again over a period. eg. Clothes, machinery etc.
(d) Material goods and non-material goods: Material goods are those goods which have
physical existence, visible, tangible. eg. Egg, meat, land, building, furniture etc. Non-material
goods which do not have physical existence, they are intangible, invisible. eg. Service of a
Veterianarian, good will of business etc.
(e) Transferable goods and non-transferable goods:
Transferable goods are the goods which can be transferred from one person to another.
eg.Machinery, books, land, cattle, goat etc.
Non-transferable goods are the goods which cannot be transferred from one person to another.
eg. Skill and wisdom of a Technician, Veterinarian, teacher etc.
(f) Competitive goods:- Production of one good must be forgone in order to produce more of
other good. For example for a given level of maize, one has to give up a certain level of
piggery production in place of increasing broiler production.
(g) Supplementary goods:- Some positive level of one good is produced without reduction in
output of another good. For example, women labourer employed in backyard poultry keeping.
(h) Substitute goods: - If price of one good falls with consequent increase in demand for it, the
demand for other related good decreases and can act as substitute for the first one. Soya can
be substituted for maize in feed ration.
(i) Complementary goods: - If production of one good causes the increased production of
another goods. For example legume in rotation increases the production of grain crops in
alternate years.

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 Wealth:
In the ordinary language the term ‘wealth’ refers to money, property, riches. But in economics
wealth means all those goods which satisfy human wants, which are scarce in relation to
demand and which command exchange value or price in the market.
Characteristics of wealth:
1. Wealth should possess utility: Wealth must be capable of satisfying human wants.
2. Wealth must be scarce: Scarcity is the binding factor for exchange. Economic goods are
exchangeable. Since wealth represents economic goods, it must be scarce.
3. Wealth must be transferable: Transferability implies changing the ownership of a good
from one to another. It is nothing but exchangeability.
4. Wealth must be external to person: This quality of wealth enables for exchange.
Skill and intelligence of persons, love, affection, friendship, good health, degree, diplomas, free
air, water, sunlight, good looks of a person etc. are all intrinsic to person and hence do not
constitute wealth.
Classification of wealth:
This can be classified into three forms:-
1. Personal or individual wealth
A common human being requires this wealth e.g. clothes, books, scooter etc.,
2. Business wealth
This is used for further production of goods and services, e.g. farms, industries, machines etc.,
3. National or Social Wealth
This includes the goods owned by states or local bodies e.g. educational institutions, public
library, transport, dam, electricity etc.,
Relationship of wealth:
Wealth and money: All money is wealth but all wealth may not be money.
Wealth and capital: All types of capital are wealth, but all wealth is not capital. eg.Motor car
used for business is capital, but when the motor car is used for personal purposes, it is not
capital.
Wealth and income: Wealth yields income. Wealth is the means and income is the end or
result of wealth.
Wealth and welfare: Welfare is the wellbeing of a person or a society. Wealth can bring a lot
of welfare. Welfare differs from individual to individual, from place to place and from time to
time. Wealth is just one of the means of providing welfare. But all wealth may not promote
welfare. Harmful goods like opium, cigarette, alcohol etc do not promote welfare. When wealth
is distributed properly in the society, wealth promotes welfare of the society. But if it is
concentrated among few individuals there is no social welfare.
Utility:
Utility is the capacity of a good that satisfies a human want. In other words, utility is the want
satisfying power of a good. Food, furniture, clothes, book etc. all have utility. Even poison has
its utility as it satisfies some human wants. Total utility may be defined as the total satisfaction
derived from the consumption of all the goods or services at the disposal of the consumer, i.e.
aggregate utilities derived.
Types of utility:
1. Form utility: By changing the form of a good, greater utility is created. It does not mean
that before change of form of good, there was no utility. eg. Utility of raw milk increases when
it is converted to paneer, ghee, butter, khoa etc. Processing adds the form utility to the
commodity.
2. Place utility: Depending upon the place, the utility of a commodity also varies. Mostly the
goods are transported from the places of production down to the places of consumption and
also from the places of surplus production to the places of scarcity. Production does not
necessarily mean conversion of raw materials into products, it also implies creation of place
utility. eg. Milk from western Maharashtra is supplied to the Marathwada region.
Transportation adds the place utility to the commodity.

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 3. Time utility: Time utility added when products are stored from the time of production to
the time of consumption. Commodities gain or loose their utility over time. eg. When raw meat
is preserved in cold storage its utility is enhanced and if not preserve properly then looses its
utility upon time. Food grain preserved during the time of abundance gets enhanced utility,
when the same are used at times of scarcity. Storage in warehouses and godowns adds the time
utility to the commodity.
4. Possession utility: Commodities in the hands of producers have some utility and by the
time they reach consumers through the traders their utility is increased. Milk in the hands of
milk producer is having less utility compared to that of consumer in the form of milk products.
Such a rise in the utility of commodities due to possession is called possession utility.
Exchange adds the possession utility to the commodity.
Characteristics of utility:
1. Utility is subjective: Utility depends upon the individual’s frame of mind. Hence a given
commodity need not bring the same utility to all the consumers. eg. Non-vegetarian food to a
vegetarian, motorcycle to teenage etc. give zero utility. Utilities derived by the occasional users
of a good are greater than those of regular users.
2. Utility varies with purpose: Depending upon the purpose for which a commodity is used,
utility of the same varies. eg. Utility derived from water varies from its use as drinking water
against its use as irrigation or for power generation etc.
3. Utility varies with time: A particular commodity gives different utilities for the same
person in different time periods. eg. Ice-cream provides greater utility to the same individual in
summer than in winter.
4. Utility varies with ownership: Ownership of a good creates far greater utility from a good
than that when it is hired.
5. Utility need not be synonymous with pleasure: Utility derived from a commodity need
not be associated always with pleasure for the consumer. eg. For a sick man, bitter medicines
are difficult to swallow, though they possess utility.
6. Utility does not mean satisfaction: Utility is not satisfaction by itself. Utility is the
quality of a good by virtue of which it gives satisfaction to an individual. The question of
obtaining satisfaction from a good depends on the consumer’s choice for the same.
Value:
Value is defined as the purchasing power of a thing in terms of other things. It is the capacity of
a good to command other things in exchange. Free goods have value-in-use and not value-in-
exchange. Economic goods possess both value-in-use and value-in-exchange. In economics,
always the term, value means value-in-exchange.
eg. If 1 Kg of milk can fetch 10 eggs then the value of 1 kg of milk = the value of 10 eggs.
Attributes of value:
Any commodity or service possess utility (satisfy human wants), scarcely available (not free in
nature), measurable, capable of being sold or bought (marketable) – all such commodities have
value.
Price:
The value of a thing when expressed in terms of money is called price. Price is the amount of
money that one has to pay for a thing in the market. Value and price are not same in the money
economy. But in barter economy where goods are exchanged for goods, value and price have
the same meaning.
Income: Income is the remuneration paid to the service rendered by factors of production.
Income can be expressed in terms of commodities and money.
Real income:
When we express income in terms of commodities it is called real income. e.g. If we say that
income of a person is five kg rice, he express his income in terms of commodity.
Money income: When we express income in terms of money it is called money income.

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TOPIC -3
Important features of land, labour, capital and organization
Production:- The term production refers to creation of or addition of utility to an existing matter
or thing to make it more capable of satisfying human wants.
Different type of production:-
a) Agriculture and livestock production on land.
b) Production by extraction of things eg.extraction of minerals from earth.
c) Manufacturing type of production: eg. Milk powder from milk.
d) Production as a result of trade, banking, warehousing etc.
e) Production due to professional services like services of veterinarian, teacher etc.
Factor of production:- Land, labour, capital and organization (enterprise) are the four factors of
production.
Normally land and labour are considered as primary factors of production, while capital
and organization are considered secondary factors of production. However, each factor of
production is having its own primary or secondary place depending on the type of production
activity.
Rewards of production:-
1. Land is rewarded by rent.
2. Labour is rewarded by wages
3. Capital is rewarded by interest &
4. Organization is rewarded by profits.
Such an apportionment of returns among different factors of production is called distribution. It is
also called as factor pricing.
Land:- In economics, land does not mean just an area of surface of earth, but it includes all the
materials and forces which nature gives freely to man either on the surface of earth or inside the
earth or in water or as free air, sunlight and heat.
Rent
 It is a reward for land and refers to that part of payment by a tenant which is made only for
use of land i.e free gift of nature.
 It is of two types namely economic rent and contract rent.
 Economic rent is the payment made for the use of land only.
 Contract rent is total payment made by tenant to landlord.
Lease
 It is defined as an oral or written contract outlining how a tenant and landlord will do business
and share income, provide for expenses, improve the land and determine business program,
practices and compensation for damage to the land or termination of lease.
 It is of five types in order of risk and return to the tenant.
o Cash lease - Direct cash payment at end of year
o Flexible cash lease - Hybrid of cash and crop share.
o Crop share lease - sharing only crop not cash deal
o Livestock share lease - Sharing livestock and its income.
o Labour share lease - Giving way for landlord to acquire extra labour and suitable
for young farmer without enough capital.
Importance of the land is for the following reasons:-
1. Production of agricultural crops.
2. Raising of livestock
3. Production of industrialised goods.
4. For extraction of minerals, petroleum, precious metals, water etc.
5. For transport
6. It influences life style, income, standard of living of people etc. indirectly.
Peculiarities of land:-
1. Free gift of nature
2. Limited in area
3. Indestructible
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 4. Immobile
5. Vary in quality from one place of earth to another place.
6. Values differ and
7. Subject to law of diminishing returns.
Productivity of land is influenced by:-
1. Natural factors like rainfall, minerals, climate etc.
2. Human factor like hard labour, application of suitable technology etc.
3. Location factors like situation in city, semi-urban or rural area.
Labour:-
Labour is defined as “any exertion of mind or body undergone partly or wholly with a
view to earn some good other than the pleasure derived directly from the work.” It can be physical
work or mental work that is done by a person with an aim of earning money. It includes the work
done by livestock owners, teachers, doctors, actors etc. Labour is a very important factor of
production as it produces wealth and labour itself in the form of human resource constitutes
wealth.
Characteristics of labour:-
1. Labour is inseparable from labourer:- The worker has to sell his labour in person and he
has to be physically present, while delivering the work. He cannot deliver the work in
absentia. Labour varies from labourer to labourer depending on races, climate, physical
and mental alertness of labourer.
2. Labour is perishable:- as the labour lost for a day is lost forever and labour cannot be
stored. In other words, it is a flow resource.
3. Labour has very weak bargaining power:-Perishability of labour is a prime factor for
the labourer, which rather forces him to accept whatever the wage that is offered. The
weak bargaining power of the labourer is taken as an advantage by the employer.
4. Lack of free mobility:- Compared to capital, labour is less mobile. It happens due to
differences in language, environment, habit etc. No doubt labourers move from one place
to another and from one occupation to another, but it is not a common feature. Thus,
labour lacks horizontal and geographical mobility. This leads to a variation in wages
among the occupations as well as spatially.
5. Supply of labour is independent of demand:- Supply of labour depends on the
population in a country. Population is one factor which can neither be increased nor
decreased overnight. Supply of labour cannot be curtailed at once even if wages fall
because the labourers must earn their subsistence. It also takes time for children to grow up
or people to get trained in order to increase the supply of labour. The increase of decrease
is a slow process and therefore supply of labour is independent of demand.
6. Supply of labour peculiarly changes with the wages: Normally the seller of a good sells
more when the price per unit of commodity is higher and vice versa. But regarding labour
a fall in wages leads to an increased supply of labour. A fall in wages leads to a reduction
of their incomes. So to make good this fall in income, family members who were not
working earlier also work to supplement the family income.
Wage
 It is a reward for labour. It means payment made for services of labour. It may be defined
as a sum of money paid under contract by an employer to a worker for his physical or
mental service rendered.
 It is of two type namely nominal wage and real wage.
 Determinants of wages are efficiency, existence of non-competing groups, ability of
learning attitude, social acceptance, hazardous and dangerous occupation, bargaining
power.
Nominal Wage:- It is a wage paid or received in terms of money.
Real Wage :-It is not money wage but rather it represents that part of standard of living of
labourer. It includes purchasing power of money and constitutes subsidiary earning, extra
work without extra payment, regularity or irregularity of employment, condition of work,
future prospect, etc.
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Capital:
Capital is defined as produced means of production. It is the result of man-made efforts
and not the free gift of nature. Capital does not mean mere cash. It means wealth that is used for
producing additional wealth. It refers to all man-made wealth or goods which are used for further
production of wealth. eg. Implements, machines, furniture, buildings etc.
Characteristics of capital:
1. It is productive in nature as it helps in producing other wealth or goods.
2. As capital is man-made and its supply is therefore, within the control of man.
3. It is a source of income whereas income is the result of or contribution of capital.
4. Capital is separable from its owner and is highly mobile as it possesses the characteristic of
territorial mobility.
5. Capital can be variable as it can be increased or decreased.
6. It is an exhaustible factor as it can be used up in the process of production.
7. It involves the element of time as it renders its services over a period of time. Therefore
payment to capital is calculated in terms of so much per cent per annum.
8. People look forward to getting an income by accumulating capital. Hence capital is
prospective.
9. Capital includes money that is used for further production and not for the personal
consumption.
10. All capital is wealth, but all wealth is not capital. eg. Building used for factory is capital
but the building used for residential purposes is not capital.
Classification of capital: There are several bases of classification of capital
On the basis of degree of durability: (a) Fixed capital (b) Working capital
(a) Fixed capital refers to durable producer’s goods like building, machinery etc.
(b) Working capital refers to those goods which can be used only once in that form.eg.fuel
Based on the scope for alternatives: (a) Sunk capital (b) Floating capital
(a) Sunk capital refers to that capital which can be used only for specific purpose. Eg.
Milking machine
(b) Floating capital refers to that capital which can be put to alternative uses. eg.Cash,fuel etc.
Based on the type of trade: (a) Production capital (b) Consumption capital
(a) Production capital refers to any goods that are used for further production.
(b)Capital used for personal consumption is not capital at all. Therefore consumption capital is
a misnomer.
On the basis of ownership: (a) Individual (b) social or government (c) National capital
(a) Individual capital refers to the capital owned by individual.
(b) Social or Government capital: owned by society or governments like public roads.
(c) National capital constituted together by individuals and government.
On the basis of transferability: (a) Material capital (b) Personal capital
(a) Material capital like building, machinery etc. which can be transferred from one person to
another.
(b) Personal capital like skill, intelligence or experience of workers which cannot be
transferred from one person to another.
On the basis of expression: (a) Money capital (b) Real capital
(a) Capital expressed in terms of money called as money capital.
(b) Real capital expressed in terms of building, machinery etc.
Functions of capital:-
 Capital increases productivity by enabling the entrepreneur to acquire the other factors of
production.
 It provides subsistence to enable workers to maintain themselves during the period of
waiting for marketing of goods.
 It provides appliances or auxiliaries of production to carry on production effectively on
modern lines.
 It provides raw materials to feed the machines.

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 Interest:- It is a reward or payment for capital use.
Organization (enterprise):
The work of bringing together the other three factors of production namely Land, Labour
and Capital in proper proportion and making them work harmoniously so as to obtain the best
results is called organization or enterprise. Organisation combines the other factors of
production and decides on what to produce. Special skill is required to combine factors of
production and accomplish the difficult task of production. This task is undertaken by organiser
or entrepreneur.
In any business activity, there is always a person who guides and controls its function. He
also coordinates and regulates all the factors which are employed in the business activity. Apart
from monitoring it, he takes the responsibility of the outcome. We call such a person, an
entrepreneur (organizer) and the business activity which he is doing called an enterprise or
organization. Successful production and successful business depends upon efficient
organization. Further organization determines the volume of production. The performance of an
organization depends upon the capabilities of the organizer or entrepreneur.
Profit is known as reward of management.
Types of business organizations or business enterprises:
1. Sole proprietorship
2. Partnership
3. Joint stock company
4. Co-operative society and
5. Public sector company
1. Sole proprietorship:- Single owner enterprise is called sole proprietor business or enterprise.
Small business like running a small livestock unit, small hotel etc. In this type of business the
proprietor owns, controls and enjoys all the profits of his organization and also bears the total
risk of the business.
Disadvantages:-
 Development of such a firm proceeds slowly because the sources of capital are limited.
 In the event of failure, not only the assets of business but also the private assets and
property of the proprietor can be claimed against by creditors. In short there is no limited
liability.
 There is lack of continuity; On retirement or death of the owner, a one-person firm may
cease to function.
 Because of these disadvantages, this type is confined to those businesses, which are just
starting up or to certain industries such as agriculture and retailing.
2. Partnership organization: Whenever fairly large sums of capital are required, in such cases
more than one person join together and contribute to the capital of the business and share the
profits on agreed terms. This is called partnership organization. Normally not more than
twenty (ten in case of a banking) may so join. There are chances of misunderstanding,
improper control, cheating etc. ultimately leading to the collapse of partnership. However, if
there is a good understanding among partners, the partnership business will be a successful
enterprise.
3. Joint Stock Company: A joint stock company is a corporate body owned by a large number
of shareholders and managed by a Board of Directors elected by the shareholders. According
to Prof. L.H.Hany “A joint stock company is a voluntary association of individuals for profit,
having a capital divided into transferable shares, the ownership of which is the condition of
membership.” The advantages are limited liability, continuity; availability of capital and ease
in expansion. Limited liability implies that in the event of loss for the company, shareholder is
responsible to the extent of his shares only. Types of Joint Stock Company are (a) Joint stock
private limited company (b) Joint stock public limited company.
4. Co-operative societies: It is a voluntary organization formed mainly to promote economic
interests of its members. Members have equal rights. A co-operative society has the motto of
“each for all and all for each”. eg.co-operative society type of organization include primary
milk producer’s co-operative society at village level.
Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 17
5. Public Sector Company: Any company undertaken and run by local, state or central
government is called public sector undertaking or company. Public Sector Company is run
mainly to bring about rapid economic development and to find huge amount of capital needed
for large projects like railways, ship building etc. Bharat Electronics Hindusthan Machine
Tools, Bharat Heavy Electrical Limited (BHEL), etc. are good examples of public sector
organizations. Public undertakings have been started with the following reasons:-
 To bring about rapid economic development
 Benefits of development are shared by all the people and
 Inability of private sectors to find huge amount of capital needed to take up large
projects.

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TOPIC -4
Livestock produce and products
Livestock contributions to national economy
Demand projections of livestock produce

LIVESTOCK PRODUCE AND PRODUCTS:-

Introduction:-
 Indian livestock sector plays a critical role in welfare of rural population.
 It contributes 5.4 per cent to the total GDP and 27 per cent to the GDP from agriculture
and allied activities engaging 30 million small producers raising one or two cow or
buffaloes.
 It is of special importance and a main source of family income in the arid and semi-arid
regions of the country.
 In the arid and semi-arid regions, the contribution of livestock to agricultural GDP is as
high as 70 per cent and 40 per cent, respectively.
 The sector has excellent forward and backward linkages, which promote many
industries and increase the incomes of vulnerable groups such as agricultural labourers
and small and marginal farmers.
 In 2005-06, livestock sector produced 97.1 million tonnes of milk, 46.2 billion eggs,
44.9 million kg of wool and around 2.31 million tonnes of meat from organized sector.
 All India Summary Reports of the 17th Livestock Census released in July 2006 points
out that India possesses the largest livestock populations in the world after Brazil.
 It accounts for about 56 per cent of the world’s buffalo population and 14 per cent of
the cattle population.
 It ranks first in respect of buffalo and second in respect of cattle population, second in
goat population and third in respect of sheep in the world.
Livestock population of India -2007 ( in millions no.):
Species 2007 Growth over Annual growth
2003 (%) (%)
Cattle 199.1 7.50 1.83
Buffalo 105.3 7.58 1.84
Yaks 0.1 38.61 8.51
Mithuns 0.3 -4.92 -1.25
Total bovines 304.8 7.52 1.83
Sheep 71.6 16.41 3.87
Goat 140.5 13.01 3.10
Pigs 11.1 -17.65 -4.74
Other animals 1.7 -23.00 -6.32
Total livestock 529.7 9.22 2.23
Poultry 648.9 32.69 7.33
 Source: Annual Report 2010-11 GOI
EGG PRODUCTION (in lakh nos.) :
2007-08 2008-09 2009-10 2010-11
Maharashtra 34640 35502 38640 42245
India 535650 555624 602671 630244
% Share 6.46 6.38 6.41 6.70

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PER CAPITA AVAILABILITY OF EGGS:
2007-08 2008-09 2009-10 2010-11

Maharashtra 32 33 35 38
India 47 48 51 53
MILK PRODUCTION (MT)
2006-07 2007-08 2008-09 2009-10 2010-11
Maharashtra 6.9 7.2 7.4 7.6 8.0

India 102.5 107.9 112.1 116.4 121.8

% Share 6.8 6.68 6.64 6.59 6.6

PER CAPITA AVAILABILITY OF MILK (grams/day)
2006-07 2007-08 2008-09 2009-10 2010-11
Maharashtra 181 184 188 190 197
India 251 260 266 273 281
SHARE OF MILK PRODUCTION BY COWS, BUFFALOES & GOATS (mt)
CB cow ND cow Buffalo Goat
Maharashtra 2.7 1.0 3.1 0.26
India 2007-08 24.0 22.8 56.6 4.4
% Share 11.5 4.53 5.55 5.91
Maharashtra 2.8 1.06 3.29 0.27

India 2008-09 26.1 23.6 57.8 4.47

% Share 10.7 4.5 5.68 6.2

Maharashtra 2887 1155 3355 282

India 2009-10 27.9 24.2 59.7 4.4

% Share 10.3 4.76 5.61 6.31

Maharashtra 3068 1230 3473 0.27

India 2010-11 29.5 25.3 62.3 4.59

% Share 10.38 4.85 5.57 5.94

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WOOL (million kg.) & MEAT PRODUCTION (mt)
Production 07-08 08-09 09-10 10-11
Maharashtra 1.67 1.70 1.72 1.44
Wool India 43.9 42.8 43.1 43.0
% 3.82 3.98 4.00 3.36
Maharashtra 0.525 0.536 0.545 0.563
Meat India 4.0 4.2 4.5 4.9
% 13.09 12.52 11.93 11.56
Poultry:-
Poultry sector, with total value of output exceeding Rs.26,000 crore and providing
direct and indirect employment to over three million people, produced around 1.9 MT
of chicken-meat in 2005.
 Between the 1970 and 2006, the annual per capita availability of eggs has quadrupled
from 10 to 41, while the corresponding increase in chicken meat has been even faster
from 146 grams to 1.6 kgs.
 While India’s share of world trade in poultry and poultry products continues to be very
small, in the last decade the value of such exports has increased from Rs.11 crore in
1993-94 to Rs. 326 crore in 2005-06.
 Exports of products, such as live poultry, eggs, hatching eggs, frozen eggs, egg powder
and poultry meat, to countries including Bangladesh, Sri Lanka, Middle East, Japan,
Denmark, Poland, USA and Angola augurs well for the industry.
 Uninterrupted supplies of feed as well as preparedness for external shocks such as avian
influenza are critical for the continued robust growth of this sector.
Dairying:-
 India ranks first in the world in milk production, which rose from 17 MT in 1950- 51 to
around 100 MT by 2006-07.
 Per capita availability of milk has also increased from 112 grams in 1968-69 to 230
grams per day in 2005-06 with ever increasing human population and is expected to
reach about 245 grams per day in 2006-07.
 Presently, about 1.13 lakh village level co-operative societies spread over 265 districts
in the country form part of the National Milk Grid.
 The Grid links the milk producers throughout India with consumers in over 700 towns
and cities smoothing the seasonal and regional variations in the availability of milk, and
ensuring a remunerative price to the producers and a reasonable price for quality milk
and milk products to the consumers.
 Under Integrated Dairy Development Project, 73 projects with an outlay of Rs.407.58
crore and spread over 25 States and 1 UT have been approved.
 Cumulative expenditure incurred up to end-March 2006 was Rs.274.33 crore.
 By end-March 2006, the programme had benefited 10.56 lakh farmers through 16,469
village-level dairy cooperative societies procuring 13.6 lakh litres of milk per day.
Livestock contributions to national economy:
Livestock farming is an integral part of crop farming and contributes substantially to
household nutritional security and poverty alleviation through increased household income. The
returns from livestock especially dairying and mixed farming in small and medium holdings are
larger and highly sustainable. The progress in this sector results in more balanced development of
the rural economy and improvement in economic status of poor people associated with livestock.
Indian agriculture is uneconomic symbiosis of crop and livestock production with cattle as the
foundation. Livestock produce milk and meat by converting the crop residues and by products
from crops which otherwise would be wasted. Livestock sector contributes by way of cash

Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 21

income, draught power and manure. Livestock provides for human needs by way of food (milk,
egg, meat), transport, draught power, fiber, fuel, fertilizer, skin, bone, blood, hide etc.
It’s a living bank providing flexible finance in time of emergencies and also serves as
insurance against crop failure for survival. If Agriculture is the foundation of our national
economy Animal husbandry constitutes the sheet anchor of agriculture.
Livestock sector plays a critical role in the welfare of India's rural population. It
contributes nine percent to Gross Domestic Product and employs eight percent of the labour force.
This sector is emerging as an important growth leverage of the Indian economy. As a component
of agricultural sector, its share in gross domestic product has been rising gradually, while that of
crop sector has been on the decline. In recent years, livestock output has grown at a rate of about 5
percent a year, higher than the growth in agricultural sector. Livestock plays a vital role in the
economic development. In India, 25 % of the agricultural GDP is contributed by this sector in
1998-99 (Economic Survey, 1999-2000). This enterprise provides a flow of' essential food
products, draught power, manure, employment, income, and export earnings. Distribution of
livestock wealth is more egalitarian (classless), compared to land. Hence, from the equity and
livelihood perspective it is considered an important component in poverty alleviation programmes.
Milk production is being around 100.9 million tonnes per year (2006-07). India is able to
provide only about 230 gms per capita availability per day whereas the requirement is 280 gms /
day. Egg production was 50.7 billion in 2006-07. The per capita availability of eggs is around 44
per year (requirement is 180 eggs), whereas the per capita availability of meat is around 2 kg per
year (requirement is 10 kgs/ annum). Wool production was 45.1 million kgs in 2006-07. In term of
milk production, India rank number one, in egg production rank third. According to one estimate
India contributed more than 502 crores per day to its gross domestic production from livestock
sector alone.
It is estimated that about 18 million people are employed in the livestock sector in
principle or subsidiary status. Export earnings from livestock sector and related products are
progressively rising. Finished leather accounted for 50 % (Rs. 1745 crore ) and meat and meat
products accounted for 42% (Rs.1457 crore) of the total export from the livestock sector during
2000-01. Though the cattle wealth is quite abundant in terms of population the production from
these animals is very poor viz., 987 kgs per lactation whereas the world average is 2038 kgs per
lactation.
The main reasons for this shortcoming is the abundant population of nondescript cows,
chronic shortage of feed and fodder, poor nutritive value of the available feed and fodder, low
fertility rates, destruction of grazing land, increasing human population and competition between
animals and man for the available feed resources.
According to estimates of the Central Statistical Office (CSO), the value of output from
livestock sectors at current prices was about Rs. 3, 40,473 crore during 2009-10, which is about
24.73 % of the value of the output of Rs.13,76,561 crore from total Agriculture & allied Sector.
Contribution and growth of livestock sector, 1980-81 prices :-
1971-80 1981-90 1991-97
Per capita GDP (Rs/annum) 1724 2177 2874
Share of AgGDP in GDP (%) 35.97 31.17 26.16
Share of livestock GDP in AgGDP (%) na 17.60 21.38
Annual growth in GDP (%) 3.66 5.61 6.83
Annual growth in AgGDP (%) 2.43 3.29 3.99

Annual growth in livestock GDP (%) - 7.31 4.92

Note: Per capita GDP and shares are average for the decade under consideration

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 Livestock Sector not only provides essential proteins and nutritious human diet through
milk, eggs, meat etc., but also plays an important role in utilization of non-edible agricultural by-
products. Livestock also provides raw material/by products such as hides and skins, blood, bone,
fat etc. The contribution of milk (Rs. 2, 28,809 crore) was higher than paddy (Rs.1, 35,307 crore),
wheat (Rs.1,03, 226 crore) and sugarcane (Rs. 37, 766 crore). The value of output from meat
group as per estimates of Central Statistical Office (CSO) at current prices in 2009-10 was Rs.
64,073 crore.
Export scenario:
On the-export front, India has a competitive advantage in the world market for many
livestock products. However, its share in world trade continues to be meagre. Dairy products
export has not been encouraging in the past due to high domestic demand and lack of
competitiveness in the world market. With the reduction in subsidies under WTO agreement by
the European countries, India's export of dairy products is likely to expand on account of price
competitiveness. By 2000 AD member states of the WTO have to reduce export subsidies and
volumes of export by 36 and 21 percent respectively.
Some top players in the meat processing industry like Venkateswara Hatcheries, Godrej
Agrovet, Vista Processed Food, Al Kabeer, Allanasons etc., with modern state-of-the-art slaughter
and processing plants, have changed the entire scenario, making the industry grow at almost 10%.
There is a huge scope for expanding exports, especially in buffalo and poultry meat, eggs and
dairy products.
Trade in livestock products (value in million rupees and share in percent):-
1980-82 1989-91 1996-98
Exports
Value of exports of livestock products 761 1830 13505
Share of livestock exports in total exports 1.02 0.53 1.05
Share of livestock exports in agricultural exports 3.50 3.27 6.22
Imports
Value of imports of livestock products 1824 910 1877
Share of livestock imports in total imports 1.41 0.10 0.10
Share of livestock imports in agricultural imports 14.27 4.79 1.52
Source: FAO Trade Year Book, various issues.
India ranks first in world buffalo population, with 56.5% i.e. 105 million of buffalo
population and one-sixth of goat population in the world. India also ranks first in milk production,
third in egg production, while it is ninth in the number of poultry. Though, India tops in meat,
milk and eggs production, exports are very low because of quality considerations. The export of
sheep and goat meat in terms of quantity is very small. India produces an estimated 1.5 million
tonnes of buffalo meat annually, of which 24% is exported. India's poultry product exports are
mainly confined to eggs and egg powder. Poultry meat exports are negligible due to high costs,
inadequate meat processing facilities and infrastructure bottlenecks.
Since 1995, production of meat & meat products has been steadily growing at a rate of 4%
p.a. Currently, the processing level of buffalo meat is estimated at 21%, poultry 6% and marine
products 8%. Only about 1% of the total meat is converted into value added products like
sausages, ham, bacon, kababs, meatballs, etc. Production of meat is governed under local by-laws
as slaughtering is a state subject. Processing of meat is licensed under the Meat Food Products
Order, 1973. Cattle, buffaloes, sheep and goat, pigs and poultry are the types of animals, which are
generally used for production of meat. Slaughter rate for cattle as a whole is 20%, for buffaloes it
is 41%, pigs 99%, sheep 30% and 40% for goats. The country has 3,600 slaughterhouses, 9
modern abattoirs and 171 meat-processing units licensed under the meat products order.

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 Total export earnings from livestock, poultry and related products was Rs. 19036.44 crore
during 2009-10.
Demand projections of livestock produce:-
Information regarding the future demand is essential for both new firms and those planning
to expand the scale of their production. It is much more important where large-scale production
is being planned and where production involves a long gestation period. Information regarding
future demand is essential also for the existing firms to avoid under or over-production.
Accordingly they will have to acquire inputs both men and material, plan their production,
advertise the product and organize sales channels. The firms are hence required to estimate the
future demand.
As per capita incomes rise in Third World countries, the demand for livestock products -
meat, milk, and eggs - not only rises faster than that for cereals in these countries but also more
rapidly than demand for livestock products in the developed countries. This in turn influences the
demand for cereals and other staple foods used as livestock feed. Livestock production is also an
important source of income and employment in the rural sector; it helps to meet equity objectives
by contributing cash income to small farmers in the Third World. Besides providing draft power
and manure, livestock in developing countries convert many agricultural wastes and by-products
into food. Finally, livestock products contribute to export earnings.
Livestock sector plays a significant role in the welfare of rural population of India. Of the
total households in the rural area, about 73 per cent own livestock. More importantly, small and
marginal farmers account for three quarters of these households. Income from livestock
production accounts for 15-40 per cent of the total farm household’s income in different states.
Thus, an increase in demand for livestock products can be a major factor in raising the income
and living standards of the rural households. In the low-income countries, the demand for
livestock products is more elastic than the demand for cereals. This implies that with the rise in
per capita income, the demand for livestock products would rise faster in the third world
countries.
It is amazing that despite a continuous increase in the supply, per capita consumption of
livestock products in India remains low. The per capita consumption of milk is only about half of
its consumption in the US and Australia, and in the case of poultry meat, it is still lower, only
about 12 percent of the consumption in China. The consumption pattern has revealed that rural
population on an average consumes less quantity of livestock products than the urban population.
The milk, chicken, and eggs in the rural areas, and milk, mutton & goat meat and eggs in
the urban areas were found to be highly income elastic. In all the three categories milk and eggs
were found to be price elastic. A sustained economic growth and steady increase in per capita
income are expected to substantially boost the demand for livestock products.
Table : Projections of human population
(in million)

Year Rural Urban Total

1993 658.5 236.7 895.2
2000 715.9 286.2 1002.1
2010 796.9 371.1 1168.0
2020 871.8 470.4 1342.2
Source: Government of India (1996) ‘ Technical Group on Population Projections’.
The demand projections for livestock products corresponding to 5 per cent GDP growth
rate, generally regarded as closer to the realistic situation. During 1993-2020, the average growth
rate (weighted) for the total domestic demand of milk has been found to be 4.9%. It is 13.7% for
mutton and goat meat, 3.5% for beef & buffalo meat, 4.8% for chicken and 6.2% for eggs. These
growth rates indicate that the meat industry has bright prospects in the country.

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 Livestock produce Estimated Demand projection – Avg. growth rate
consumption - 1993 2020 (million tonnes) for the total
(million tonnes) domestic demand
Milk 45.02 147.26 4.9%
Mutton and goat meat 0.78 12.72 13.7%
Beef and buffalo meat 0.49 1.15 3.5%
Chicken 0.25 0.81 4.8%
Eggs 0.54 2.58 6.2%
Techniques of forecasting are many but the choice of a suitable method is a matter of
experience and expertise. To a large extent, it also depends on the nature of the data available for
the purpose. In economic forecasting, the classical methods use the historical data in rather
rigorous statistical manner for making the future projection.
Various methods of forecasting demand may be grouped under the following categories
 Survey methods
 Market studies and experiments
 Statistical or analytical methods and
 Other methods
Survey Methods :-
 These methods are generally adopted in estimating short-term demand.
 These methods include direct interview, complete enumeration, sample survey, opinion
survey, etc.,
 Survey methods include
o Survey of consumer’s plan through direct interview of consumers
o Collection of expert’s opinion and
o Collection of opinion of sales representatives.
Market studies and experiments:-
 Studies and experiments are carried out in consumer’s behaviour under actual, though
controlled, market condition.
 This method is known in common parlance as market experiment method. This method
has the following serious disadvantages.
o Experimental methods are very expensive and not affordable by small firms.
o Forceful generalization with a high degree of reliability from too small sample
size.
o Results of controlled experiments are questionable in application to the
uncontrolled long-term condition of market.
o Changes in socio-economic conditions, political changes, natural calamities
may invalidate the results.
Statistical Methods:-
 Statistical methods utilize historical (time-series) data and cross-section data for
estimating long term demand.
 These methods are considered to be superior techniques of demand estimation because
o Element of subjectivity in this method is minimum.
o Method of estimation is scientific.
o Estimation is based on theoretical relationship between dependent and
independent variables.
o Estimates are relatively more reliable and estimation involves smaller cost.
o Frequently used statistical methods for demand projections are
 Trend projection method which involves both graphical and fitting trend
equation
 Regression method

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Other methods of forecasting demand:-
 There are several other methods available for forecasting demand. However the choice
depends on the availability of data, purpose and technical competence of forecaster.
 These methods include the end-use method, econometric methods like Barometric
Forecasting, Delphi Technique, Box-Jenkins method, moving average method, etc.,
------------------------------------------------------------------------------------------------------

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TOPIC - 5
Theory of consumer behaviour: law of diminishing marginal utility and
indifference curve analysis
Consumer behavior: It is defined as “the process whereby individuals decide whether,
what, when, where, how much and from whom to purchase goods and services”. For
successful business an understanding of the consumer needs is the focal point. Hence it
becomes inevitable for the business concerns to know the consumer and his behavior
towards buying to understand how buying decisions are taken. It is essential to understand
the needs, aspirations, expectations and problems of consumers.
The whole behavior which ultimately motivates a person to decide to buy
something is the consumer behavior.
The theory of demand begins with the analysis of the behavior of consumer, since
the market demand is the summation of the individual consumers. Based on his income
and the market prices of various goods and services, he plans spending of his income with
the aim of attaining maximum possible utility or satisfaction. Two techniques are used in
the analysis of consumer’s behavior (1) utility analysis or the Marshallian approach (2)
indifference curve technique. Having understood the concept of utility (chapter no. 2), an
attempt is made here to examine related law of utility viz. the law of diminishing marginal
utility.
Law of diminishing marginal utility:
This law was initially formulated by German economist H.H.Gossen. It is one of
the important laws of economics. It is a law of consumption. According to Prof. Alfred
Marshall the law of diminishing marginal utility states that “the additional benefit which a
person derives from a given increase of his stocks of anything diminishes with the growth
of the stock he has.” If one goes on consuming a particular commodity (i.e. additional or
extra utility) derived by him from every successive unit consumed goes on decreasing.
More emphatically, the law is based on the observation that each successive unit of a
commodity brings in lesser and lesser utility until the point of satiation is reached. After
the point of satiation is reached, any further consumption results in disutility i.e. consumer
derived negative satisfaction. More and more we have a thing, the less and less we want it.
It is evident through this law that though some goods have greater utility than others
The law is applicable only when: (assumptions)
1. The units consumed are identical in all respects ie. size, colour, quality, taste etc.
2. The units consumed are reasonably large, i.e. cups of milk and not spoons or drop of
milk.
3. The units must be consumed continuously without any time gap.
4. The person consuming the commodity must be mentally sane and normal person.
Explanation of the law:
Before looking into the law, two concepts need to be understood viz. marginal
utility and total utility.
Marginal utility: It is an additional utility derived by an individual, by the
consumption of one more unit of the commodity.
Total utility : It is the sum amount of satisfaction derived from the consumption of
different units of the commodity.
Let us assume that a hungry person consumes one cup of milk after another
continuously without any time gap. In such a situation his hunger is satisfied to more
extent by the consumption of first cup. That means the first cup of milk gives him more
utility. By consumption of second cup and successive cups the utility or satisfaction
derived is lesser and lesser than the satisfaction derived by the consumption of first cup.
That means the marginal or additional utility goes on decreasing although the total utility is
on the increase.

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 Table: Utility Schedule for cups of milk
No. of units of milk Total utility derived from Marginal utility derived
consumed (cups of milk) the consumption of all the from the consumption of
units every additional units of
milk
1 40 40 – 00 = 40
2 70 70 – 40 = 30
3 90 90 – 70 = 20
4 100 100 – 90 = 10
5 100 100 – 100 = 00
6 90 90 – 100 = -10
7 70 70 – 90 = -20
8 40 40 – 70 = -30
In the above example for convenience sake the numbers are chosen in an arbitrary manner.
In above table, consumption of first cup of milk gives a marginal utility of 40 units, while the
second 30 units, the third 20 units and so on. The consumption of successive cup of milk
results in declining marginal utilities but remain positive till marginal utility became zero.
Any further consumption of cup of milk makes the marginal utility negative.
With regard to the total utility, it goes on increasing; right from the consumption of
first unit till the point of satiety (maximum satisfaction) is reached. At this point total utility is
maximum. This attained at the 5th unit cup of milk. The relation between marginal utility and
total utility is that as the marginal utility is falling, total utility is increasing at a decreasing
rate. When marginal utility is zero, the total utility is maximum, and finally the negative
marginal utility results in declining total utility.
Some people tend to think that law of diminishing marginal utility is not applicable
to acquisition of money, precious materials like gold, silver, diamonds or for consumption of
alcohol etc. But in reality acquisition of more and more of anything decreases the utility of
that thing.
The graphical representation of the law in fig.1 indicates that marginal utility is
falling throughout, while total utility is increasing at a decreasing rate till marginal utility
becomes zero. Total utility starts falling, when marginal utility becomes negative.

TU

Total utility

Marginal utility

0 x
Unit of milk cup MU
Fig 1. Diminishing Marginal Utility

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 Importance of the law:
It is the basic law on which various other laws like law of demand, law of
substitution, etc rely upon. Marshall has built up the theory of taxation and public expenditure
by applying this law to money.
Exceptions to the law:-
Inspite of it being a basic law of economics, it has limitations in its application. This
law does not apply for those persons with abnormal qualities i.e. those who are misers and
those having drinking, gambling habits, etc. Similarly, this law does not apply for persons
who enjoy their hobbies.
INDIFFERENCE CURVE:
It is assumed that the consumer is rational and attempts to maximize utility (the want
satisfying quality in a good) from his spendable income. It is a fact that consumers make
choice from among many goods so as to maximize satisfaction from their limited money
income. In view of the limitations of cardinal utility approach, modern economists developed
an alternative technique viz. indifference curve technique to examine the consumer’s
behaviour. This technique was developed by the Modern Economists J.R.Hicks and
R.G.D.Allen for the analysis of demand.
The indifference curve analysis is based on the assumption of ordinal utility. It explains the
behaviour of consumer in terms of his preferences or rankings for different combinations of
two goods. Since the satisfaction derived from the consumption of various goods cannot be
measured objectively, it is enough if the consumer indicates his preference for the various
combinations of commodities.
An indifference curve is derived from an indifference schedule. A list of various
combinations of two goods, arranged in such a way that the consumer is indifferent to the
combinations preferring none of any other is called indifference schedule. It is the tabular
statement of different combinations of two commodities yielding the same level of
satisfaction. A hypothetical indifference schedule is given in table below.
Table : Indifference schedule
Combinations X Y
A 1 20
B 2 15
C 3 11
D 4 8
E 5 6
F 6 5
In the above schedule, the consumer is indifferent whether he buys ‘A’
combination of 1 unit of X + 20 units of Y or ‘D’ combination of 4 units of X + 8 units of Y
or any other combination. All the above combinations of X and Y commodities yield the same
satisfaction.
If the various combinations are plotted on a graph and are joined by a line, it
becomes indifference curve.

Good Y

0 Good X x
Fig.2: Indifference curve
In above fig. 2, the curve labeled I is an indifference curve. All combinations on the
indifference curve are equally satisfactory to the consumer.
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 An indifference curve is the locus of the combinations of two goods that are equally
satisfactory to a consumer, or to which, the consumer is indifferent. Indifference curve (iso-utility
curve may be defined as the locus of various combinations of two commodities which yield the
same total satisfaction to the consumer.
Indifference schedules:

A diagram showing a set of indifference curves is called indifference map (Fig. 3). An
indifference map is graphic device that shows the taste of an individual consumer. The
combinations of two goods that lie on a higher indifference curve always preferred to those that lie
on a curve below it.
y

Good Y

I3
I2
I1

0 Good X x
Fig.2: Indifference Map
Properties of indifference curves:
1. Convex to the origin: The absolute slope of an indifference curve declines as we move
along the curve from left downwards to the right. This means that marginal rate of
substitution of goods is diminishing.
(*Marginal rate of substitution is the rate of exchangeability between the two goods which are
equally preferred. It indicates the amount by which one good is reduced to gain another good by
one unit. Marginal rate of substation is negative and the sign is ignored.)
2. Negatively sloped: An indifference curve has a negative slope which implies that if the
quantity of one good increases, the quantity of other goods must be decreased. This is to
keep the consumer on the same level of satisfaction.
3. Non-intersecting: Indifference curves do not intersect with each other. If they intersect,
then the point of intersection would imply two different levels of satisfaction.
4. An indifference curve that lies to the right of another denotes higher utility and
combination of goods on higher indifference curve are preferred by the consumer.
The Budget Line:
Consumer choices are made subject to income. Income acts as a constraint to maximize the
satisfaction by the consumer. Suppose a consumer has Rs. 50 to spend on two goods ‘Ice-cream’
and ‘Egg’. The price per unit of ‘Ice-cream’ and ‘Egg’ is Rs. 5 and Rs. 2 respectively. If the
consumer spends his entire income on ‘Ice-cream’, he will purchase 10 units of Ice-cream. On the
other hand, if he spends all his income on ‘Egg’, he will purchase 25 units of egg. These two
possibilities of spending Rs. 50 are shown in Fig. 3. The line connecting point A and B, denotes
the budget line.
Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 30
 y
A

Egg

0
Ice cream B x
Fig. 3 Budget line
A budget line shows all possible combinations of two goods that could be purchased with a given
amount of income.
Changes in prices of goods or money income, shift the budget line. Keeping the prices of
goods constant, if the money income increases, the budget line shift parallel to itself. Since the
relative price ratio does not change, the slope of the budget line remains the same. The slope of the
budget line indicates the price ratio of two goods.
Consumer’s equilibrium:
Having known the consumer’s preference as indicated by indifference map and the information on
income and prices of goods as given by the budget line, now we can determine that combination
of goods, which maximizes the satisfaction. The rational consumer wants to choose the highest
indifference curve given the budget constraint.
y

D
Egg B
I3
C I2
I1

0 Ice cream x
Fig. 4. Consumer’s equilibrium
From fig.4, we can observe that the optimal position of the consumer is at point B where the
budget line is just tangent to the indifference curve I2. Combination D is preferred to B but is
beyond budget limitation. Combinations A and C are on the budget line, but are inferior to
combination B, because they are on lower indifference curve (I1). Any indifference curve to the
right of I2 is beyond the reach of the consumer’s income and any to the left of I2 is less preferable
than I2. Thus, the combination B indicated by the tangency of indifference curve I2 and the budget
line is the best combination of goods that the consumer can purchase. At the point of tangency, the
slopes of indifference curve and the budget line are equal.
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TOPIC - 6
Theory of Demand
Demand:
Demand normally means the desire or willingness for a good. But in economics
simple desire or willingness for a good alone may not represent demand. Apart from the
desire or willingness, consumer should be able to buy the good. Thus, desire and ability to
buy are the key components of demand. More specifically demand is defined as a
schedule that shows the amounts of a product or service the consumers are willing
and able to purchase at each price in a set of possible prices during some specified
time in a specified market. Consumers like to possess a particular commodity but without
ability to pay, in which case it is not a demand. Apart from these, two more requisites are
essential, viz. time and market, for demand is likely to vary over time and also among the
markets. The conditions hence imposed are a specific time and a specific market to
measure the demand.
According to Bowden, demand means “propensity of the consumers to buy
different quantities of a particular good at different unit prices.” It indicates how much the
consumers would be buying when the price per unit of a commodity is changing.
Types of demand:
1. Price demand: It refers to various quantities of a good or service that a consumer
would be willing to purchase at all possible prices in a given market at a given
point in time, ceteris paribus (with other things same)
2. Income demand: It refers to various quantities of a good or service that a
consumer would be willing to purchase at different levels of income, ceteris
paribus.
3. Cross demand: It refers to various quantities of a good or service that a consumer
would be willing to purchase not due to changes in the price of the commodity
under consideration, but due to changes in the price of related commodities.
4. Joint demand: Certain goods are to be used together to satisfy a particular want.
Eg. Pen and Ink. The demand for such commodities is known as Joint demand.
5. Composite demand: A commodity can be put to several uses and that commodity
may be demanded to satisfy any want or more of such uses. The demand for such
commodity is known as the composite demand. Eg. Electricity may be demanded
for household uses, industrial purpose etc.
6. Direct and Derived demand: Demand for milk is direct demand whereas the
demand for mineral mixture to increase milk production is derived demand.
Determinants of demand:-
 Amount of a commodity or service that a consumer wishes to purchase is called as
quantity demanded of that commodity or service.
 Purchase of this quantity is influenced by several factors, which are called as
determinants of demand.
 The relationship between the quantity demanded and its determinants are expressed in
the form of a functional equation known as demand function.
o Qd = f {Pi, Pj, Y, T, C, P, I...}
o Where Qd = Quantity demanded
o Pi = Price of that commodity
o Pj = Prices of related goods (substitutes and complements)
o Y = Income of consumer
o T = Tastes and preferences of consumer
o C = Climate or weather
o P = Size and composition of population
o I = Income distribution of the society
 Thus the quantity demanded of a commodity is determined jointly by all these factors
indicated.
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  Changes in any one or two or more of these factors listed above would become the
causes for the changes in demand.
Demand curve:- Demand curve is a graphical representation of demand schedule (fig.1).
The demand curve will have a downward slope. Usually the demand curves slopes
downward from left to right indicating inverse relationship between price and demand for
the commodity.
Reasons for the inverse relationship:-
 There are two reasons why demand curve slopes downwards (or why people buy more
when the price falls).
o Consumer is able and willing to buy more of a good when its price falls. Because, a
fall in the price of a good is equivalent to an increase in the income of the
consumer, i.e. with the commodity being cheaper, the consumers’ real income
increases which can be used for purchasing some more units of the commodity.
This is called as ‘income effect’.
o If the price of a good falls, it tends to be substituted wholly or partly for other
commodities raising the quantity demanded of this good. This is called as
’substitution effect’.
The income and substitution effects combine to increase the ability and willingness of the
consumer to buy more of the commodity whose price has fallen.
DD is the demand curve.

y
D

Price

D
0 x
Quantity
Fig. 1: Demand curve
LAW OF DEMAND:
A greater quantity of a commodity is demanded at a lower price and a smaller quantity is
demanded at a higher price. This inverse relationship between price and quantity
demanded is called as "Law of demand". The law of demand explains the functional
relationship between the quantity demanded of a commodity and its unit price, i.e. a rise in
the price of a commodity or service is followed by a reduction in the quantity demanded
and a fall in the price is followed by an extension in demand, with other conditions
remaining the same.
Exceptions to the law of demand:-
Following are the exceptional cases, where, the law of demand does not hold good. The
demand curve instead of sloping downwards may rise upwards when there is an increase in
price showing that more quantity would be demanded when the price rises. This tendency
was first observed by Sir Robert Giffen in 19th Century. Hence this exceptional process is
called Giffen paradox.
1. Giffen goods (inferior goods): This phenomenon says that rise in price is followed by
an extension of demand, while a fall in price is followed by a reduction in demand for
the good. In the case of poor, who spends major portion of their income on an inferior
commodity like bajra, are left with lesser amount to spend on other items. Suppose in
a situation where the price of bajra rises, with the prices of other commodities and
money income remaining the same, the rise in price of bajra makes him worse-off than

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 before. Further, he cannot buy the same quantity as he was buying earlier with allotted
money. His family will be starved. Now he has to cut down the expenditure on other
items not only to maintain but also to increase the quantity of bajra he bought per unit
of time. On the other hand, if the price of bajra falls, the increased real income enables
him to spend on superior foodgrains. This leads to a contraction of demand for bajra,
even though there is a fall in its price.
2. Prestigious goods: When the possession of a good brings in social distinction,
consumer would go for the same even if its price is higher. An example to be cited
here is the diamonds that the rich people purchase, as the possession of the same is
prestigious to them.
3. High priced commodities: When the consumers view that those products which are
superior are sold at higher prices, they do not mind to buy more of the same at higher
prices.
4. Fear of shortage: If the existing price is higher and it is expected to increase further,
consumers would buy more of it even at higher price, fearing for the shortage.

The law of demand holds good only under the following conditions:
 Consumers’ tastes should not change
 Consumers’ income should not change
 The prices of substitutes remain same.
 No new substitutes should have been discovered.
 The commodity in question should not be one which confers distinction or
honour to a person.
 No further changes in price are expected.
 The law of demand holds good during a short period of time. There may be
many factors like change in fashion, custom, season, population etc. which
may modify the above conditions. However the above conditions remain
fairly constant for a short period of time.
Movement along the demand curve:
It refers to change in the quantity demanded due to change in price. It can be either
extension or contraction of demand.
Extension of demand means buying more quantity of commodity at a lower price,
while contraction of demand indicates buying less at a higher price.
Table: Demand schedule of the whole market for eggs per week.
Price per ten eggs Quantity demanded by Quantity demanded / week
different individual demanded (Unit of ten eggs)
A B C D E
20 7 5 0 8 10 30
18 10 8 0 10 12 40
15 12 10 5 14 14 55
12 13 14 10 16 17 70
10 15 16 14 19 21 85
As given in above table for consumer A, when the price of eggs falls from Rs. 20 per unit
to Rs. 10 per unit, the quantity demanded increased from 7 units to 15 units. It is a case of
extension of demand. For the consumer A, when the price increased from Rs.15 to Rs.18
the quantity demanded decreased from 12 units of eggs to 10 units. It is the case of
contraction of demand. The terms extension and contraction refer to the movement on the

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 same demand curve (Fig.2). The downward movement from A to B is extension, while the
upward movement from B to A is contraction. Extension and contraction of demand
represent the “change in quantity demanded”. This is purely a price resulted phenomenon
of demand changes for a commodity, while other factors influencing demand are assumed
to be at fixed level.
y D

P A
Price
P1 B

0 Q Q1 x
Quantity
Fig. 2 Movement along the demand curve
Shift in demand curve:
It refers to change in demand not due change in price but due to change in the
values of other variables influencing demand. It can increase or decrease in demand result
in the shifting of the demand curve. Increase in demand means more demand at the same
price or same demand at higher price. On the other hand, decrease in demand means less
demand at the same price or same demand at lower price.
y D2 D D1

P1

Price
P
D1
P2
D

D2
0 Q2 Q Q1 x
Quantity
Fig. 3: Shifts in the demand curve
This is shown in Fig.3. When there is an increase in demand, the demand curve shifts
upwards to the right side of the initial demand curve DD. D1D1 is the new demand curve
representing increase in demand. At ‘OP’ price, the quantity demanded is OQ. Increase in
demand indicates the purchase of same quantity of a commodity (OQ) at a higher price of
OP1 or purchase of OQ1 quantity at the same price of OP. The decrease in demand is
indicated by the shift of the demand curve towards left downwards to the initial demand
curve. D2D2 is the demand curve representing decrease in demand. Decrease in demand
indicates purchase of the same quantity of a commodity (OQ) at a lower price of OP 2 or
purchase of OQ2 quantity at the same price of OP. Increase and decrease denote ‘change in
demand’.
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TOPIC - 7
Individual and market demand, elasticity’s of demand and
factors affecting demand
Demand schedule:
The demand schedule shows the relationship between the price and the quantity demanded.
The demand schedule may be drawn for an individual or for the whole market.
Individual demand schedule:-
The various quantities of a commodity that a consumer would be willing to purchase at all
possible prices in a given market at a given point in time, other things being equal is called
Individual Demand. Individual demand schedule is merely a list of prices together with the
quantities that will be purchased by a consumer. It is pairing of quantity and price
relationship.
Table: 1- Imaginary demand schedule of an individual for eggs per week.
Price per ten eggs Quantity demanded / week
(Unit of ten eggs)
20 8
18 10
15 12
12 15
10 18
An example of a demand schedule for a consumer for a particular week is illustrated in
table 1. At Rs. 20, the consumer will purchase 8 units of eggs, at Rs. 18, 10 units and so
on.
As the price of eggs decreases the quantity demanded will increase.
Market demand: Market demand is the sum of the demand of all the consumers in a
market for a given commodity at a specific point of time. Assume that in a market there are
only five consumers, viz. A, B, C, D and E with individual demand schedules as presented
in Table 2. A look at the table indicates different pairs quantity and price relationship. The
following is the imaginary demand schedule for eggs for the whole market in a particular
week.
Table: 2- Imaginary demand schedule of the whole market for eggs per week.
Price per ten eggs Quantity demanded by Quantity demanded / week
different individual (Unit of ten eggs)
A B C D E
20 7 5 0 8 10 30
18 10 8 0 10 12 40
15 12 10 5 14 14 55
12 13 14 10 16 17 70
10 15 16 14 19 21 85
Consumer ‘C’ is not willing to buy eggs for any price higher than Rs. 15. Given the
individual demand schedules, market demand schedule can be worked out at each price
level as indicated in the last column of the table. It is horizontal summation of the demand
of individual consumer at each unit price. The market demand at Rs. 20 is 30 units of eggs,
at Rs. 18, 40 units and at Rs. 15 it is 55 units and so on.
Governments and business persons are more concerned by the demand schedule of
the whole market than the individual demand schedule.
Elasticity of demand:
The law of demand says that demand varies inversely with the price, other things
being equal. From the law of demand, we know the direction in which quantity and price
are moving. What is not known is the extent by which quantity demanded is responsive to

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 changes in price. This is the information, which is precisely needed by businessmen and
policy-makers. Alfred Marshall developed the concept of elasticity of demand which
measures the responsiveness of quantity demanded to changes in price. Elasticity of
demand indicates the degree of relation between quantity demanded and price. In fact
elasticity of demand is the rate at which quantity demanded changes because of
change in price. To be more precise, elasticity of demand is defined as “the relative
change in the quantity demanded to the relative change in the price.”
Types of elasticities of Demand:
There are three types of elasticity’s of demand
viz. (i) Price elasticity of demand
(ii) Income elasticity of demand and
(iii) Cross elasticity of demand
(i)Price Elasticity of Demand (Ed): This shows the responsiveness of quantity demanded
of a commodity, when price of that commodity change, with other factors being constant.
% change in quantity demanded
Price elasticity of demand (Ed) =
% change in price

(or) Proportionate change in quantity demanded

=
Proportionate change in price

Change in quantity
X 100
Initial quantity
=
Change in price
X 100
Initial price
(ii)Income Elasticity of Demand (EI)
It measures the responsiveness of demand due to changes in the income of the
consumers in terms of percentage, when other factors influencing demand viz. Price of the
commodity, price of substitutes, tastes, preferences, etc. are kept at constant level.
% change in quantity demanded
Income elasticity of demand (EI) =
% change in income

(or) Proportionate change in quantity demanded

=
Proportionate change in income

Change in quantity
X 100
Initial quantity
=
Change in income
X 100
Initial income

(iii)Cross elasticity of Demand (Exy):

Demand for one good (X) is also influenced by the price of other related good (Y).
These may be substitutes or complements. It is the ratio of percentage change in quantity
demanded of commodity (X) and percentage change in price of related commodity (Y).

Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 37

 % change in quantity demanded of commodity (X)
Cross elasticity of demand (Exy) =
% change in price of related commodity (Y)

(or) Proportionate change in quantity demanded of commodity (X)

=
Proportionate change in price of related commodity (Y)

Change in quantity (X)

X 100
Initial quantity (X)
=
Change in price (Y)
X 100
Initial price (Y)

Degrees of elasticity of demand:

The elasticity of commodities varies depending on the nature of the commodities.
The demand is elastic in the case of luxuries such as costly motor cars, expensive
television sets etc. However the demand is inelastic in the case of necessities like wheat,
milk, ordinary rice, electricity etc. The demand is elastic in the case of commodities whose
consumption can be postponed or in such commodities which have variety of uses or
which have substitutes. The elasticity of demand is illustrated in the following example.
Price per Percentage Demanded Percentage Nature of Elastic /
unit variation in units variation in variation in Inelastic
price demand demand
10 -- 10 -- --- --
15 50 4 60 Negative Elastic
12 20 9 10 Negative Inelastic
8 20 11 10 Positive Inelastic
6 40 15 50 Positive Elastic
Consider a commodity whose value per unit at normal time is rupees 10 and at that price
the total units demanded say is also 10 units. When the price changes to rupees 15/- per
unit which results in contraction of demand to 4 units. In this case there is 50 % variation
in price and the variation percentage (reduction) in the number demanded is 60, thus the
proportion to the proportion of variation in demand is more in proportion to the variation
in price. This is a case of elastic demand. However, when the unit price is altered to rupees
12 or rupees 8, the respective alterations in the total number demanded say are 9 and 11,
the variation percentage is 20 resulting in percentage variation in the number demanded to
10 %. In both the cases the demand is inelastic as the percentage variation in the number of
units demanded (10%) is less than the variation in price (20%).
Measurement of price elasticity
Elasticity of demand can be measured by four methods viz.
o Proportional method
o Total outlay / Expenditure method
o Geometrical or point elasticity method and
o Arc elasticity of demand

Proportional method: In proportional method, price elasticity of demand is measured as

below.
 Price elasticity of demand is the ratio of proportionate change in the quantity
demanded to the proportionate change in the price.

Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 38

 % change in quantity demanded
Price elasticity of demand (Ed) =
% change in price
Total outlay / Expenditure method:- In this method, compare total expenditure of the
consumer before and after change in price.
S. No. Price (Rs./unit) Quantity (units) Total expenditure (Rs.)
1 5.00 6 30.00

2 4.50 10 45.00
3 4.00 15 60.00
4 3.00 20 60.00
5 2.00 25 50.00
6 1.00 30 30.00
Geometrical or point elasticity method:- It is a geometrical method for measuring
elasticity at a point on the demand curve. Method used when price and quantity changes
are extremely small. Elasticity at any point of demand curve is the ratio of lower part of the
straight line to the upper part. At any point to the right of mid-point the elasticity is less
than unity, to the left of mid-point more than unity and at mid point the elasticity is unity
Arc elasticity of demand: - Price elasticity of demand measured between two distinct
points on a demand curve is called arc elasticity of demand. This method uses the mid
points between the old and new data in the case of price and quantity. It studies a portion
of the demand curve between two points.
Ed= ∆Q/(Q1+Q2)/∆Q/(Q1+Q2)
Based on the magnitudes of elasticity of demand, it can be categorized into five
degrees
(i) Perfectly Elastic Demand:- A slightest change in price of a commodity leads to an
infinite change in quantity demanded. Here the demand curve will be a horizontal
line parallel to X-axis.
(ii) Perfectly Inelastic Demand: It is a situation in which change in price of a
commodity leaves the demand unaffected. Demand curve is vertical to X-axis.
(iii) Relatively Elastic Demand : It means that lesser proportionate change in the price
of a commodity is followed by a larger proportionate change in the quantity
demanded.
(iv) Relatively Inelastic Demand: It means that large proportionate change in the price
of a commodity is followed by a smaller proportionate change in the quantity
demanded.
(v) Unitary Elastic Demand: When a given proportionate change in price results in
the same proportionate change in the quantity demanded of a commodity, the
demand is said to be unitary elastic. Elasticity of demand is one.
y D D
P
P1
Price
D D D
D
0 Quantity x 0 Quantity x 0 Q Q1 x
Fig. 1 Perfectly elastic Fig. 2 Perfectly inelastic Quantity
Fig.3 Relatively elastic

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 D D
P P
P1
P1 D
D

0 Q Q1 x 0 Q Q1 x
Quantity Quantity
Fig.4 Relatively inelastic Fig.5 Unitary elastic
Factors affecting elasticity of demand:-
 Nature of commodity
 Availability of substitutes at ruling market price
 Number of possible substitute E.g. Uses of the plastics
 Proportion of income spent on the good.
 Period of time / range of commodity use.
 Possibility of new purchasers / consumption pattern.
 Proportion of market supplied at ruling price.
Practical importance of Elasticity of Demand:
The importance of the elasticity of demand can be visualized from the points as given
below:
1. Determination of Wages: The elasticity of demand for labour plays an important
role in the determination of wages. If the demand for labour is elastic, any pressure
put up by labour in the form of strikes to get higher wages would be unsuccessful.
On the other hand, if the demand for labour happens to be inelastic, even a threat of
strike would help the workers to get the approval of their employers in raising their
wages.
2. The Elasticity of Promotional Activity: The producers are well convinced that
the advertisement makes the demand for a product less elastic. Hence, they would
not mind spending substantial amount of money on advertising. The price increase
therefore will not reduce the sales.
3. Determination of Monopoly Price: The monopolist considers the nature of
demand for his product before fixing the prices. If the demand is elastic, a lower
price would help him to realize more profits. On the other hand, if the demand is
inelastic, he is in a position to fix a higher price. The monopolist while practicing
price discrimination also takes into account the elasticity of demand.
4. Undertaking the Public Utilities: The Government itself runs some enterprises or
industries in the interest of people, otherwise they are subjected to exploitation by
the private people. In the case of electricity, the demand is inelastic and it is very
essential item in the lives of humans. In the interest of the public, electricity boards
are run by the Government to supply power at reasonable rates.
5. Taxation: The nature of demand for a good helps the Govt., looking into the
possibilities of raising the revenue. If the demand is less elastic for a good, by
levying more indirect taxes on that good, the Govt. would get larger revenue.
6. International Trade: The country gains in the international trade by exporting
those goods, for which the demand in the export market is less elastic and by
importing those goods for which the demand is elastic. The less elastic nature of
demand in the export market helps the nation to charge a higher price and pay less
price for those goods which are imported, and

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 7. Paradox of Poverty in Plenty: A bumper crop instead of bringing prosperity to
the farmers, ruin their economic position. It is a common phenomenon in
agriculture. The inelastic demand for the products in the years of bumper harvest
brings down the prices, consequent to which the farmers fail to realize prices of
normal years.
Factors affecting demand:
The change in demand for a product is due to the factors other than the price factor of the
same product.
1. Taste and Preferences: These are influenced by fashions, population changes,
advertisement, customs, habits, popularity, season etc. Changing fashions in men/women
wear, ornaments, automobiles etc. will attract the people to buy them, so that they are fit to
the changing fashion world. Changes in population also bring variations in their tastes and
preferences. New generation will have something different attitudes in all walks of life,
consequently new tastes emerge. Advertisement has become an important instrument of
sales promotion/selling strategies of the manufactures. Customs of the society enforce the
people to change their life styles, as a result of which new preferences add to their long list
of wants. People are habituated to certain aspects of life and develop new preferences.
Popularity of a product attracts the new consumer towards it. Popularity of the product is
one, the influence of which cannot be avoided by the consumer. Season bound
requirements compel the people to have a new set of preferences each season. Thus, the
changes in tastes and preferences make the consumer more satisfied than before.
2. Income: Changes in the income of the consumer leads to a shift in the demand curve. The
proportion of income spent on food and other necessaries decreases with increase in the
income level of the consumers.
3. Price of other related goods: The change in price of one good influences the consumption
of other good, depending upon the relationship between the goods. If two commodities are
supposed to be substitutes such as meat and chicken, the rise in price of one good results in
increase in demand for the other good. There are certain goods which need to be used
together viz. Bread and jam, bread and butter etc. which are called complements. Increase
in price of one good brings down the demand for the other good. A rise in price of bread
reduces the demand for butter.
4. Habits: Large numbers of smokers in a region influence the demand for tobacco and its
products.
5. Region: In high altitude regions demand for woollen clothes, meat etc. would be
persistent.
6. Season: Demand for eggs decreases in summer season and increases in winter season.
ENGEL'S LAW:-
The 19th century statistician Engel noticed that any additional income is tended to be spent
more on luxuries and non essentials than on essentials and his observation is commonly
known as Engel’s law which can be postulated as follows.
“The proportion of personal expenditure devoted to necessities decreases as income rises”.
The Engel’s law represented diagrammatically illustrates that expenditure on food and clothes
form a larger proportion of total expenditure of people with low incomes than of those with
higher incomes.

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 CONSUMER'S SURPLUS:-
Consumer's surplus is based on diminishing utility. Concept of consumer surplus is defined as
the excess of price, which a person would be willing to pay rather than go without the good.
In short Consumer's surplus is what we are prepared to pay minus what we actually pay or it
is the difference between total utility and the amount spent.
 Consumer’s surplus = Total utility – Total price
No. of ice cream Price Total cost TU MU Consumer’s surplus
(Rs.)
1 20 20 100 100 80
2 20 40 180 80 140
3 20 60 240 60 180
4 20 80 280 40 200
5 20 100 300 20 200

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TOPIC - 8
Laws and types of supply
Elasticity of supply
SUPPLY:
Supply means the quantity of a good or service offered by a producer for sale at different
unit prices in a given market at a point of time. It is the willingness of the supplier to offer the
goods for sale at different unit prices.
According to Prof. Mc. Connel supply is defined as “a schedule which shows the various
amounts of a product which a producer is willing to and able to produce and make available for
sale in the market at each specific price in a set of possible prices during some given period”.
STOCK: Supply is the actual quantity that a seller is willing to sell at a particular price, while
stock is the amount of output that exists in a market. Depending on the demand for a commodity
stock is converted into supply. For perishable commodities stock and supply are the same and for
durable commodities stock and supply are different.
INDIVIDUAL SUPPLY SCHEDULE:
Supply schedule depicts the list of quantities-price relationships of a commodity in a
market at a specific point of time by an individual seller. In other words, it reveals the mind of
sellers in offering various quantities of a given commodity against corresponding prices.
Table: 1 Hypothetical Supply Schedule of a Commodity in a Market.

Price (Rs./Q.) Quantity supplied (Q.)

300 30
325 40
350 50
375 60
400 70
425 80

It reveals that at price of Rs. 300 the quantity supplied by a seller is 30 Q, at Rs. 325, 40 Q and so
on. As the price per unit of the commodity rises, the quantity supplied is also increasing. As price
increases, sellers are committed to increase their sales. When a supply schedule is plotted on a
graph it becomes a supply curve (Fig.1). The supply curve will have a positive slope i.e.it slopes
upwards from left to right.

y
S

Price

0 x
Quantity
Fig. 1: Supply curve

Market Supply:
It is the sum of the quantity of commodity that is brought into a market for sale by the sellers in a
given market at a specific point of time. Assume that there are three sellers in a market viz. A, B
and C with individual supply schedules as shown in Table 2.

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 Table: 2- Market supply schedule
Price (Rs./Q) Individual seller’s supply / week Market supply (Q)
(A+B+C)
A B C
300 30 35 0 65
325 40 50 0 90
350 50 65 50 165
375 60 80 70 210
400 70 95 90 255
425 80 110 110 300
The price quantity relationship of the three sellers reveals that at Rs. 300 per quintal, seller
‘A’ is prepared to sell 30 Q, while seller ‘B’ 35 Q and seller ‘C’ is not prepared to sell at all at this
particular price. The seller ‘C’ is not prepared to sell the commodity at any price less than
Rs.350/Q. Market supply is the sum total of output that is sold by the three sellers as presented in
the last column of the table. Thus, the market supply is 65, 90, 165 Q and so on. The supply curve
is drawn based on the first and last columns of the table (Fig.2).
y
Sm

Price

0 Quantity supplied x
Fig. 2: Market supply curve
Determinants of supply:
 Price of the commodity – when price of a commodity increases, its supply also
increases.
 Price of a related commodity – When price of a good increases , supply of its substitute
declines e.g. mutton and chicken.
 Cost of inputs of production – When cost of raw materials increases, supply decreases.
 State of technology – Improvement in technology lower the cost of production and
increases the supply.
 Factors outside the economic sphere like flood, drought, fire etc.
 Tax and subsidy – Higher taxation will decrease the supply and granting subsidies will
raise the supply.
LAW OF SUPPLY:
The law of supply indicates the functional relationship between the quantity supplied of a
commodity and its unit price. The law signifies the positive relationship i.e. as the price of a
commodity rises its supply extends and as the price falls its supply contracts, with other things
remaining the same. Producers normally tend to increase the supplies in the wake of rising prices
and reduce the same when the prices are on the lower side. Supply varies directly with the price.
Extension and contraction of supply (Change in quantity supplied)
Extension and contraction of supply refers to the movement of product supply on the same
supply curve. Extension of supply means offering more quantity for sale at a higher price, while
contraction means offering less quantity at a lower price. As from Table 2, that the quantity of
commodity supplied by ‘A’ at Rs. 300 is 30 Q and it is 40 Q when the price rose to Rs. 325. Here
the quantity supplied has increased from 30 to 40 Q. It is the case of extension of supply.
Conversely if the price falls from Rs. 325 to Rs. 300, the quantity supplied too falls from 40 Q to
30 Q. It is the contraction of supply.
Graphically (Fig.3), when it is depicted, it shows that the upward movement from A to B is
extension of supply and downward movement from B to A is contraction of supply.

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 y S
B
P1
Price
A
P
S

0 x
Q Q1
Quantity
Fig. 3 : Extension and contraction of supply
Increase and Decrease in Supply (Shift in supply)
Increase in supply implies more supply at the same price and decrease in supply means
less supply at the same price. The change in supply results in a shift of the supply curve. An
increase in supply results in the shift of the supply curve towards right side of the initial supply
curve SS as shown in Fig. 4. The new supply curve is S1S1. On the other hand, a decrease in
supply causes a shift of the supply curve towards the left side of the initial supply curve. The new
supply curve thus formed is S2S2. Originally OQ quantity is supplied at OP price. But due to
changes in supply conditions at the same price OP, OQ1 quantity of commodity is supplied
indicating increase in supply. On the other hand, again influenced by changing supply conditions
at the same price, OQ2 is supplied. This is decrease in supply.
S2
y S
S1

Price P
S2

S1
0 x
Q2 Q Q1
Quantity
Fig. 4 : Increase and decrease in supply
ELASTICITY OF SUPPLY:
Elasticity of supply of a commodity is the responsiveness, or sensitiveness of supply to the
changes in price. Supply is said to be elastic, if a small change in price causes considerable change
in the quantity supplied. The supply is inelastic when a given change in price leads to little or less
change or no change in the quantity supplied. In short, elasticity measures the adjustability of
supply of a commodity to price.
Elasticity of supply is expressed as the ratio of percentage change in the quantity of good
supplied and percentage change in price of the good.
% change in quantity of good supplied
Elasticity of supply (Es) =
% change in price of good supplied
Degrees of elasticity of supply:
1. Perfectly Elastic Supply: When the supply of commodity increases to infinite quantity or
unlimited quantity, even though there is invisible rise or minute rise in the price, the
elasticity of supply is said to be infinity.
2. Perfectly Inelastic Supply: It means that the quantity supplied is not responsive to change
in prices. Elasticity of supply in this case is zero.

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 3. Relatively Elastic Supply: Supply is referred as relatively elastic, when the percentage
change in quantity supplied is more than the corresponding percentage change in price. It
is also called elastic supply. Elasticity of supply is more than one.
4. Relatively Inelastic Supply: Supply is said to be relatively inelastic, when the percentage
change in quantity supplied is less than the corresponding percentage change in price. In
this case the elasticity of supply is less than one.
5. Unitary Elastic Supply: When percentage change in quantity supplied equals the
percentage change in price, it is called unitary elastic supply. Here the elasticity of supply
is equal to one.
 Perfectly inelastic - Esp = 0
 Inelastic - Esp<1
 Unitary elastic - Esp = 1
 Elastic - Esp >1
 Perfectly elastic - Esp = Infinite
Factors influencing Elasticity of Supply:
1. Availability of inputs of Production: If the needed inputs are available as per the
requirement, the supply is elastic. If any one of the factors is not available which is
absolutely necessary, supply would be inelastic.
2. Length of Time Period: It is the period of time required to adjust the supplies to the
changes in prices. The biological characteristics of the product dictate the changes of
responsiveness.
3. Diversification of Production Activity: When the producer is engaged in production of a
number of products and facilities exist for shifting of production from one product to the
other, in such a case for each product the supply is elastic.
4. Availability of Alternative Markets: Suppose there exists several markets for the
producer to sell the goods, a fall in price in one market would prompt him to shift his
goods to other markets and a rise in price in one market induces him to shift his goods to
that market. In such a case the supply is elastic.
5. Flexibility in Starting and Winding up the Business: If a particular production activity
is quickly taken up and quickly wound up, the supply of the goods is elastic.
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TOPIC - 9
Cost - concepts
Introduction:
The cost of production exists because the supply of productive resources is scarce relative
to their demand. The costs have relevance to a specific time period and the cost in any production
period include the value of the resource services transformed into product in this single period
rather than the value of the resources itself. The resources used in the production may be (i) poly-
period resources (which represents stock services and only a part of these stock of services is
transformed into product in each distinct production period) and (ii) mono-period resources
(which represent a stock of services but here the entire stock of services is transformed into a
product in a single period).
In order to make rational choice from amongst alternatives, costs should therefore, be
considered with relation to a specified time period. Consideration of cost curves is essential and
forms the basis for entry and exit of the firms in the industry. Profit maximizing rule is determined
with the help of cost curves, cost functions and production functions. This rule is popularly known
as marginal analysis at which MC=MR. The costs are also one of the major price determinants in
all the market situations of the economy. The knowledge regarding the cost functions is very much
essential for optimal managerial decisions to be taken by the firm as well as the Government.
There are seven costs, which explain the behaviour of the firms in the production of requisite
products. The cost of production of different commodities relative to their prices is an important
topic for discussion.
Production costs :
Production costs play an important role in decisions making by the farmers. Cost of
production often becomes a policy issue when producers complain that the prices they receive for
their product do not cover the cost of production.
Cost of production here means the expenses incurred per unit of output.
Costs in farming can be divided into two main categories i.e. Fixed cost and Variable cost
Knowledge regarding various relationships existing between costs and output is necessary
to comprehend the concepts of equilibrium conditions of different firms under different market
situations. Here we require to know how the fixed cost (FC), Variable cost (VC), total cost (TC),
average fixed cost (AFC), average variable cost (AVC), Average Cost (AC), and Marginal Cost
(MC) are related to different output levels of the firms under different levels of technology used
by the firms.
Fixed costs:-
A resource or input is called a fixed resource if its quantity does not vary during the
production period. Fixed costs are those which do not change in magnitude as the amount of
output of the production process changes and are incurred even when production is not
undertaken. Fixed costs remain the same irrespective of level of production. These costs remain
invariant in the short run but in the long run there are no fixed costs as all the inputs can be varied.
Fixed costs include cost items like taxes, insurance, depreciation on machinery, implements, tools,
buildings, salaries of personnel working in the firm etc. These are also known as indirect costs,
sunk costs and overhead costs. The summation of all these costs is called total fixed costs (TFC).
TFC is a horizontal straight line parallel to X-axis (Fig.1).
y

Cost TFC

0 x
Output
Fig. 1 Total fixed costs.

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Variable Costs:
An input is a variable input if its quantity varies during the production period. Variable
costs as per definition vary with the level of output. These include costs of seed, tractor fuel,
repairs, feed, fertilizer cost, etc. Labour if hired on daily basis, interest on current investment,
hired machines and other services are also included in variable costs. These are also known as
working costs, operating costs, direct costs, prime costs, circulating costs and running costs. These
are second phase costs. The summation of these costs refers to total variable costs (TVC).
Graphically TVC is as inverse ‘S’ shape (Fig.2).
y TVC

Cost

0 x
Output
Fig. 2. Total Variable Costs
Total Costs:
These include total fixed costs as well as total variable costs. Its shape is similar to that of
TVC (Fig.3).
y TC

Cost

TFC

0 x
Output
Fig. 3. Total Costs
COST FUNCTIONS:
 Production of output requires input, which cost money, and therefore there exist a relationship
between output and cost.
 Total cost curve or cost function represents the functional relationship between output and
total cost.
 Cost function can be presented Arithmetically (tabular form), Geometrically (graphic form)
and Algebraically (equation form)
Tabular form:
Output TFC TVC TC
0 10 0 10
2 10 2 12
5 10 4 14
9 10 6 16
13 10 8 18

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Graphic form:
 Nature of cost curve depends on nature of the corresponding production function.
 Hence, when cost is portrayed on X-axis and the product on Y-axis, the total cost curve
will have the same shape as total product curve.

Algebraic form:
 C = f(Y). Where, C-total cost and Y-output
RELATIONSHIP BETWEEN TFC, TVC AND TC:
 Total fixed cost (TFC) is represented by a straight line parallel to X-axis and it remains
unchanged for all output levels in a time period.
 TVC-is zero, when output is zero. It increases as output increases. The shape of TVC curve
depends on the shape of the production function.
 TC is the sum of TFC and TVC. When no variable output is added, TC is equal to TFC.
 The TC curve is shaped exactly like the TVC curve, but is placed above the total variable
cost by the units of total fixed cost.
UNIT COSTS:-
Unit costs are Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost
(ATC or AC) and Marginal Cost (MC). These unit cost curves are more important than total costs
in decision making process.
Average Variable Costs:
It is the amount spent on the variable inputs to produce an unit of output. It is worked out
by dividing the total variable cost by the amount of output.
Algebraically it is expressed as

Total Variable Costs TVC

AVC = =
Output Q
When a small amount of output is produced, cost of variable input per unit of output becomes very
high. In other words that productivity of variable input increases when greater amounts are used in
the production of the commodities due to economies of scale. Average variable cost decreases,
reaches a minimum and increases thereafter. This causes AVC to have ‘U’ shaped when it is
graphed. This is shown in the Fig.4. When it is ‘U’ shaped it becomes reciprocal of average
physical product (APP) curves.

y AVC

Cost

0 Output x
Fig. 4. Average Variable Costs

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AVC falls to minimum level at the output level where Average Physical Product (APP) is
maximum. Thereafter due to production of greater amount of output, AVC rises again and
becomes vertical at certain level of maximum output.
Average Fixed Costs (AFC):
It is the cost of fixed resources or inputs required for producing one unit of output. It is
worked out by dividing the Total Fixed Costs by the amount of output.
Total Fixed Costs TFC
AVC = =
Output Q
Hence, as output increases, Average Fixed Cost (AFC) continues to decline.
AFC curve is declining with the increased output because TFC is constant. Due to this it is
continuously falling up to its maximum output. It is having the shape of hyperbola (Fig.5).
y

Cost

AFC
0 x
Output
Fig. 5. Average Fixed Costs
Average Total Costs or Average Costs (ATC or AC):
When the total costs are divided by output, we get ATC (Fig.6). Average total cost, similar
to average variable cost, first decreases, attains a minimum and increases thereafter.
Total Costs TC TFC+TVC
ATC = = =
Output Q Q

y ATC

Cost

0 x
Output
Fig. 6. Average Total Costs
Marginal Costs (MC):
Marginal cost is the change in total cost in response to a unit increase in output. In other words,
Marginal cost is the change in total costs from increasing output by one extra unit.
It is found out by dividing the change in total cost by changes in output. As per the
definition, it is the change in the total cost due to the change in output. As output increases, MC
first falls, and then it slopes upwards and passes through average variable cost and average cost at
their minimum points. In other words, Average variable cost will slope downwards and keep
falling as long as the marginal cost is below them.
Algebraically it is expressed as
Change in Total Costs TC TVC
MC = = or
Change in output Q Q

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Note that to compute MC, we can use TC or TVC because fixed costs cannot be changed. The
only component of change in TC is TVC.
ILLUSTRATIONS:
Worked example of short run production costs
A simple numerical example of short run costs is shown in the table below. Fixed costs are
assumed to be constant at Rs. 200. Variable costs increase as more output is produced.
Total Fixed Total Variable Total Cost Average Cost Marginal Cost
Output Costs (TFC) Costs (TVC) Per Unit (the change in total cost
(Q) (TC= TFC + (AC = TC/Q) from a one unit change
TVC) in output)
0 200 0 200
50 200 100 300 6 2
100 200 200 400 4 2
150 200 250 450 3 1
200 200 260 460 2.3 0.2
250 200 265 465 1.86 0.1
300 200 280 480 1.6 0.3
350 200 325 525 1.5 0.9
400 200 400 600 1.5 1.5
450 200 610 810 1.8 4.2
500 200 850 1050 2.1 4.8
In our example, average cost per unit is minimised at a range of output between 350 and
400 units. Thereafter, because the marginal cost of production exceeds the previous average, so
the average cost rises (for example the marginal cost of each extra unit between 450 and 500 is 4.8
and this increase in output has the effect of raising the cost per unit from 1.8 to 2.1).

For example, consider the case of Vijay’s Paneer Centre. Vijay uses two inputs to make paneer :
labour and capital (paneer press machine) (This is obviously a simplification, because the paneer
making uses other inputs such as milk, citric acid, flavour and floor space.
But we will imagine there are just two inputs to make the example easier to understand.) Labour
can be hired on very short notice. But new paneer press machines take 3 months to install. Thus,
the short run for Vijay’s Paneer Centre is any period less than 3 months, while the long run is any
period longer than 3 months. In the case of Vijay’s Paneer Centre, paneer press machines are a
fixed input during any period less than 3 months, whereas labour is a variable input. So, the cost
of renting ovens is a fixed cost in the short run, while the cost of hiring labor is a variable cost.
Suppose the firm’s rental payments on paneer press machines add up to Rs. 40 a day; then FC =
40. And suppose that if the firm produces 100 units (200 gm each) of paneer in a day, its labor
cost (wages for labour) is Rs. 500; then VC = 500. The firm’s total cost is TC = 40 + 500 = 540.
Suppose that when the firm produces 150 units of paneer a day, its labor cost rises to Rs. 700; then
the new VC = 700 and the new TC = 40 + 700 = 740. This information is summarized in the table
below.
Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 51
Vijay’s Paneer Centre’s Total, Fixed and Variable Costs

Quantity Total Cost Fixed Cost Variable Cost

(per day)
100 540 40 500
150 740 40 700
In the case of Vijay’s Paneer Centre, we said earlier that the firm can produce 100 units of
paneer with FC = 40, VC = 500, and TC = 540. Therefore, ATC = TC/Q = 540/100 = 5.4. Also,
AFC = 40/100 = 0.4 and AVC = 500/100 = 5. Notice that we can use AFC and AVC to find ATC
a different way: ATC = AFC + AVC = 0.4 + 5 = 5.4, which is the same answer we got before. If
Vijay Paneer Centre produced 150 paneer units instead of 100, the calculations would be the
same, except we’d use Q = 150, VC = 700, and TC = 740 instead. FC would still be 40. This
information is summarized in the table below.
Vijay’s Paneer Centre’s TC, FC, VC, ATC, AFC, AVC
Quantity Total Cost Fixed Cost Variable Cost ATC AFC AVC
(per day)
100 540 40 500 5.40 0.40 5.00
150 740 40 700 4.93 0.27 4.67
It’s easy to find ATC using TC and Q, like we just did. But you should also be able to find Q
using TC and ATC, or find TC using Q and ATC. Since we know that ATC = TC/Q, we also
know that TC = ATC Q and Q = TC/ATC. For example, suppose you know that Vijay’s Paneer
Centre has TC = 740 and ATC = 4.93. Since ATC = TC/Q, the following equation must hold: 4.93
= 740/Q. If you solve the equation, you’ll find that Q = 150 (approximately).
We said that TC = 540 when Q = 100, and TC = 740 when Q = 150. So TC = 740 - 540 = 200,
Q = 150 - 100 = 50, and therefore MC = 200/50 = 4. We say that the marginal cost is 4 for units
between 100 and 150. This is assuming we don’t have information about how much it would cost
to increase output by just one, from 100 to 101 units of paneer. Notice that the MC differs from
ATC. At Vijay’s Paneer Centre, the original ATC was 5.4, and the new ATC (after increasing
quantity to 150) was 4.93. Neither of these is equal to the MC of 4 that we just calculated. The
table is the same as the last one, but with a new column for MC.
Vijay’s Paneer Centre’s TC, FC, VC, ATC, AFC, AVC and MC
Quantity Total Cost Fixed Cost Variable Cost ATC AFC AVC MC
(per day)
100 540 40 500 5.40 0.40 5.00
4
150 740 40 700 4.93 0.27 4.67
Notice that MC is listed between lines. That’s because MC shows the change that results from
going from the first line to the second line.
Cash costs (explicit cost):
 Cash costs are incurred when resources are purchased and used immediately in the
production process.
 Cash costs result from purchases of non-durable inputs such as fertilisers, fuel, oil, and
casual labour which do not last more than one production process.
Non-cash costs (implicit costs):
 Non-cash costs consist of depreciation and payments to resources owned by the farmer.
 E.g., Depreciation on tractor, equipment, buildings, payments made to the farmer
himself or family labour, management and owned capital.
Opportunity cost :
 Opportunity cost of an output is defined to be the income that can be earned in the next
best alternative use.
 For example, a farmer with 25 kg concentrate feed which can either be fed to his cows
or sold.

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  If he gives the feed to his cows, the opportunity cost is the amount of money for which
the feed can sold to others.
 If he sells the feed, the opportunity cost is the amount of extra income, which can be
obtained by giving this feed to his animals.
 Opportunity cost is defined to be the real cost of any input.
Depreciation cost:
Depreciation cost refers to the decline in the value of asset due to usage, accidental damage
and time obsolescence. It is the loss or decline in value which occurs in time due to wear and tear
with items of farm property such as building, equipment, machinery and livestock etc.
Degree of depreciation varies among different types of assets. The change depends on type
and extent of use of an asset.
Social cost:
It is also called as externalities. From the point of view of society, the firms will give rise
to some additional costs to the society in the form of environmental degradation, health hazards,
water/air or noise pollution in the area etc, this cost is called as social cost.
Break even point:
Break-Even Point is the quantity of output corresponding to minimum of average total
cost. Exactly at this point, the producer neither gains nor looses anything. Whatever income he
gets above this point is his profit. Suppose the farmer is operating below this point he will be
incurring loss towards his fixed cost.

Shut down point:

Shut-Down Point is the quantity of output corresponding to minimum point of average
variable cost. Exactly at this point, the producer is in a position to meet the expenses towards the
variable cost alone. A farmer must produce at least this amount so that he will be able to cover the
variable cost of production. If the total revenue curve goes below this point, it is better to close the
business instead of incurring losses. So this point is called as Shut Down Point.

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TOPIC - 10
Theory of production
Theory of production
Production of goods depends on the cost of production, which in turn depends on the
prices of inputs or the factors of production. Cost of production is determined by the physical
relationship between inputs and outputs.
Production in economics is generally understood as the transformation of inputs into
outputs. Apart from physical changes of matter, production also includes services like buying and
selling, transporting, and financing. But the economic analysis we restrict the use of the term
production to the production of goods only, because in the production of goods we can precisely
specify the inputs and also identify the quantity and quality of outputs. Theory of production
includes factors of production (land, labour and capital) and their organization.
Importance of theory of production:
1. Helps the analysis of relation between costs and volume of output; it tells us how a
manufacturer combines various outputs in order to produce a given output in an
economically efficient manner, i.e. at the minimum unit cost.
2. Provides a base for the theory of the demand of firms for production.
Law of returns
Production is the result of application of various input factors. In the process of production,
the farmers combine the required input factors in various proportions. This type of usage of inputs
by the farmers gives way for the operation of the laws of returns.
In the production process, when a single input factor is varied keeping other required
factors constant, the relationship that takes place between single variable input and the consequent
output pertains to either one or a combination of the following relationships.
1) Law of increasing returns 2) Law of constant returns & 3) Law of decreasing returns.
1. Law of Increasing Returns:
The addition of each successive unit of the variable factor to the fixed factors in the production
processes, adds more to the total output than the previous unit. i.e. each successive unit of variable
factor adds more and more to the total output.
Relevant data are presented in Table No.1:
Fertilizer (Kg) Total output Marginal
X (Q) X Y output
Y Y/ X
1 3 1 5 5
2 8 1 7 7
3 15 1 8 8
4 23 1 12 12
5 35
Table:1 Law of increasing returns
y TPC

Output

0 Input x
Fig. 1 Increasing returns
It is clear from the table that first unit of fertilizer results in three quintals of output second unit
adds five quintals, and so on.

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When the data is graphed the resultant curve is convex to X- axis (Fig.1). Relationship is
algebraically shown below:-

1Y1 2Y2 nYn

< < ..........
1X1 2X2 nXn

2. Law of constant returns:

The addition of each successive unit of the variable factor to the fixed factors adds the same to the
output as observed for the previous unit i.e. each successive unit of variable factor results in an
equal quantity of additional output.
Relevant data are presented in Table No.2:
Fertilizer (Kg) Total output Marginal
X (Q) X Y output
Y Y/ X
1 5 1 5
5
2 10 1 5
5
3 15 1 5 5
4 20 1 5 5
5 25
Table 2: Law of constant returns
It is clear from the Table No.2 each additional unit of fertilizer adds five quintals to the total
output. The data if plotted on graph, the production function is linear (straight line) (Fig.2).
Relationship is algebraically shown below:-
1Y1 2Y2 nYn
= = ..........
1X1 2X2 nXn

y TPC

Output

0 Input x
Fig.2 Constant returns
3. Law of decreasing returns (law of diminishing returns):
The addition of each successive unit of the variable factor to the fixed factors in the production
process, adds less to the total output than the previous unit i.e. each successive unit of variable
factor adds less and less to the total output.
It is evident from the Table No.3 that the first unit gives 15 units, second adds 12 units, third unit
adds 8 units and so on as shown in table.
Relevant data are presented in Table No.3:
Fertilizer (Kg) Total output Marginal
X (Q) X Y output
Y Y/ X
1 15
1 12 12
2 27
1 8 8
3 35 1 6 6
4 41 1 4 4
5 45
Table 3: Law of decreasing returns

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The data if plotted on graph, the resultant curve is concave to X-axis (Fig.3). Relationship is
algebraically shown below:-
1Y1 2Y2 nYn
  ..........
X
1 1 X
2 2 nXn

y TPC

Output

0 Input x
Fig.3 Decreasing returns
Laws of returns to scale:
It refers to the change in output as a result of a given proportionate change in all the factors of
production simultaneously. When all the factors or inputs involved in a production process are
increased or decreased simultaneously, in a certain fixed proportion, the response of output to such
an increase or decrease in the input levels is explained through the concept of returns to scale.
Returns to scale are a long run concept as all the variables are varied in quantity. Returns to scale
are increasing or constant or decreasing depending on whether proportionate simultaneous
increase of input factors results in an increase in output by a greater or same or small proportion.
Returns to scale is illustrated with the help of hypothetical data as shown in Table No. 4.
Table No. 4: Returns to scale
Labour (L) Capital (K) Total output Increment in Nature of
(Q) output returns to scale
0 0 0
1 1 8 8
9 INCREASING
2 2 17
3 3 28 11
4 4 38 10
5 5 48 10 CONSTANT
6 6 58 10
7 7 68 10
8 8 76 8
9 9 82 6 DECREASING
10 10 86 4
From the table no. 4, it can be seen the variation in total output for changing proportion of L and
K. Initially, when the input proportion is changing, output is changing by an increasing proportion.
This is increasing returns to scale. This trend is seen in the use of L and K up to the ratio of 3:3.
Constant increase in output is found till the proportion of L and K is extended up to the ratio of
7:7. This is constant returns to scale. The use of L and K in the proportion of 8:8 onwards reveals
the decreasing returns to scale. This concept is graphically presented in fig.4.
y

II Stage

Output I Stage
III Stage

0 Scale x
Fig. 4 Returns to scale
Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 56
 Short and long run production function:
Production function is the relationship between inputs and outputs. Production function, which
relates to factors and products where some resources are fixed can be termed as short-run
production function (Regardless of the number of fixed resources and level at which each is
held fixed). Those input-output relations which permit variation in all inputs or all factors
(none is fixed) can be termed as long run production function.
Law of Variable Proportion or Law of Diminishing Return
Definition :
 “If the quantity of one productive service is increased by equal increments, with the
quantity of other resource services held constant, the increments to total product may
increase at first but will decrease after a certain point” – E.O.Heady
 “An increase in capital and labour applied in cultivation of land causes in general, less than
proportionate increase in the amount of product raised, unless it happens to coincide with
an improvement in the arts of agriculture” - Marshall.
 As the amount of variable resource used in production of a product is increased, the output
of the product will at first increase at an increasing rate, then increase at a decreasing rate
and finally a point will be reached, where further application of the variable resource will
result in a decline in the total output of production.
 In short, marginal product of variable input will first increase, then decrease and finally
become negative.
Short Run and Long Run :
 Short run refers to a period of time in which the supply of certain inputs (e.g. plant,
building and machines, etc.) is fixed or inelastic.
 In short run, therefore, production of a commodity can be increased by increasing the use
of variable inputs, like labour and raw materials.
 They do not refer to any fixed time period. While in some industries short term may be a
matter of a few weeks or a few months, in some others (e.g., electric and power industry),
it may mean three or more years.
 Long run refers to a period of time in which the supply of all the inputs is elastic, but not
enough to permit a change in technology.
 In long run, the availability of even fixed factor increases. Therefore, in long run,
production of commodity can be increased by employing more of both, variable and fixed,
inputs.
 Economists use another term, i.e., very long period which refers to a period in which the
technology of production is subject to change.
 In the very long run, the production function also changes. The technological advances
mean that a larger output can be created with a given quantity of inputs.
Short run production with one variable input :
 Laws of returns state the relationship between the variable input and the output in the short
term.
 By definition, certain factors of production (viz., land and capital equipments such as plant
and machinery) are available in short supply during the short run. Such factors are known
as fixed factors.
 On the other hand, the factors which are available in unlimited supply even during the
short periods are known as variable factors.
 In short run, therefore, the firms can employ a limited or fixed quantity of fixed factors and
an unlimited quantity of the variable factor.
 In other words, firms can employ in the short run, varying quantities of variable inputs
against a given quantity of fixed factors. This kind of change in input combination leads to
variation in factor proportions.
 The laws which bring out the relationship between varying factor proportions and output
are therefore known as the Law of Variable Proportions, or what is more popularly known
as the Law of Diminishing Returns.

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 Long term production with two variable inputs :
 We shall now discuss the relationships between inputs and output under the condition that both
the inputs, capital and labour, are variable factors. This is a long run phenomenon.
 In the long run, supply of both the inputs is supposed to be elastic and firms can hire larger
quantities of both labour and capital. With large employment of capital and labour, the scale of
production changes.
 The technological relationship between changing scale of inputs and output is explained
through the production function and isoquant curves techniques.
Production rules for the short run
There are three rules for making production decisions in the short run. They are -
 Expected selling price is greater than minimum ATC (or TR greater than TC). A profit can be
made and is maximized by producing where MR = MC.
 Expected selling price is less than minimum ATC but greater than minimum AVC (or TR is
greater than TVC but less than TC). A loss cannot be avoided but will be minimized by
producing at the output level where MR=MC. The loss will be somewhere between zero and
the total fixed cost.
 Expected selling price is less than minimum AVC (or TR less than TVC). A loss can not be
avoided but is minimized by not producing. The loss will be equal to TFC.
Application of these rules is as follows. With a selling price equal to MR1, the intersection of
MR and MC is well above ATC, and a profit is being made.
When the selling price is equal to MR2, the income will not be sufficient to cover total costs but
will cover al variable costs, with some left over to pay part of fixed costs. In this situation, the loss
is minimized by producing where MR=MC, because the loss will be less than TFC.
Selling price should be as low as MR3, income would not even cover variable costs, and the loss
would be minimized by stopping production. This would minimize the loss at an amount equal to
TFC.
Production rules for the long run :
 There are only two rules for making production decisions in the long run.
o Selling price is greater than ATC (or TR greater than TC). Continue to produce, because a
profit is being made. This profit is maximized by producing at the point where MR=MC.
o Selling price is less than ATC (or TR less than TC). There will be a continuous loss. Stop
production and sell the fixed asset(s), which eliminate the fixed costs. Money received
should be invested in a more profitable alternative.
 This does not mean that assets should be sold the first time a loss is incurred. Short-run losses
will occur when there is a temporary drop in the selling price.
 The second long-run rule should be invoked only when the drop in price is expected to be long
lasting or permanent.
Difference between law of variable proportion & returns to scale
S.N. Law of variable proportions (short Law of returns to scale (long run
run production function) production function)
1 Describes the behaviour of output when one Examines the behaviour of output, when all inputs
input is varied are varied at the same time
2 Some factors of production are constant All factors are varied
3 The proportion among factors varies The proportion among the factors remains the same
4 It is a short run production function It is a long run production function
5 Here increasing, constant and decreasing Here increasing, constant and decreasing returns to
returns to a factor are observed scale are observed
6 Increasing returns are due to the efficient Increasing returns to scale are due to scale
utilization of fixed resources as a result of economies of production
application of sufficient quantity of variable
resource
7 Optimum output is the result of best The optimum output is the result of optimum size
proportion among fixed and variable of the plant
resources
8 The diminishing returns are due to over Diminishing returns to scale are due to the
exploitation of fixed factor operation of diseconomies of scale
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TOPIC - 11
Economics of animal disease and disease losses

Economics of Disease Losses and Mechanism of Disease on Altered Productivity:-

 At present, animal health management becomes more complex phenomenon involving
multiple issues in order to optimize livestock production.
 In dealing with animal health issues, economic evaluation has become increasingly
important as the effects of diseases which remain to be controlled are far more subtle
than was the case for epidemic problem.
 It is necessary to define the ways in which a particular disease lowers productive
efficiency.
 Over the years it has become clear from many studies that typically animal health
measures yield very high economic return to livestock producers.
 In order to explain unusual nature of effects of disease on animal and hence to show
how economic studies on animal disease should be carried out.
 It is necessary to define the exact mechanism by which a disease can influence
productivity.
Mechanism of Disease on Altered Productivity:-
 Infectious and parasitic diseases cause diversion of feed resources to growth and
multiplication of causative agents.
 Non-infectious disease can affect in a different manner. These diseases may cause
direct or indirect effect.
 Effect of ingestion:
 Most infectious and non-infectious diseases cause major effect of reduced feed intake
with rare incidence of increased intake.
 Reduced feed intake is often called as anorectic effect. Its effect on feed conversion
efficiency is known as specific effect.
 This specific effect is of economic relevance and is of two types.
 Since lower production is achieved from same feed intake and efficiency of production
process is adversely affected.
 Anorectic effect reduces both intake and output without altering efficiency of
production.
 This is an important consideration as variable cost in purchased feed and a fixed cost in
feed and fodder establishment.
 Effect of Disease on Physiological Process:
 Diseases generally modify different physiological processes such as nutrition,
metabolism, respiration and excretion.
 Mainly protein metabolism is highly affected by many diseases compared to other every
metabolism.
 Altered protein metabolism results in depletion of protein in the body of host leading to
weight losses, and production loss.
 In rare cases, every metabolism impairment occurs as secondary to protein metabolism.
 This results in every costs of tissue regeneration. Other mineral and micronutrient
metabolisms are also altered by disease process.
 Cobalt, copper, zinc and vitamins status have all been affected by protein metabolism.
 Since lung diseases can adversely affect productivity, another mechanism by which
disease might impair physiological function is a production respiratory function.
 Similarly altered kidney function and liver function can cause production deficiency.
MEASURABLE EFFECTS OF DISEASES ON LIVESTOCK PROFITABILITY:
Premature Death
 This is the easiest of all consequences of diseases.
 In economic studies, death loss can be measured as a difference between the potential
market value and its value when dead (which may not be zero), less the costs which

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 would have been incurred in obtaining market value (extra feed, care to market age,
marketing cost etc.).
Changed value of animal and products from slaughter animal
 Diseased animals may have lower marketing value either due to visible lesions or due to
indirect changes in appearance or body confirmation which make them less attractive.
 This reduced value may be due to changes in the ratio of meat to fat or meat to bone.
 Presence of lesions of zoonotic diseases may render animal totally unfit for
consumption from aesthetic point of view.
 Some external parasitic diseases cause reduction value of skin/hides to their uses.
Reduced Live weight Gain
 It is well known fact that diseased animal gain weight more slowly than equivalent
disease free animals.
Reduced Yield and Quality of Products from Live Animals
 Yield of animal products like milk, wool and meat may be reduced by disease.
 Quality of these products may also be reduced in term of change in milk composition
(in mastitis) and change in wool quality.
 In case of yield reduction, price of commodity will fall and livestock producer will
suffer. But in case of quality change, consumer will suffer the loss.
Reduced Capacity for works
 Most important use of animal in developing country is as a source of traction. There are
certain diseases like FMD causing reduced capacity to work.
 Disease can severely curtail rice paddy field preparation and other task for which
animals are essentials. So this is essential economic loss of producing field.
Altered production of dung for fuel and fertilizer
 Dung is used as cooking fuel in most developing countries, apart from using it as
fertilizer.
 Disease which cause high metabolic rate will indirectly influence rumen metabolism by
reducing the supply of dung.
Altered feed conversion efficiency
 Feed conversion efficiency is the ultimate measure of influence of disease on the
production process, but its measure requires accurate measurement of feed intake which
is possible only under controlled feeding.
 In grazing system, it is reasonable to take changes in feed as an adequate indication of
change in feed conversion efficiency when comparing diseased and disease free animals
kept under identical condition.
Effect of Disease on herd productivity
 Effect of disease spreads from individual animal to broader extent of herd management.
 Reduced Productive life of animal
 Reduced productive life of animal is due to increased culling which might be due to
reason of low yield or disease or unawareness of facts to farmers.
 Less accurate genetic selection
 If a disease alters any of the components of productivity which are the subject of
genetic selection pressure in the herd (milk or wool yield), it will affect efficiency with
which animals of superior genetic merits are identified.
Effect on capacity to maintain and improve the herd
 If less progeny born, fewer animals are available as herd replacement or for sale to
market products.
 Thus not only livestock sale income reduced but also management flexibility for herd
improvement will be curtailed.
 It will lead to the purchase of breeding animals with all the additional risks that exists.
 For example, liver fluke and other gastro-intestinal parasites have been shown to affect
reproductive performance in ewes.
 In cattle, bovine leucosis and ephemeral fever have been reported to affect
reproduction.
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Effects of disease control measures on productivity of animals
 In evaluating economic benefit of disease control, it is necessary to consider not only the
difference in productivity between diseased and healthy animals, but also the change in
productivity following elimination of a disease from an affected animal i.e. as in mastitis
and worm infestation.
 Thus selection of an economically optimal control strategy will be strongly influenced by
this consideration.
EFFECT OF ANIMAL DISEASE ON HUMAN AND ANIMAL WELFARE:
Effect on human nutrition
 Major direct effect on human welfare is through reduced supply of high quality animal
protein to young children and adolescents.
 Thus animal diseases reduce their nutritional value.
Effects on Community Development
 Animals are source of supply of traction power and dung material in most developing
countries.
 Further, they are sources of products like wool, hair, hide, feather, fur etc., used for
clothing, decoration, manufacture of utensils. Animal disease may cause reduced supply of
these products.
 Another effect of animal disease which is zoonotic is to cause disease in human as well as
the animal population, thus amplifying their impact.
Cultural significance of animal
 In most countries animals serve functions far beyond the utilization roles.
 In our country, cow is considered as saint and buffaloe is considered as vehicle of Yam
(God for killing).
Animal Welfare
 Animal disease control is an important issue in protecting the welfare of managed animals.
 There have been surprisingly few efforts to qualify welfare effects of diseases and most of
the information available is opinion rather solid evidence.
 Greater biological understanding will be required before quantitative assessments of effects
of disease on animal welfare.
METHODS OF MEASURING THE ECONOMIC BENEFITS OF ANIMAL DISEASE
CONTROL
 Main function of measuring benefits of animal disease control is on estimating benefits of
action against disease rather than on economics.
 The simplest approach is to compare alternative control programme within farms.
 Ideally large number of farms should be included in such study to obtain estimates of
variation in outcome between farms.
 In some cases, it may be necessary to conduct a comparison solely between farms because
the farm is the smallest feasible unit.
 It requires large number of farms because of the extent of variation in controlled factors
between farms.
 There are standard economic techniques which should be used to describe and summarize
the outcome of economic studies.
 The most common ones are partial budgeting, cost-benefit analysis and decision analysis.
 The focus of economic studies must be on estimating the benefit of action against a disease
rather than just on the economic impact of the presence of a disease.
 Although it is not possible to get all of the economic data using other analytical procedures
of which computer modelling is among the most useful.
 There are standard economic procedures to include an evaluation of risk of each of
alternative course of action.
 A rational approach to provision of health care requires that the product and welfare
significance rather than pathological severity of the disease should be the measuring
yardstick for livestock.
 In this way health and production issue can be brought together for the benefit of livestock
producer and equally of the consumer.
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TOPIC - 12
Livestock business and Marketable livestock commodities
CONCEPTS, SCOPE AND CHARACTERISTICS OF LIVESTOCK BUSINESS:
Concepts
 Livestock business includes both livestock and its products under business transaction.
 Livestock generally includes all domestic animals which are meant for human welfare.
 It includes primary activities of rearing all kinds of animals for food and other uses.
 Business of livestock and its products encompasses various activities involved in
directing the resources from point of production to consumption point. It includes
various forms of utilities.
 Livestock business includes all operation involved in movement of animals, raw
materials and the effect of such operation on livestock farmer, middlemen / traders,
butchers and consumers.
 Livestock business comprises all activities, agencies and policies involved in the
procurements of all inputs by livestock producers and movement of livestock and its
products from livestock farmers to consumers.
 Livestock business is the link between livestock farmers and non-farm sectors.
 Further it includes organization of all material supply to processing of finished
products, their demand and policy relating to farm products.
Scope
 Livestock business in a broader sense is concerned with livestock and its products by
farmers / traders and of inputs required by them in production of these animals and their
products. This subject of livestock business includes product marketing as well as input
marketing.
 Livestock rearing is an age old practice even before existence of agricultural farming
with seed.
 Traditionally nomadic farmer reared their livestock wherever the feed and water were
available.
 Now days modern animal husbandry activities attract usage of more scientific
knowhow on breeding, feeding and animal health care. Modern practices are more input
intensive.
 Thus the scope of livestock business includes both input and output trading.
 These are subject matter of livestock marketing includes marketing function, agencies /
traders, channels, efficiency and costs, price spread, market integration, production
surplus, government policy and research, training and market statistics.
 Business of livestock products is a complex process.
 It includes all the functions and processes involved in the movement of produce from
livestock farmers to consumers.
 Neither producers nor consumers of livestock products are located at one place. They
are spread all over the country.
 Time wise, too, the production and consumption of livestock products do not coincide.
 Moreover, farm products are produced in a form which is different from the one in
which they are consumed. They move in different ways and at different places and
times.
 The number and type of functions, the cost of performing these functions, the margins
or profits of those who perform these functions, and the competition in the trade – all
these vary from commodity to commodity, from time to time and from place to place.
Characteristics of livestock business
A good developed livestock business possess the following characteristics
 A good livestock business should provide livestock and livestock products which the
consumers want and are ready to pay for.

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  It should provide a wide variety of products to consumers so that they may easily
choose for themselves. The variety should not be so wide as to create confusion for
him.
 No harmful products should be offered for sale in the market, precautions should be
taken to protect consumers.
 Information on the presence of products in the market and their relative merits should
be available to all the prospective consumers.
 There should not be any sort of pressure on the consumers to buy products from a
particular trader or class of traders.
 Retailing services should be available in the market for small consumers.
 Prices should be fair and uniform for the products for all categories of consumers.
 There should not be any inefficiency or waste in the market.
MARKETABLE LIVESTOCK COMMODITIES:
Producer’s Surplus
 Producer’s surplus is the quantity of produce which is, or can be, made available by the
livestock farmers to the nonfarm population.
 Producer’s surplus is of two types:
o Marketable surplus
o Marketed surplus
 Marketable surplus
 Marketable surplus is that quantity of produce which can be made available to non-farm
population of a country. It is a theoretical concept of surplus.
 Marketable surplus is the residual left with producer-farmer after meeting his
requirements for family consumption, payment to labour, payment to landlord as rent,
and social and religious payments in kind. This may be expressed as follows
MS = P – C Where,
 MS = Marketable surplus
 P = Total production and
 C = Total requirements (family consumption, farm needs, payment to
labour, landlord and payment for social and religious work).
 Marketed surplus
 Marketed surplus is that quantity of the produce which the producer-farmer actually
sells in the market, irrespective of his requirements for family consumption, farm needs
and other payments. Marketed surplus may be more, less or equal to the marketable
surplus.
 Whether the marketed surplus increases with the increase in production has been under
continual theoretical scrutiny.
 It has been argued that poor and subsistence farmers sell that part of the produce which
is necessary to enable them to meet their cash obligations.
 This results in distress sale on some farms. In such a situation, any increase in the
production of marginal and small farms should first result in increased on-farm
consumption.
 An increase in the real income of farmers also has a positive effect on on-farm
consumption because of positive income elasticity. Since the contribution of this group
to the total marketed quantity is not substantial, the overall effect of increase in
production must lead to an increase in the marketed surplus.
Relationship between marketed surplus and marketable surplus
 Marketed surplus may be more, less or equal to the marketable surplus, depending upon
the condition of the farmer and of the produce.
 The relationship between the two terms may be stated as follows
Marketed surplus < or > or = Marketable surplus
o Marketed surplus is more than marketable surplus when the farmer retains a smaller
quantity of the products than his actual requirements for family and farm needs. This is

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 true especially of small and marginal farmers, whose need for cash is immediate. This
situation of selling more than the marketable surplus is termed as distress or forced sale.
Such farmers generally buy the produce from the market in a later period to meet their
family and /or farm requirements. The quantity of distress sale increases with the fall in
the price of the product. A lower price means that a larger quantity will be sold to meet
some fixed cash requirements.
o Marketed surplus is less than the marketable surplus when the farmer retains some of
the surplus produce. This situation holds true under the following conditions:
 Large farmers generally sell less than the marketable surplus because of their
better retention capacity. They retain extra produce in the hope that they would
get a higher price in the later period.
 Farmers may substitute one product for another product either for family
consumption purpose and the variation in prices.
 Marketed surplus may be equal to marketable surplus when farmer neither
retains more nor less than his requirement. This holds true for perishable
commodities of the average farmer.
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TOPIC - 13
Concept of market: meaning and classification of market
MEANING, CONCEPT AND NEEDS FOR MARKETING:
Meaning of Market
 Market is a derivative of Latin word 'marcatus' meaning merchandise, wares, traffic,
trade or place where business is conducted.
 It may mean and include a place as an open space (in village) or a larger building where
actual buying and selling takes place.
 An assembly or a meeting together of people for their private purchases and sale of
goods at a stated time and place e.g. village fairs or periodical markets.
 An area of operation or geographical or economic extent of commercial demand for
commodities. The course of commercial activity by which exchange of commodities is
affected. It may mean all inhabitants of an area.
Marketing
 American committee on marketing has defined marketing from the following three
viewpoints
o Legalistic view: Marketing includes all activities, which are concerned with
effecting changes in ownership and possession of goods and services.
o Economic view: Marketing is that part of economics, which deals with the
creation of time, place and possession utilities.
o Descriptive view: Marketing is the performance of business activities that direct
the flow of goods and services from the producer to the final user or consumer.
 Philip Kotler has defined, "Marketing, as the set of human activities directed at
facilitating and consummating exchanges".
o In simple words, it is defined that the marketing is the process of providing the
right product in the right place at the right price and at the right time.
Concepts of marketing: Sales concept and marketing concept are clearly distinct from each
other.
Sales concept
o Starts with the firm's existing products and considers the task as one of using
selling and promotion to stimulate profitable sales.
Marketing concept
o Starts with firm's existing and potential consumers and their needs; it plans a
coordinated set of products and programmes to serve these needs; and it hopes to build
its profits on creating meaningful value satisfactions.
o In the words of Philip Kotler, the marketing concept is a customer orientation backed
by integrated marketing aimed at generating customer satisfaction and long-run
customer welfare as the key to satisfying organizational goals.
o Integrated marketing means an intelligent adaptation and coordination of four P's viz.,
Product, Price, Place and Promotion.
 Price should be made consistent with quality.
 The channels of distribution made consistent with price and quality
 The promotion made consistent with channels, price and product quality.
o To achieve this type of integration, many companies have created product managers
and market managers.
Based on the new concept of marketing, the marketing process can be illustrated below:
 Here, the marketing process starts with the consumer and ends, with the consumer.
 After knowing consumer needs and wants, appropriate products and services are developed
and demand for these products and services is stimulated and created by implementing
suitable promotional polices.
 Then the said demand is satisfied through an optimum distribution strategy.

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  Finally, by organizing appropriate marketing information system, feedback is collected and
in the light of this information, appropriate changes are initiated so as to adopt the
marketing elements to the changing situation in the market place.
Needs for marketing
 In developing countries, it is the least developed part of the economy probably, because
of the strong, pervasive prejudice against the middleman.
 Marketing would make the producers capable of producing marketable products by
providing them with standards, with quality demands and with specifications for their
products.
 Marketing is the most easily accessible, "multiplier" of managers and entrepreneurs in
an "underdeveloped" growth area and they are the critical needs of these countries.
 Marketing can covert latent demand into effective demand. It cannot by itself, create
purchasing power, but it can uncover and channel all the purchasing power that exists.
So it can create conditions for higher level of economic activity in the developing
countries.
 Marketing in a developing country is the 'developer of standards' for product and
services as well as of conduct, integrity, reliability, foresight and of concern for the
basic long-range impact of decisions on the customer, supplier, economy and the
society.
 Whether the economy developed or developing is immaterial as far as marketing is
concerned because the basic functions of marketing (buying, selling, transporting ,
storing, grading, financing, risk bearing and marketing information ) and the utilities
(Time, Place and possession utilities) created by them are a necessity for any social
system.
 Marketing provides wide employment opportunity.
CLASSIFICATION OF MARKETS:
On the Basis of Location (Place of location)
 Village market
 A market which is located in a small village, where major transactions take place among
the buyers and sellers of a village, is called a village market.
 Primary markets
 These markets are located in big towns near the centres of production of commodities.
 In these markets, a major part of the produce is brought for sale by the producer-farmers
themselves.
 Transactions in these markets usually take place between the producers/farmers and
traders.
 Secondary wholesale markets
 These markets are located generally at district headquarters or important trade centres or
near railway junctions.
 Major transactions in commodities take place between the village traders and wholesalers.
 Bulk of the arrivals in these markets is from other markets.
 Produce in these markets is handled in large quantities.
 There are, therefore, specialized marketing agencies performing different marketing
functions such as those of commission agents, brokers, weighmen etc.
 Terminal market
 A terminal market is one where the produce is either finally disposed of to the consumers
or processors or assembled for export.
 Merchants are well organized and use modern methods of marketing.
 Commodity exchanges exist in these markets which provide facilities to forward trading in
specific commodities.
 Such markets are located either in metropolitan cities or in sea-ports.
 Delhi, Mumbai, Chennai, Kolkatta and Cochin are terminal markets for many
commodities.
 Seaboard Markets
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  Markets which are located near the seashore and are meant mainly for the import and / or
export of goods are known as seaboard markets. These are generally seaport towns.
 Examples of these markets in India are Mumbai, Chennai, Kolkatta and Cochin.
On the Basis of Area/Coverage
 On the basis of the area from which buyers and sellers usually come for transactions,
markets may be classified into the following four classes
 Local or Village Market
 A market in which the buying and selling activities are confined among the buyers and
sellers drawn from the same village or nearby villages.
 The village markets exist mostly for perishable commodities in small lots, e.g., local
milk market or vegetable market.
 Regional market
 A market in which buyers and sellers for a commodity are drawn from a larger area than
the local market.
 Regional markets in India usually exist for food grains.
 National market
 A market in which buyers and sellers are at the national level.
 National markets are found for durable goods like jute and tea.
 World market
 A market in which the buyers and sellers are drawn from the whole world. This is the
biggest market from the area point of view.
 This market exists in the commodities which have a world-wide demand and /or supply,
such as coffee, machinery, gold, silver, etc.
On the Basis of Time Span
 Short-period markets
 Markets which are held only for a day or few hours are called short period markets.
 Products dealt within these markets are of a highly perishable nature, such as fish, fresh
vegetables, and liquid milk.
 In these markets, the prices of commodities are governed mainly by the extent of
demand for, rather than by the supply of, the commodity.
 Long-period markets
 These markets are held for a longer period than the short period markets.
 Commodities traded in these markets are less perishable and can be stored for some
time; these are food grains and oilseeds.
 Prices are governed both by the supply and demand forces.
 Secular markets
 These are markets of a permanent nature. Commodities traded in these markets are
durable in nature and can be stored for many years.
 Examples are markets for machinery and manufactured goods.
On the Basis of Volumes of Transactions
 Wholesale market
 A wholesale market is one in which commodities are bought and sold in large lots or in
bulk.
 These markets are generally located in either towns or cities.
 Economic activities in and around these markets are so intense that over time the
population tends to get concentrated around these markets.
 These markets occupy an extremely important link in the marketing chain of all the
commodities including farm products.
 Apart from balancing the supply and demand and discovery of the prices of a
commodity, these markets and functionaries in them serve as a link between the
production system and consumption system.
 Retail markets
 A retail market is one in which commodities are bought by and sold to the consumers as
per their requirements.
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  Transactions in these markets take place between retailers and consumers.
 Retailers purchase the goods from wholesale market and sell in small lots to the
consumers in retail markets. These markets are very near to the consumers.
On the Basis of Nature of Transactions
 Spot or Cash markets
 A market in which goods are exchanged for money immediately after the sale is called
the spot or cash market.
 Forward markets
 A market in which the purchase and sale of a commodity takes place at time t but the
exchange of the commodity takes place on some specified date in future i.e., time t+1.
 Sometimes even on the specified date in the future (t+1), there may not be any exchange
of the commodity. Instead, the differences in the purchase and sale prices are paid or
taken.
On the Basis of Number of Commodities in which Transaction takes place
 General markets
 A market in which all types of commodities, such as food grains, oilseeds, fibre crops
etc., are bought and sold is known as general market. These markets deal in a large
number of commodities.
 Specialized markets
 A market in which transactions take place only in one or two commodities is known as
a specialized market.
 For every group of commodities, separate markets exist. The examples are food grain
markets, vegetable markets, wool market and cotton market.
On the Basis of Degree of Competition
 Each market can be placed on a continuous scale, starting from a perfectly competitive
point to a pure monopoly or monopsony situation.
 Extreme forms are almost non-existent. Nevertheless, it is useful to know their
characteristics.
 In addition to these two extremes, various midpoints of this continuum have been
identified.
 On the basis of competition, markets may be classified into the following categories.
 Perfect markets
A perfect market is one in which the following conditions hold good
 There is a large number of buyers and sellers;
 All the buyers and sellers in the market have perfect knowledge of demand, supply and
prices;
 Prices at any one time are uniform over a geographical area, plus or minus the cost of
getting supplies from surplus to deficit areas;
 The prices are uniform at any one place over periods of time, plus or minus the cost of
storage from one period to another;
 The prices of different forms of a product are uniform, plus or minus the cost of
converting the product from one form to another.
 Imperfect market
 Markets in which the conditions of perfect competition are lacking are characterized as
imperfect markets.
 The following situations, each based on the degree of imperfection, may be identified.
Monopoly market
 Monopoly is a market situation in which there is only one seller of a commodity.
He exercises sole control over the quantity or price of the commodity. In this
market, the price of a commodity is generally higher than in other markets.
 Indian farmers operate in monopoly market when purchasing electricity for
irrigation. When there is only one buyer of a product the market is termed as a
monopsony market.

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 Duopoly market
 A duopoly market is one which has only two sellers of a commodity. They may
mutually agree to charge a common price which is higher than the hypothetical
price in a common market (Bus transport -Private and Public sector).
 Market situation in which there are only two buyers of a commodity is known as
the duopsony market.
Oligopoly market
 A market in which there are more than two but still a few sellers of a commodity
is termed as an oligopoly market. A market having a few (more than two) buyers
is known as oligopsony market.
Based on number of sellers/buyers in the market
o Monopoly - Only one seller
o Oligopoly - Few number of sellers
o Monopsony - Single buyer
o Oligopsony - Few number of buyers
o Perfect/Pure competition - large number of sellers and buyers
o Bilateral monopoly - single seller and single buyer
On the Basis of Nature of Commodities (type of goods dealt in market)
 Commodity markets
 A market which deals in goods and raw materials, such as wheat, barley, cotton,
fertilizer, seed, etc., are termed as commodity markets. Specific commodities are bought
and sold in these markets. eg. Bullion market (purchase and sale of gold, silver etc),
Produce exchange market, manufactured and semi-manufactured goods market, etc.
 Capital markets
 Capital market is responsible for meeting the financial requirements of big industrial
and commercial concerns.
 Capital is required at every stage of business which comes from the money market,
stock exchange and foreign exchange.
Money market
 It includes a number of agencies providing finance to business & industrial concerns.
 Such markets, on one hand, help the people to invest or deposit their surplus funds
either in industrial concerns or in banks and on the other, allow those who are in need
of money to take loans through banks for a reasonable remuneration in turn by way
of interest.
Stock exchange market
 In this market, shares are purchased and sold in different parts of the country. Ex.
BSE, NSE
 These markets are highly specialized and command a very wide area of operation.
 Main purpose of such markets is to make investments in public and private sector
undertakings.
Foreign exchange market
 It is a market for buying and selling of foreign currencies. It can also be called as an
international market concerned with the export and import trade of a country.
 Mumbai, London, New Delhi are examples of such markets.
On the Basis of Stage of Marketing
 Producing markets
 Those markets which mainly assemble the commodity for further distribution to other
markets are termed as producing markets.
 Such markets are located in producing areas.
 Consuming markets
 Markets which collect the produce for final disposal to the consuming population are
called consumer markets.
 Such markets are generally located in areas where production is inadequate, or in
thickly populated urban centres.
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On the Basis of Extent of Public Intervention
 Regulated markets
 In these markets, business is done in accordance with the rules and regulations framed
by the statutory market organization representing different sections involved in
markets.
 The marketing costs in such markets are standardized and practices are regulated.
 Unregulated markets
 These are the markets in which business is conducted without any set rules and
regulations.
 Traders frame the rules for the conduct of the business and run the market.
 These markets suffer from many ills, ranging from un-standardised charges for
marketing functions to imperfections in the determination of prices.
On the Basis of Type of Population Served
 Urban market
 A market which serves mainly the population residing in an urban area is called an
urban market.
 Nature and quantum of demand for agricultural products arising from the urban
population is characterized as urban market for farm products.
 Rural market
 The word rural market usually refers to the demand originating from the rural
population.
 There is considerable difference in the nature of embedded services required with a
farm product between urban and rural demands.
On the Basis of Visibility
 Black Market
 In black markets, scarce commodities are sold at a very high price not openly but in a
secret manner.
 The situation arises on account of excess of demand over limited supply.
 Black market is an anti-social activity which gives way to black money.
 Open Market

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TOPIC - 14
Market price and normal price
Price determination
Market price
Market price is the price which prevails in the market at, any particular moment due to the
temporary equilibrium of the forces of demand and supply. It is the result of temporary causes and
passing events which influences demand and supply or both. The market price oscillates round the
normal price. It is the actual price which prevails in the market at any particular moment. In the
very short period, the cost of production has no effect on market price. All kinds of commodities
have a market price.
Normal price:
The normal price on the other hand, is the price which tends to prevail in the market in the
long run. It is the result of long run equilibrium between demand and supply. It is affected by
persistent and permanent causes in the long run. The normal price in actual practice seldom
prevails in the market, because in the long run a change takes place either in demand or in supply
conditions. In fact, the long run normal price like tomorrow never comes. In the long run, the
normal price must be equal to both the marginal cost and the minimum average cost. The normal
price will be of those commodities which are reproducible. For instance, unique, diamonds or
some old manuscript cannot be reproduced even if their demand rises. The supply will remain
fixed. So we cannot measure their normal price.
Market price versus normal price
S. No. Market price Normal price
1 Market price is determined by the Normal or natural value of a commodity is that
equilibrium between demand and which economic forces would tend to bring
supply in a market period or very about in the long run. Normal prices are those
short run. prices to which one expects prices to tend.
2 Determined by temporary Result of the long-run equilibrium between
equilibrium between the forces of demand and supply when the supply conditions
demand and supply at a time. have fully adjusted themselves to the changed
demand conditions.
3 Reached at a given moment of day as Long-run normal price, in practice, may never
a result of the temporary equilibrium. reach.
4 Governed by temporary causes and Influenced by permanent and persistent causes.
passing events.
5 Fluctuates from day to day due to Under given permanent conditions demand and
temporary changes either on the side supply, remains the same.
of demand or on that of supply.
6 Market price may be above or below The long run normal price must be equal to both
the marginal and average cost the marginal cost and the minimum long-run
production depending upon the average cost.
demand conditions.
7 All commodities have a market Only reproducible commodities can have normal
price. price

PRICE DETERMINATION:
The value of a thing when expressed in terms of money is called price. Price expresses
value in terms of money. Price is the amount of money that one has to pay for a thing in the
market. Our main purpose in the preceding chapters was to bring us to a position where we can
explain how price is determined under conditions of perfect competition. Under perfect
competition, a single buyer or a consumer is unable to influence the price and therefore takes the
market price as given and allocates his money expenditure so as to obtain maximum satisfaction.
As well as a single firm or producer cannot affect the price of his product by his own individual
action, then such single firm or producer takes the market price as given and adjust its output so as

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to obtain maximum profits. The demand of all the buyers taken together and the supply of all the
buyers taken together that determine the price by their interaction.
Price determination can be examined arithmetically, graphically and algebraically.
Arithmetic Approach:
The information in Table 1, reveals that at Rs. 12, the quantities demanded and supplied are both
equal i.e., 80 Q. At this price, what the buyers are willing to purchase and what the sellers are
willing to offer are the same. Therefore, Rs. 12 per unit is the equilibrium price and quantity
amounting to 80 Q is the equilibrium output.
Table No.1: Demand, supply and the equilibrium Price and Output
Price / unit (Rs) Quantity demanded (Q) Quantity supplied (Q)
14 60 120
13 70 100
12 80 80
11 90 60
10 100 40
Graphic Approach:
y D S

Price p

S D

0 Quantity Q x
Fig. 1 Determination of equilibrium price and quantity.
The intersection of market demand curve (DD) and the market supply curve (SS) indicates the
equality of quantity demanded by the consumers and that supplied by the producers Fig. 1. This
equality of quantity demanded and quantity supplied is called equilibrium quantity (OQ) and the
price that occurs at this balancing point is called equilibrium price (OP). When such a condition
prevails in a market, the market is said to be in equilibrium, because there are neither shortages
nor surpluses of commodities (Fig.1).
Market disequilibrium:
When the market equilibrium gets disturbed, it leads to market disequilibrium. This situation
occurs when there is surplus or shortage of a commodity.
A case of surplus:
As observed in Fig. No. 2, at OP1 price suppliers are prepared to sell OQ2 quantity, while the
consumers prefer to buy OQ1 quantity only. Hence OP1 price is not in equilibrium as quantity to
the extent of (OQ2 – OQ1) is available as surplus. Since there is a surplus, the market is in
disequilibrium. Suppose if the seller wants to sell the surplus they have to oblige the pressure of
consumers to reduce the price. When the same takes place i.e. when price slides down to OP the
consumers are prepared to purchase what all the suppliers offer for sale.

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 y D S
surplus

P1

Price P

S D

0 Q1 Q Q2 x
Quantity
Fig. 2: Market disequilibrium – A case of surplus
A case of shortage:
At Price OP1, which is lower than the equilibrium price, the suppliers are prepared to sell smaller
quantities depicted as OQ1 in the Fig. No. 3. The quantity demanded by the consumers on the
other hand is OQ2 quantity, which is higher than the quantity the sellers prefer to sell. The gap
between OQ1 and OQ2 indicates the shortage of the commodity in the market. Since the quantity
supplied is less than the demand in the market, the consumers are willing to get the quantity they
required consequent to which the price rises up to OP, which is an equilibrium price. At this price
OP, the quantity supplied by the suppliers equals the quantity that the consumers demand ie. OQ.

y D S

Price
P1
shortage

S D

0 Q1 Q Q2 x
Quantity
Fig. 3: Market disequilibrium – A case of shortage

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TOPIC - 15
Marketing of livestock- methods
Perishable and non-perishable livestock products- meaning
Livestock marketing problems
Needs for marketing:
 In developing countries, it is the least developed part of the economy probably, because of
the strong, pervasive prejudice against the middleman.
 Marketing would make the producers capable of producing marketable products by
providing them with standards, with quality demands and with specifications for their
products.
 Marketing is the most easily accessible, "multiplier" of managers and entrepreneurs in an
"underdeveloped" growth area and they are the critical needs of these countries.
 Marketing can covert latent demand into effective demand. It cannot by itself, create
purchasing power, but it can uncover and channel all the purchasing power that exists. So it
can create conditions for higher level of economic activity in the developing countries.
 Marketing in a developing country is the 'developer of standards' for product and services as
well as of conduct, integrity, reliability, foresight and of concern for the basic long-range
impact of decisions on the customer, supplier, economy and the society.
 Whether the economy developed or developing is immaterial as far as marketing is
concerned because the basic functions of marketing (buying, selling, transporting , storing,
grading, financing, risk bearing and marketing information ) and the utilities (Time, Place
and possession utilities) created by them are a necessity for any social system.
 Marketing provides wide employment opportunity.
Different Marketing methods:-
1. Sale Under Cover of a cloth:
Under this method of sale, the prices of the products are settled through a transaction, which is
done under the cover of a cloth. A given price is fixed between the buyers and the commission
agents (of the seller) by pressing the fingers of each other, for which code symbols are
arranged. This practice is continues till an acceptable price is settled. The highest bidder is
privileged to buy the produce, and this price is conveyed to the buyer by the commission
agent. Sometimes the price that is finally settled may not be the highest one though
theoretically it is claimed as the highest one. Although this method has severe drawback that
actual price is not let known to the seller and this method of sale is legally not permitted, still
found in some markets.
2. Sale Through Negotiations
This is a method, which facilitates direct contact between the buyers and sellers. The seller
approaches the buyer with a sample of the produce proposed to be sold. The buyer quotes the
price, if he is satisfied with the quality and if the seller accepts the price, the deal is completed.
The sellers get advantage here, as he is in a direct contact with the buyer.
3. Sales Based on Samples
In this method, commission agents approach the buyers with the sample of the lots proposed to
be disposed. The commission agents go round the shops of the buyers and produce is offered
to that buyer, who offered the highest price per unit of the produce.
4. Morghum Method
A common method of sale found in villages when the farmers borrow funds from local money
lenders. The transactions are effected based on the oral agreement that is made between the
buyers and sellers. In these transactions harvest price is the selling price. It is a common
method of sale found in villages.
5. Open Auction Sale
This is the method, which prevails in most of the regulated markets. The prospective buyers
examine the lots of the produce kept for sale and offer their bids openly. Highest bidder has

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 the right to take the possession of the commodity, provided the price offered is acceptable to
the seller.
6. Closed Tender System
This is more or less, the same as that of the open auction system except that the bids are
offered in the form of closed tenders. This method is followed in some regulated markets. The
lots of produce that are kept for sale at display units are given lot numbers. The prospective
buyers inspect the lots and offer their prices on a slip of paper and put in a sealed box kept for
that purpose. When all the buyers complete their turn the slips deposited in the sealed box are
taken out and arranged according to the lot number. Highest bidder has the right to take the
possession of the produce in the lot. How well this type of sales is conducted depends upon the
efficiency with which the officials of the markets conduct this method of sale.
7. Vendor
8. Street peddler
9. Exhibition/Fair/Haats/Sandies etc.
Marketing channels:
Marketing channel can be defined as path through which a product moves from producer to
consumer. The livestock commodities move from the livestock owners to consumers over time.
This movement is made possible through various market intermediaries that operate in the
marketing system. The chain of intermediaries through which the various farm commodities pass
between producers and consumers is called marketing channels. Marketing channels differ from
commodity to commodity. Marketing channels of food-grains are different from those of
livestock, and livestock products and those of processed products. Also the selling behaviour of
small livestock farmers do vary against the large farmers. The development of market for the
products brings in the changes in the length of the marketing channels. Hence a short channel of
distribution will be an effective tool to reach the target consumers. However, distribution of
products having lower unit value and high turn over like eggs involves a large number of
middlemen. There are mainly two types of marketing channel i.e Organized and Unorganized.
Organized marketing channel involve participation of government institution or co-operative
federation. E.g Co-operative Milk Producer’s Federation. It is basically a service motive
organization where consumer price will not have any violent fluctuation. Unorganized marketing
channel has much participation of private traders having profit motive e.g. Private milk vendors.
Following are the some of the channels for selected livestock commodities.
eg. Marketing channels for eggs
Producer

Poultry marketing centre Local wholesaler

Retailer

Consumer
eg. Marketing channels for Milk
Producer
Vendor
Milk Co-operative Society

Local Consumer

Milk Supply Union

Urban Consumer

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MARKETING OF LIVESTOCK AND LIVESTOCK PRODUCTS:
Perishable Goods:
 Marketing of livestock and livestock products is different from manufactured or industrial
goods.
 Most of the livestock products are perishable in nature and the period of perishability varies
from a few hours to few months.
 Most of the farmers are landless, marginal or small. Therefore the produce of individual is very
less.
 Lastly, most of the farm products are processed before they are used, purchased and consumed
by the ultimate consumers.
 Selling of perishable products like fruits, vegetables, and livestock products (milk, meat, and
egg) require fast movement of the commodities from the producers to the ultimate consumers.
Non-Perishable Goods
 Non-perishable goods are goods that can be used again and again in the process of production.
They are tangible goods that normally survive many uses. They don't loose their utility or
shape after their first use.
 They continue to provide utility over a long period of time, of course their utility over a long
period diminishes in value and utility.
 Example factory buildings, machines and equipment are durable. Refrigerators, machine tools
and clothing are non perishable.
 Non perishable goods normally require more personal selling and services command a higher
margin and require more seller guarantees.
 The perishable goods as used for the smaller period of time are not having any guarantee.
 Whereas the Non perishable goods are usually provided with guarantee period. They can
classified as Durable (TV, Refrigerator) and Industrial goods (Milking Parlour, Feed Mill,
Machines in Automobile industry, etc).
PROBLEMS IN LIVESTOCK AND LIVESTOCK PRODUCT MARKETING:
Lack of producer's organization
 The farming community is more or less disorganized at the village level.
 Except for a few, till now no such organization has developed which may prove a sound
basis for strengthening the bargaining power of the farmers.
 An individual deals in his own product, he sells his surplus produce in the village or at
the primary market level with his low bargaining power and hence, he is always at a
disadvantage against the organized trading community.
Forced sale
 In a country like India, majority of subsistence producers are compelled to sell their
produce immediately after harvest in order to meet the pressing claims of their lenders
even if the prices are not remunerative.
 Most producers sell their product, repay debts, face a shortage, and fall in debt again.
Thus they sell to repay debt only to fall in debt again.
Superfluous middlemen
 Since the farmer sells a substantial portion of his surplus produce in the village and
nearby markets, there is always intervention of a number of middlemen between him
and the consumer and naturally share of the consumer's price received by the producer
is reduced.
Malpractices in the market
 Malpractice arises on account of multiplicity of market charges, spurious deductions,
unfair weighment and undesirable mode of sale.
 Weight and scales are manipulated against the seller.
 There are all kinds of arbitrary deductions for religious and charitable purpose.
 The burden falls entirely on the seller and he has no effective means to protect himself
against such practices.
 Some quantity is taken away from the producer's produce as sample.
 This varies from produce to produce. The producers are not paid for this even when no
sales are effected.
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Absence of grading and standardization and inadequate storage facilities
 Many state governments have not so far prescribed grades and standards for many
livestock products.
 A good number of farmers have little knowledge of grading their produce and usually
mix up good and bad quality product into a single lot which secures them a lower price
for their produce in the market.
 There is general inadequacy of good storage facilities both in urban as well as in rural
areas.
 The indigenous methods of storage adopted in village do not adequately protect the
produce.
 As a result, physical losses go on increasing if the period of storage is lengthened.
Undeveloped modes of transportation
 Without a good transporting system, no individual will have the incentive to produce or
to purchase more than minimum.
 Unless it is reasonably convenient for the farmer to exchange his surplus produce for
consumer goods or farm production requisites, he is lacking an important incentive to
exploit the full potentials of his animals.
 Lack of an efficient transport network is the real limiting factor in the attempts to
increase livestock production in our Country.
Variability in Output
 The quantity of farm products available depends upon several factors.
 With the gambling nature, one cannot forecast the quantity of products that would be
produced as livestock production is mainly biological depending on weather, rainfall etc
for its main inputs like feed, fodder etc.,
Seasonality in production
 Much of farm production is highly seasonal. The production varies from one season of
the year to another.
 Hence, storage facilities must be made ready to hold the product until it is consumed.
 This seasonality in production thus, raises costs of marketing through demand storage
facilities.
 The seasonal variability in production of items like milk, egg, butter etc is not as acute
as it used to be a few years ago.
 The widespread use of rapid transportation and refrigeration has tendered to reduce the
seasonality.
Raw materials
 Farm output which mainly sold in the farm of raw materials is used subsequently for
processing.
 Sugarcane is to be converted into sugar, oils seeds into oil, animals in to meat, wool in
to cloth before all these are used for consumption.
 Hence the raw materials produced by the farmers are to be processed at once stage or
the other before final consumption.
Perishability
 In relation to other products, agricultural products by nature are perishable. All products
ultimately deteriorated.
 Eggs, mutton, and milk must move into the place of consumption very quickly,
otherwise they would completely lose their value.
 These perishable products require speedy handling and often-special refrigeration,
which raises the cost of marketing.
Others
 The differences in variety, colour, palatability, nutritive value, size, quality etc. of the
products are the other determinants of a good market for these products.
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TOPIC - 16
Merchandising – product planning and development
Merchandising
 It is the barometer of efficiency in buying and selling and it is closely related to several
aspects of buying and stock management.
Product Planning and Development
 Product planning covers a broad area of decisions including product-line planning,
introduction of new products, deletion of the product from product-line, product
modification, packaging, labelling, branding etc.,
 Alternative growth stages
 Marketers have four alternative ways for growth in sales and profits
o Market penetration
o Market development
o Product development and
o Product diversification.
 New product development process
 Most of the successful companies employ one or more of the following alternatives in
locating organizational responsibility for new product development.
o New product committees / departments
o Product mangers/ venture teams.
 There are seven stages for new product development process such as Idea generation,
Screening, Concept development and testing, Business analysis, Product development,
Test marketing and Commercialization.
 Product Development programme
 This is an important stage in atleast three ways i.e.
o It marks the first attempt to develop the product in a 'concrete form'
o It represents a huge investment for developing a technically feasible product.
o Lastly, it provides an answer as to whether the product idea can be translated
into a technical and commercially feasible product.
 Primarily there are four steps involved in the product development stage: (i.e)
Engineering, Consumer testing, Branding and Packaging.
 Other activities involved in the product development stage are
o Formulation of preliminary advertising and promotion programme,
o Trade merchandising programme,
o Application for patent and copy rights etc.
 Systematic planning of all phases of new product development and introduction can be
accomplished through the use of such scheduling methods as the
o Programme Evaluation and Review Technique (PERT) and
o Critical Path Method (CPM)
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TOPIC - 17
Marketing functions: Exchange functions
Marketing function:
A marketing function may be defined as a specialized activity performed in accomplishing
the marketing process. Marketing facilitates the transfer of ownership of the products from the
producers to the consumers. In the transfer of ownership from the producer to the ultimate user,
several activities are performed. These activities are known as marketing functions. Marketing
function encompasses the broad functions of concentration and dispersion. Marketing functions
vary for different commodities. Marketing functions of cereals and pulses vary from that of milk
and eggs. For the same commodity, the farmer may sell part of the commodity directly to the
consumer and rest of the product may be transported to the nearby markets.
The marketing functions are classified into three categories:
o Exchange function
o Physical functions
o Facilitative functions
EXCHANGE FUNCTIONS:
Exchange functions are those activities involved in the transfer of ownership of goods.
Buying and selling are the complementary functions around which all marketing efforts revolve
and they are basic to the entire marketing process. These buying and selling functions are
associated with demand creation and price determination functions of marketing.
1. Buying:
Buying activities include a careful determination of needs, the selection of proper sources
of supply, the testing of the suitability of the goods available, negotiations concerning price, and
other similar matters and transfer of title from the seller to the buyer. Here buying refers to buying
of goods by manufacturers, middlemen or retailers for resale and not buying of goods by
consumers for consumption. Important feature here is that the buying must be at the right time, in
right quantity, of right quality, at the right price, from right place or source.
Buying involved several steps:-
 Decision regarding the type, quality, quantity, time, source, mode of purchase etc.
 Preparation of list of goods to be purchased
 Selection of suppliers.
 Negotiations with the supplier regarding term of sale, mode of delivery, terms of
payments, concessions if any etc.
 Placing of purchase orders with the suppliers.
 Following up of the purchase order to expedite the prompt delivery of the goods ordered.
 Receipt of goods
 Inspection and approval of goods and making of payments for the purchase.
Following are the sub-functions of buying:-
a. The function of planning the purchases:- The buyers must plan their needs and undertake
the purchases. Also the buyers should survey their own markets to identify the quality and
quantity of the goods that are required.
b. Contractual function:- It is the identification of the sources of supply to conform the
suppliers of a commodity so that the flow of supplies can be made continuous to the market.
c. The function of negotiation:- It refers to discussion of exchange of ideas that take place
between buyers and suppliers regarding terms of purchase, quantity to be bought etc.
2. Selling:-
Selling is the process of finding the buyers and convincing them to buy the product at a
price that is satisfactory to both sellers and buyers. It involves the transfer of ownership as well
as physical transfer of materials from the seller to buyer and the buyer in turn making payments
to the sellers on terms agreed mutually.

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 Sub-functions of selling includes:-
a. Product planning and development:-The needs of the consumers should be taken into
consideration in selling. We identify that product which is required by the buyer and sell the
same.
b. Contractual functions:- It involves identifying the potential consumers for the product and
initiating and maintaining contacts with them for selling the commodity.
c. Demand creation:- Once the potential consumers identified we introduce various sales
techniques to stimulate them so that the desired sales target can be achieved.
d. The functions of negotiations:- Some important factors to be considered at the time of
selling are quality and quantity of the commodity proposed to be transacted, time of transfer,
particulars of packing, mode of payment etc. These should be well negotiated to avert any
future conflicts between the buyers and the sellers.
3. Demand creation:-
When commodities are basic requirements of the consuming section, the demand is automatically
created. The need of demand creation arises for those products with which the consumers are not
familiar and they are likely to consume by an act of persuasion, highlighting the merits of the
products through personal approach of the salesmen, advertisement, through various mass media
like newspapers, posters, leaflets, radio, television etc. Besides sellers resort to sales promotion
activities like distribution of free samples, price discounts, exhibitions, sales by instalments etc.
4. Price determination:-
In the marketing system all the participants who help the movement of the products to the ultimate
consumers should be rewarded. This is possible by pricing the products at various stages, as they
move from the farmers to the consumers. Prices are determined by the aggregate forces of demand
and supply in a market; while prices are discovered at each stage in the marketing channel i.e.
market intermediaries discover the prices based on the availability of the commodities and the
demand for the commodities from the buyers at each stage. The prices that are discovered
facilitate to clear the supplies at each stage so that the distribution of the commodities flows
smoothly among the persons who need them.
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TOPIC - 18
Marketing functions: Physical functions
PHYSICAL FUNCTIONS: includes following functions -
1. Grading
2. Transportation
3. Storage and warehousing
4. Packaging
These are essential to the main functions of marketing (Assembling, Processing and Dispersion).
1. Grading:
Grading means the sorting of produce into different lots having the same characteristics
with respect to quality specifications. It is the process of dividing the lots of commodities with
already set standards. For example poultry eggs weighing 60 gms and above, 53-59 gms, 45-52
gms and 38-44 gms are graded as extra large, large, medium and small eggs respectively.
Marketing is accomplished in a better way and in more profitable lines when the products
are subjected to certain standards and separation of lots is done on the basis of set standards. This
will help in fixing price on what standard the product has. Grading acts as an incentive to produce
a better quality product. Hence there is no extra effort needed to ensure the quality of the product.
Grading ensures a wide market for the product. Consumers will be greatly benefited, as price paid
is in commensurate with the quality of the product. Also, they have the choice of picking the
goods from various alternative grades available in line with the prices fixed.
Standardizing and Grading imply setting up of the basic measures which the goods
must conform.
2. Transport:
This function is primarily concerned with making goods available at the proper place
resulting in creating place utility of the products. The products, rights from farmer’s fields to the
ultimate consumers are moved through transportation. The spatial variations in livestock
production need the movement of the commodities from the places of surplus production to the
places of deficit production. Besides, the output produced in an area cannot be consumed there
only. It needs transportation. As livestock products are highly perishable it is imperative that these
products have to be transported as quickly as possible from the place of production to the place of
processing or consumption. For example, fluid milk has to be transported from the procurement
centres, which is usually situated at the village level to a district level processing centre. Such
transportation may be effected through road, rail or air etc. Often these transport modes are
equipped with refrigeration and cold storage facilities to prevent spoilage during transit.
Transportation is necessary for providing goods to the consumers in time and also to explore
marketing opportunities in faraway places. Transportation helps in development of markets,
reduction in spatial price differences, provision of employment etc.
3. Storage and warehousing:
The term storage or warehousing refers to keeping or holding a product and preserving it
for some time. Storage creates time utility. Seasonality of production is a specific characteristic of
agricultural and livestock products. On the other hand, consumption of the products is regular and
continuous. This un-matching situation requires the need of storing the commodities after harvest
to make them available throughout the year.
The following are some of the reasons why storage is done:
o To even out the seasonal fluctuation in production
o To lengthen the shelf life of the farm products which are mostly perishable
o To improve the quality as well as the value of the products.
Storage is accomplished by chemical methods or through refrigeration etc. Storage is
involved at various stages in the marketing. Producers, who can afford to sell the produce at a later
date, store the produce. The middlemen in the process of buying and selling activity also store the
produce to take advantage of the market situation. The consumers, who can purchase the
commodities in bulk, when the prices are on the lower side, also go for storage. Though the
commodities are stored to take the price advantages by all those concerned, storage is associated
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with risks as well. The sources of risks are spoilage, moisture loss, damage due to pests, rodents
etc.
4. Packaging:
Packaging is the technology of enclosing or protecting products for distribution, storage, sale, and
use. To make the products move from farm gate to merchants and finally to different users, some
kind of packaging is essential. eg. Packing of milk products in boxes, milk in sachets/glass bottles,
fish in baskets etc. It facilitates easy handling, reduces spoilage, ensures cleanliness, reduces
marketing costs, prolongs storage life etc.

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TOPIC - 19
Marketing functions: Facilitative function

Facilitative functions:
There are other functions to facilitate functions of exchange and physical distribution of
marketing.
 Standardization
 Financing
 Risk bearing
 Market information
1. Standardization:
Standardization precedes grading. A standard specifies what basic quality a product must
have to be consistent with the established characteristics. The characteristics based on which the
standards are determined are: shape, size, colour, weight, flavour, composition etc. For example,
milk has its standards fixed on the basis of percentage of fat and percentage of solids not fat.
Similarly eggs are standardised on the basis of weight of the eggs. Wool standards are fixed on the
basis of colour, fineness, length and curliness or crimp of wool fibre. Pyle has defined
standardization as “the determination of the basic limits on grades or the establishment of model
processes and methods of producing, handling and selling goods and services.”
2. Financing:
Finance is as necessary in marketing as in production of goods or services. If necessary
finance is not managed at cheaper interest rate, functions of marketing cannot be run smoothly.
Finance is necessary in the marketing for different reasons. For example, arrangement of adequate
finance should be made to meet different expenses before selling the products, to meet the changes
in fashion and interest, to meet competition in market and changes in demand and meet the
ensuing decline in price. Finance is also necessary for storing and transporting goods.
Arrangement of adequate finance should be made to face any problem arisen from uncertainty of
price, from credit sale, etc.
3. Risk bearing:
Persons carrying out business, have to bear the risk whenever losses occur. These losses
occur due to various reasons. It may be due to sudden fall in the prices or due to destruction of
products by way of accidents involving fire, natural calamities like floods, hurricanes, heavy rains
etc. Fall in price and changes in consumer demands are called ‘market risks’. And risks occurring
due to natural calamities like rain, flood, fire etc. are called ‘physical risks’. Physical risks may
also arise due to thefts. Government policies like movement restrictions or imposing levies etc.
bring losses to the marketers called ‘institutional risks’. Physical risks are covered through goods
insurance offered by insurance companies. Market risks may be minimised by intelligent
forecasting based on market information, intelligence and wide experience.
4. Market information:
Market information: It is the job of collecting, interpreting and disseminating large variety of
data which are needed for the smooth operation of marketing processes. It includes all the facts,
estimates, opinions and other information which affect the marketing of goods and services
(Tousely, 1968). This information is of great importance to the farmers, merchants and
Government as well. Price information is very vital for farmers in their decision of timing the
sales. Merchants require market information to carry on their routine transactions like buying,
storing and selling. This information facilitates them in planning their strategies like quantities to
be purchased, quantities to be sold immediately and quantities to be stored in the market, where
they should plan their sales etc. Government too needs this information to keep an eye on the price
trends and for market intervention, maintenance of buffer stock etc. Market information
constitutes market news and market intelligence. Market news is the present information on
prices of the commodities, market arrivals, stock, directions of outflows etc. The availability of
market information helps the farmers to plan their sales. Timely availability of this information is
of utmost importance. Market intelligence is the a continuous study of market behaviour with

Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 83

reference to price trends, arrival over time, stocks over time, outflows over time etc. Based on the
available information one can peep into the future to know the price trends, supply and demand
situation etc. market intelligence is a process of formulating an intelligent marketing strategy
based on the vast executive experience, available market information, and marketing research.
The sources from which one cat get the market information are news papers, bulletin of
agricultural prices (weekly), Agricultural situation in India (monthly), Agricultural prices in India
(annual) etc. and the reports of the Bureau of Economics and statistics, the Directorate of
Marketing and Inspection (DMI), the Directorate of Economics and Statistics, regulated markets
etc. The Directorate of Economics and Statistics and concerned state marketing departments
collect data regarding (a) quantity of various products produced in different areas (b) quantities of
products held in storage (c) arrivals in various markets, (d) prices prevailing in local, regional,
national and international markets. The informative data so collected is disseminated through
radio, television, news papers, weekly and monthly bulletins. Daily prices are published in most
the newspapers. The informative marketing data is also collected through sales executives and
from those personnel who are specially appointed as specialists by various trading firms.
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Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 84

TOPIC - 20
Market opportunities
Introduction:
Every producer or a trader ultimately aims at marketing his product to earn good profits.
For profitable marketing to happen there has to be enough environment, consumer base, efficient
distribution system, willingness of the consumer to spend for a certain product, encouragement by
the state and central governments, enough per capita incomes etc. All these activities which create
a potential for profitable marketing constitute marketing opportunities. In this context one can say
countries, which have high per capita income like USA, Canada, England etc.have a bigger
consumer base. Of late India and China have emerged as the consumer giants and together they
may provide one of the biggest marketing opportunities in the world. This is particularly so as
these countries once looked down as poor countries are now emerging as consumer giants because
of increasing per capita income.
Indian market is endowed with a traditional yet efficient distribution system spread over
the whole of the country down to village level. This system has wholesalers, semi wholesalers,
retailers, selling agents, commission agents and brokers. India has one of the best economical
distribution systems in the world. There is both public distribution system and private distribution
system for channelizing various commodities to consumers. The ownership of public distribution
system is vested with cooperatives, state and central governments, whereas the ownership of
private distribution system is vested with private individuals and companies. Now there is a good
competition between public and private distribution systems, which has resulted in the consumer
getting commodities and services at an advantageous price and quality. The public distribution
system particularly takes care of the economically weaker section of the society by giving them
certain essential commodities at subsidised rates, thus fulfilling the obligation of social justice.
But by and large one can say that in India now exists a free market as most of the restrictions on
trading various commodities have been removed due to the government’s policy of liberalisation,
globalisation and privatisation.
While there is great opportunity for the Indian trader to move the markets in the Indian
urban areas, the rural market also has tremendous opportunity. With the advent of TV, Radio and
other media entering every nook and corner of the village and with that the advertisements
reaching the vast population of the country a wide market for consumer products has been created.

Market Opportunities:
Companies must look internally for strength and weakness and externally to the environment
for opportunities and threats. Most opportunities and threats evolves from
 Changes in the demographic, economic, political, legal and cultural environment.
 Change in the competitive environment, such as a technological break through by a
computer.
 Events that may or may not be under the company's control such as strike by the work
force or a serious fire in an industrial plant.
o New market opportunities are determined by discovering customer groups with
unmet needs.
o The new market opportunities arise for a variety of reasons in industrialized
societies. One is geographical mobility.
o People live where they did not live before and thus create new markets.
o The aggressive business firms recognize these new markets and build new super
markets, new discount houses etc.
o Another source of new market is social mobility.
o As people become more educated and acquire more sophisticated social
environment their interest change frequently resulting in markets for new products.
o Yet another cause of new market is psychic mobility, when people change the
conception of themselves and their environment along with physical and social
mobility.

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Consumer behaviour:
 Consumer behaviour refers to those acts of individuals directly involved in obtaining
and using economic goods and services, including the decision processes and
determines these acts.
 Consumer behaviour may be analyzed from the 3 principal angles as detailed below :
 Steps in the buying process
 Broadly, a buying decision involves the following steps/stages
o Decision that there is a need for a product
o Pre-purchase search about its relevant particulars
o Analyzing the importance of different factors involved (i.e.) price, utility,
durability and the like,
o Weighing the pros and cons of alternative products
o Selection of the best available product in the context
o Use of the product and
o Post use review
 Role of individuals in the buying process
 There are five different roles that persons play in a buying decision process.
o Initiator: The person who first suggests or thinks of buying the particular
product.
o Influencer: A person who explicitly /implicitly carries some influence on the
final decision.
o Decider: A person who ultimately determines any part or the whole of the
buying decision -Whether/What/ How/ When/ Where to buy?
o Buyer: The person who makes the actual purchase.
o User: The person (s) who consume or use the product or services
 Determinants of buyer behaviour
The buying behavior of consumer is affected by a number of factors which are generally
uncontrollable.
I) Cultural factors:-
1) Culture: It is the family values, beliefs, perceptions and preferences affect the consumer
buying behavior.
2) Subculture: It include nationality, religious group, and communities etc. which affect the
consumer behavior.
3) Social class: The members of different social class have different likings.
II) Social factor:-
1) Family: the members of family also affect the buying behavior of consumer. Family
includes of Influencer ( the person who senses the need to buy a product), Decider (the person
who takes final decision to buy the product) and User (the person who finally uses the
product).
2) Reference group: The group outside the family also affects the consumer behavior. It
includes the persons with whom we interact like friends, neighbours, co- workers etc.
3) Role and status: Like a person plays the role of son, husband, brother, father, businessman
etc. in his life. So the consumer buying behavior depends upon the role played by him.
III) Personal factors:- Age, occupation, income, life style etc also affect consumer
behaviour.
IV) Psychological factors:- Consumer behaviour also affected by motivation, perception,
attitude etc.
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Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 86

TOPIC - 21
Import and export of animal and animal products
 India is known for its livestock wealth and ranks high among the nations having bovine
population.
 However, despite having huge livestock population, India stands insignificant in the
world trade of livestock products.
 The recent concerted efforts made by the government in the era of liberalization after
opening up of the national economy to the international market have certainly boosted
India’s export trade of livestock products to newer heights.
 The dairy industry of India is already at a take-off stage and the entry of the corporate
sector following the liberalized policies of government is bound to complement the
efforts of National Dairy Development Board (NDDB) to usher in a white revolution.
 The most important achievement of the dairy industry is the near-self sufficiency in
milk production.
 Nonetheless, the possibility of India emerging as a potential exporter of various
livestock products will largely depend on India’s own ability to exploit her potential in
this sector and generate exportable surplus of these commodities, aside her competitive
strength in the world market.
VALUE OF IMPORT OF LIVESTOCK AND LIVESTOCK PRODUCTS DURING
1997-98 to 2002-03.
( Rs. million)
Broad Groups 1997- 1998- 1999- 2000- 2001- 2002-03
98 99 2000 01 02
Livestock 28 14.7 18.8 13.5 17 36.5
Meat and Edible Meat Offals - 0.3 2.6 4.3 5.9 3.7
Dairy and Poultry Products and 300.2 424.3 1811.3 535.7 393.1 946.9
Honey
Animal Fodder and Feed 413.5 499.4 668.5 818.5 1227.7 12941.37
Leather 5343.1 6142.1 6587.9 8730.6 10330.2 9735.2
Raw Wool and Animal Hair 6127.7 4979.9 4969.4 4686.8 6339.3 8957.3
All Groups (Total) 12212.5 12060.7 14058.5 14789.4 18313.2 32620.97
Source - Directorate General of Statistics & Commercial Intelligence, Calcutta , (DGCIS,
Calcutta )

Import of livestock and livestock products by India in 2010-11

S.N. Commodity Quantity (MT) Values (Lac)
1 Milk and cream 2062 2958.83
2 Swine meat 1115350 1050.94
3 Processed meat 3366163 2104.86
4 Animal casings 1809425 3514.92
5 Poultry products 619150798 30132.73
6 Sheep and goat meats 11908384 25318.88
7 Buffalo meat 709437485 841268.61
8 Dairy products 36867375 53389.41
(Source: www.apeda.gov.in)

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Import of Livestock Products
 Livestock products include meat and meat products of different types that comprise fresh,
chilled and frozen meat as well as tissue or organs of poultry, pig, sheep and goat.
 It also consists of egg and egg powder; milk and milk goods; pet foods of animal origin
and embryos, ova or semen of cows, sheep and goats.
 No livestock product may be imported into India without a valid sanitary import permit.
PROCEDURE FOR IMPORT OF LIVESTOCK PRODUCTS INTO INDIA
 All live-stock products shall be imported into India subject to the following conditions,
namely:
 No live-stock product shall be imported into India without a valid sanitary import
permit issued under clause (3).
 All applications for a permit to import consignments by land, air or sea shall be made in
either Form A (Application For Permit To Import Live-Stock Products For Personal
Consumption) Or Form B(For Trading / Marketing ) whichever is relevant, and sent in
triplicate to the Joint Secretary, Trade Division, Department of Animal Husbandry and
Dairying, Ministry of Agriculture, Government of India .
o The sanitary import permit shall be issued for import of livestock products if,
after a detailed import risk analysis, the concerned authorities are satisfied that
the import of the consignment will not adversely affect the health of the animal
and human populations of this country.
o The import risk analysis shall be conducted by the concerned officers of the
Department on the basis of internationally recognised scientific principles of
risk analysis and the analysis shall be conducted with reference to the specific
product and the disease situation prevailing in the exporting country vis-a-vis
the disease situation in India .
o The issue of permits shall be refused if the results of the import risk analysis
show that there is a risk of the specific product bringing in one or more specific
diseases, which are not prevalent in the country and which could adversely
affect the health and safety of the human and animal populations of this country.
o The import permit shall lay down the specific conditions that will have to be
fulfilled in respect of the consignment, including pre-shipment certifications and
quarantine checks.
o The permit shall also specify the post-import requirements with regard to
quarantine inspections, sampling and testing.
o The import permit issued under this clause shall be valid for a period of six
months, but can be extended by the concerned authority for a further period of
six months, on request from the importer and for reasons to be recorded in
writing.
 All livestock products shall be imported into India through the seaports or airports
located at Delhi, Mumbai, Kolkata and Chennai, where the Animal Quarantine and
Certification Services Stations are located.
o On arrival at the entry point, the livestock product shall be inspected by the
Officer-in-charge of the Animal Quarantine and Certification Services Station or
any other veterinary officer duly authorised by the Department Of Animal
Husbandry and Dairying, wherever required, in accordance with the specific
conditions laid down in the sanitary import permit and with general guidelines
issued by the Department of Animal Husbandry and Dairying from time to time.
o After inspection and testing, where-ever required, the concerned quarantine or
veterinary authority shall accord quarantine clearance for the entry of the
livestock product into India or, if required in public interest, order its destruction
or its return to the country of origin.
o Where ever disinfection or any other treatment is considered necessary in
respect of any livestock product , the importer shall, on his own or at his cost
through an agency approved by the Department of Animal Husbandry and
Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 88
 Dairying, arrange for disinfection or other treatment of the consignment, under
the supervision of a duly authorised quarantine or veterinary officer.
 It shall be the responsibility of the importer.
o To bring the livestock product to the concerned Animal Quarantine &
Certification Services Station, or to the place of inspection, disinfection or
treatment or testing as directed by the Quarantine or veterinary officer duly
authorized on this behalf;
o To open, repack and load into or unload from the Animal Quarantine Station
and seal the consignment; and
o To remove them after inspection and treatment or testing, according to the
directions of the Quarantine or veterinary officer duly authorized by the
Department.
 The Central Government may, in public interest, relax any of the conditions specified
under this Schedule relating to the permit in relation to the import of any live-stock
product .

VALUE OF EXPORT OF LIVESTOCK AND LIVESTOCK PRODUCTS DURING 1997-

98 to 2002-03
( Rs.million)
Broad Groups 1997-98 1998-99 1999- 2000-01 2001-02 2002-03
2000
Livestock 13.3 47.5 58.9 76.3 90.41 62.82
Meat and Edible Meat Offals 8022.9 7721.3 7964.3 14568.6 11828.4 13575.5
Dairy and Poultry Products and 1155.5 859 1142.9 2081.6 3524.8 3567
Honey
Animal Fodder and Feed 653.06 671.5 418 543.6 973.2 322.41
Leather 11006 11292.7 10384.1 17455.7 21971.4 24705.4
Raw Wool and Animal Hair 64.11 63 38.7 34.2 18.8 22.8
All Groups(Total) 20914.87 20655 20006.9 34760 38407.01 42255.93
Source - Directorate General of Statistics & Commercial Intelligence, Calcutta , (DGCIS,
Calcutta )

EXPORT PROCEDURE:
 Certain documentation takes place while exporting from India. Special documents may be
required depending on the type of product or destination.
 Certain export products may require a quality control inspection certificate from the Export
Inspection Agency.
 Some food and pharmaceutical product may require a health or sanitary certificate for
export.
Shipping Bill/ Bill of Export is the main document required by the Customs Authority for
allowing shipment.
 Usually the Shipping Bill is of four types and the major distinction lies with regard to the
goods being subject to certain conditions which are mentioned below
 Export duty/ cess
 Free of duty/ cess
 Entitlement of duty drawback
 Entitlement of credit of duty under DEPB (Duty Entitlement Pass Book) Scheme

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 The following are the documents required for the processing of the Shipping Bill:
 GR forms (in duplicate) for shipment to all the countries.
 4 copies of the packing list mentioning the contents, quantity, gross and net weight of each
package.
 4 copies of invoices which contains all relevant particulars like number of packages,
quantity, unit rate, total f.o.b./ c.i.f. value, correct & full description of goods etc.
 Contract, L/C, Purchase Order of the overseas buyer.
 AR4 (both original and duplicate) and invoice.
 Inspection/ Examination Certificate.
The formats presented for the Shipping Bill are as given below:
 White Shipping Bill in triplicate for export of duty free of goods.
 Green Shipping Bill in quadruplicate for the export of goods which are under claim for duty
drawback.
 Yellow Shipping Bill in triplicate for the export of dutiable goods.
 Blue Shipping Bill in 7 copies for exports under the DEPB scheme.
 Documents Required for Post Parcel Customs Clearance
 In case of Post Parcel, no Shipping Bill is required. The relevant documents are mentioned
below:
Customs Declaration Form
o It is prescribed by the Universal Postal Union (UPU) and international apex body
coordinating activities of national postal administration. It is known by the code number
CP2/ CP3 and to be prepared in quadruplicate, signed by the sender.
 Despatch Note, also known as CP2. It is filled by the sender to specify the action to
be taken by the postal department at the destination in case the address is non-
traceable or the parcel is refused to be accepted.
 Prescriptions regarding the minimum and maximum sizes of the parcel with its
maximum weight Minimum size: Total surface area not less than 140 mm X 90 mm.
Maximum size: Lengthwise not over 1.05 m. Measurement of any other side of
circumference 0.9 m./ 2.00 m. Maximum weight: 10 kg usually, 20 kg for some
destinations.
Commercial invoice
 Issued by the seller for the full realisable amount of goods as per trade term.

INTERIM GUIDELINES FOR IMPORT OF BOVINE GERMPLASM

 The import and export of the cattle/ buffalo germplasm is under restricted list and is
allowed against the license issued by Directorate General of Foreign Trade, Ministry of
Commerce on the recommendation of this Department.
 Introduction of temperate dairy breeds in the country for cross-breeding indigenous non
-descript cattle has been accepted for quite some time now.
 In pursuance to this, the need has been felt by number of State Governments/
Organisations to import exotic germplasm to produce the quality cross-bred animals.
 With the extension of the breeding programme and the artificial breeding network, a
surge in the demand for the exotic germplasm is also expected.
 There is a definite demand for the germplasm of Indian breeds of cattle and buffalo, in
South America, South Asia and other countries. Keeping in view our responsibility
towards conservation of the rich diversity, it is important to broadly categorize the
germplasm of cattle and buffalo meant for breeding purposes and further for the export
purposes.
 Imposing a complete ban on the export of Indigenous germplasm because of
conservation concern would actually be counterproductive.
 Such a ban will only encourage the flow of germplasm through illegal trade and in a
country with such huge land border it will be impossible to control such flow through
illegal trade.
 It can be used for the up gradation of the indigenous stock.

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 o Accordingly, it has been felt that some guidelines should be put in place for
processing such applications for import and export of germplasm.
o Interim Guidelines for export /import of bovine germplasm
Guidelines for the Import of bovine germplasm
 Import of live animals (bovine) and bovine germplasm will be permitted for breeding
purpose only.
 Eligibility of Importers
o The institutes/Organizations capable of keeping and maintaining the
performance records 'of exotic germplasm should only be permitted to import
bovine germplasm and these institutions will be evaluated by the Department of
Animal Husbandry. Dairying and Fisheries (DADF) for grant of permission.
o Complete genetic and production data /information with respect to the
germplasm should be submitted to this Department before the actual imports.
o Post import information from the date of import to the date of disposal in
prescribed proforma must be maintained and submitted to Department of
Animal Husbandry, Dairying and Fisheries and State Governments on six
monthly basis.
o The feeding schedule from the importing country should be supplied along with
other documents
o The import should be based on the fat % and lactation yield in addition to other
milk component character standards. The type evaluation should form the
integrated component of selection.
o The guidelines formulated by OlE, Codex Alimentarius and lETS should be
strictly adhered to while importing the genetic material.
o The pre and post import quarantine measures for live animals and germplasm
should be strictly adhered to according to GOI health protocols.
o The justifications for import and future roadmap for utilization of imported
germplasm should be supplied with other documents.
o No objection certificate from the concerned State Government should be
submitted before the actual imports.
 Screening Committee
o All the applications for the import of germplasm will be examined. by .the
Department of Animal Husbandry Dairying and Fisheries (DAD F).
 Veterinary Certificates
o The imports should be regulated as per the provision of Livestock Importation
Act, 1898 amended from time to time and as per the protocols/ veterinary
certificates
 Order of import
o For import of germplasm, the order of preference should be frozen semen,
frozen embryos, and live animals, which shall be based on the assessment of the
domestic requirement of bulls and bull mothers and their availability in the
country.
 Standards for Import of Germplasm
o Semen from progeny tested sires with +ve sire indices/breeding values (with
reliability of> 85%) should only be allowed for importation.
o The selection criterion for milk fat should be a minimum of3.5% in HF and 5%
in Jersey. Semen should be procured from the bulls with daughters average
lactation yield ( in 305 days) above 9000 liters in HF and 6000 liters in Jersey.
o Bulls should be improver for type characters like udder and feet conformation.
o Donor bull should be free from genetic disorders like bovine leukocyte adhesion
disease (BLAD), deficiency of uridine mono-phosphate synthetase (DUMPS),
citrulinemia (deficiency of argino-succinate synthetasea) and Factor XI

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 Embryos should be procured from the donor dams -HF with minimum lactation
o
yield of' l000 lts with minimum of 3,5% fat. Sire should be progeny tested with
sire indices/breeding value of higher order (with reliability of> 85%).
o Embryos should be procured from the donor dams- Jersey with minimum
lactation yield of 7000 Its with minimum of 5% fat. Sire should be progeny
tested with sire indices/breeding value of higher order (with reliability of>
85%),
o In case of import of indigenous germplasm, average of top 20% of genetic
material on current animal register of the exporting country shall be considered
for import.
o Import of germplasm of other exotic breeds will be allowed only for
experimental purpose subject to condition that the semen is from progeny tested.
o For import of live animals, Semen, Embryos of other bovine breeds, the DADF
shall consider and recommend case-to-case basis.
GUIDELINES FOR EXPORT OF BOVINE GERMPLASM
 Export of live animals (bovine) and bovine germplasm will be permitted for breeding
purposes only.
 The export of germplasm will be allowed subject to the fulfilment of following
conditions:-
o For export of’ germplasm, order '"of preference should be frozen semen, frozen
embryos and lastly live animals.
o Animal should conform to breed characteristics.
o Milk production records of breed averages will be considered during export of
live animals.
o However elite animals (top 20% of the production level) of each breed having
best milk product (on level should not be exported.
o The export component should not exceed 5% of animals of the concerned breed
estimated as qualified for export per year.
o However, export of live animals of some of the Indigenous breeds categorised
as threatened/ endangered shall not be allowed.
o Countries which are interested in importing bovine germplasm (live animals,
semen, ova, embryo and gonads) will provide their import policy documents and
health protocols to Govt. of India.
o The exporting agency from India will comply with the rules and regulations as
intimated by DADF.
o The export of germplasm (semen, ova & embryos) of all the breeds may only be
permitted to only those countries, which are willing to have similar
arrangements on reciprocal basis.
o The health certificate requested by the importing authorities will be provided by
the registered Veterinarian authorized by DADF.
o Exporting agency/ State Government will keep the detailed data on the exported
animals and shall regularly inform DADF.
o For export of Embryo/ ova, the collection and processing techniques as
stipulated under section 3.3 Appendix 3.3.1.1 to 3.3.1.13 and micro-
manipulation of the Bovine Embryos at Appendix 3.3.3.1 to 3.3.3.5 of the DIE
Terrestrial Anima1.Health code (2005). as amended from time to time may be
adhered to. ..
o Similarly the collection and processing procedure of semen as per section
3.2,Appendix 3.2.1.1 to 3.2.1.10 of the DIE Terrestrial Animal Health code
(2005) as amended from time to time may be complied.
o The animals with National Institute/NDDB, registered animals with CHRS or
State Government or Livestock Development Boards, shall be eligible for
Consideration for export of germ-plasm.

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 o Preferential treatment shall be given to the SAARC countries in terms of the
number of animals and breeds to be exported especially from Central Cattle
Breeding Farms (CCBFs). .
 Although India is a world leader in the production of Dairy Animal Products.
 India's exports of Animal products has increased from 1266333.38 MT with the value
of Rs. 4109.93 Crores in 2006-07 to 2101759.49 MT with the value of Rs.5104.63
Crores in 2007-08.
 India’s exports of poultry products has increased from Rs. 318.17 Crores in 2006-07 to
Rs 441.09 Crores in 2007-08.
 Birds, eggs, in shell, fresh, preserved or cooked constitute the largest segment with
about 50% share. Processed egg products accounted for about 48% of the exports.
 India's export of Buffalo meat and sheep/goat meat products reached 483478.29 MT
and 8908.72 MT with the value of Rs. 3549.78 Crores and Rs. 134.10 Crores during
2007-08.
 Frozen bovine meat dominated the exports with a contribution of over 97%. The
demand for bovine meat in international market has sparked a sudden increase in the
meat exports from India. The main markets for Indian bovine meat are Malaysia,
Philippines, Mauritius, and Gulf countries.
 Concentrated Dairy products such as skimmed milk continues to be the largest item of
export, which together accounts for nearly 78% of net milk and milk products exports
during the year 2006-07.
 The exports of Dairy Products reached. 69415.44 MT with the value of Rs.866.58
Crores in 2007-08 as against Rs. 434.58 Crores in 2006-07.
 On the other hand butter, butter oil, ghee and other milk fat together accounted for just
over 10% of the net milk and milk product exports from India during 2006-07.
 India’s exports of Processed Meat and Natural honey attained 1245.47 MT and
12231.19 MT with the value of Rs. 12.96 Crores and Rs. 93.30 Crores in 2007-08.

BUFFALO, SHEEP AND GOAT MEATS AND THE AREAS OF PRODUCTION

Buffalo Meat :
 India's livestock population includes, 88 million buffaloes, which is 58 per cent of the
world's buffalo population.
 Animals which are generally used for production of meat comprise of sheep and goats,
pigs and poultry.
 Besides about 3600 slaughter houses, there are live modern abattoirs and one integrated
abattoir meat processing plant for slaughtering buffaloes for exports and domestic
consumption.
 There are 24 meat processing plants including 13, hundred percent export oriented units
who are mainly engaged in export of meat products.
 In the last one-year three new export oriented units of buffalo meat processing have
been approved and are reportedly under implementation.
 In addition, there are few animal casing units engaged in collecting cleaning, grading
and exporting sheep and goat and cattle guts .
 The individual products under this sub-head are as below:
o Carcasses Of Bovine Animals(Fresh)
o Meat Of Bovine Animals With Bone (Fresh)
o Boneless Meat Of Bovine Animals (Fresh)
o Carcasses Of Bovine Animals (Frozen)
o Meat Of Bovine Animals With Bon (Frozen)
o Boneless Meat Of Bovine Animals (Frozen )
Production and Export of buffalo meat
 The major areas for Buffalo Meat production are Maharashtra, Andhra Pradesh , Uttar
Pradesh

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 India Facts and Figures
 India’s export of Buffalo (bovine) meat has increased from Rs. 3213.75 Crores
in 2006-07 to Rs 3549.78 Crores in 2007-08 .
Major Export Destinations (2007-08)
 Vietnam, Malaysia, Philippines, Angola, Saudi Arabia
Sheep and Goat Meat
 Goats\Sheep constitute a very important species of livestock in India, mainly on
account of their short generation intervals, higher rates of prolificacy, and the ease with
which the goats as also their products can be marketed.
 They are considered to be very important for their contribution to the development of
rural zones and people.
 The local initiatives to promote quality labels and innovative products for cheeses, meat
and fibres could help goats in keeping a role for sustainable development in an eco-
friendly environment all over the world.
 However, the future of the goat and sheep industry as a significant economic activity
will also be very dependent on the standards of living in the countries where there is a
market for the goat products.
Areas of Production
 Rajasthan, Jammu, Kashmir, Uttar Pradesh, Gujarat, Hilly regions of North and Eastern
Himalays are the Indian regions with maximum livestock population.
 The individual products under this sub-head are as below.
o Carcasses Of Lamb (Fresh)
o Carcasses Of Sheep (Fresh)
o Meat Of Sheep With Bone (Fresh)
o Boneless Meat Of Sheep (Fresh)
o Carcasses Of Lamb (Frozen)
o Carcasses Of Sheep (Frozen)
o Meat Of Sheep With Bone (Frozen)
o Boneless Meat Of Sheep (Frozen)
 India Facts and Figures
o The world production of Sheep meat was 8.89 million tones and Goat meat was
5.14 million tones in 2007.
o India ranked seventh in sheep and second in goat meat production.
o India’s export of sheep/goat meat has been increased from Rs. 65.87 Crores in
2006-07 to Rs.134.10 Crores in 2007-08 .
 Major Export Destinations (2007-08) of buffaloe meat.
o Saudi Arabia, UAE, Qatar, Germany, Oman.

POULTRY PRODUCTS, DAIRY PRODUCTS AND THE AREAS OF PRODUCTION

Poultry Products:
 Poultry is one of the fastest growing segments of the agricultural sector in India today.
While the production of agricultural crops has been rising at a rate of 1.5 to 2 percent
per annum that of eggs and broilers has been rising at a rate of 8 to 10 percent per
annum.
 As a result, India is now the world's fifth largest egg producer and the eighteenth largest
producer of broilers.
 The Potential in the sector is due to a combination of factors - growth in per capita
income, a growing urban population and falling real poultry prices.
 Poultry meat is the fastest growing component of global meat demand, and India, the
world's second largest developing country, is experiencing rapid growth in its poultry
sector.
 In India, poultry sector growth is being driven by rising incomes and a rapidly
expanding middle class, together with the emergence of vertically integrated poultry

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 producers that have reduced consumer prices by lowering production and marketing
costs.
 Integrated production, market transition from live birds to chilled and frozen products,
and policies that ensure supplies of competitively priced corn and soybeans are keys to
future poultry industry growth in India. There are number of small poultry dressing
plants in the country.
 These plants are producing dressed chickens. In addition to these plants, there are five
modern integrated poultry processing plants producing dressed chicken, chicken cut
parts and other chicken products. These plants will manufacture egg powder and frozen
egg-yolk for export.
Areas of Production
 Over all, Tamil Nadu counts for maximum egg production. In Andhra Pradesh,
Hyderabad is the city with maximum poultry and hatcheries.
 Besides the state of Andhra Pradesh, Vishakhapatnam, Chittoor, Karnataka, Tamil
Nadu, Maharashtra, Gujarat, Madhya Pradesh, Orissa and North Eastern States are the
major egg contributors
 The individual products under this sub-head are as below
o Live Poultry <=85 Gram
o Other Live Poultry <=185 Gram
o Live Poultry > 185 Gram
o Other Live Poultry >185 Gram
o Edible Poultry Meat (Fresh)
o Edible Poultry Meat (Frozen)
o Other Poultry Meat Not Cut In Pieces
o Cuts & Offals Excluding Livers
o Eggs In Shell
o Other Eggs
o Egg Yolks Dried
o Other Egg Yolks
o Eggs Not In Shell (Dried/Cooked)
o Eggs Not In Shell (Frozen/Preserved)
o India Facts and Figures
o India’s export of poultry products has increased from Rs. 318.17 Crores in
2006-07 to Rs 441.09 Crores in 2007-08 .
 Major Export Destinations (2007-08)
o Kuwait, Afghanistan, Oman, Japan, Denmark.
Dairy Products
 India now has indisputably the world's biggest dairy industry—at least in terms of milk
production; last year India produced close to 100 million tonnes of milk, 15% more
than the US and three times as much as the much-heralded new growth champ, China.
 Appropriately, India also produces the biggest directory or encyclopaedia of any world
dairy industry.
 The dairy sector in the India has shown remarkable development in the past decade and
India has now become one of the largest producers of milk and value-added milk
products in the world.
 The individual products under this sub-head are as Butter Fresh, Butter Milk, Butter
Oil, Fresh Cheese, Milk & Cream in Powder, Milk for Babies, Other Fat, Skimmed
milk powder, Other milk power, Whole Milk, Ghee.
Areas of Production
 Maharashtra, Himachal Pradesh, Madhya Pradesh, Punjab, Rajasthan, Tamil
Nadu are the major production area of Dairy Products in India.

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 India Facts and Figures :
 Concentrated Dairy products such as skimmed milk continues to be the largest
item of export, which together accounts for nearly 78% of net milk and milk
products exports during the year 2007-08.
 The exports of Dairy Products reached. 69415.44 MT from 45371.84 MT.
India’s export of Dairy products has increased from Rs. 434.58 Crores in 2006-
07 to Rs 866.56 Crores in 2007-08.
Major Export Destinations (2007-08)
 Bangladesh, UAE, Egypt, China, Algeria.

ANIMAL CASING, PROCESSED MEAT AND THE AREAS OF PRODUCTION

Animal Casing
 India, being a country with numerous states and vast area, has resources for production
of animal casings of high quality with excellent calibration and shining colour.
 This makes India one of the major exporters of animal casing in the world.
 Animal products including the products or animal casing like Bladders and Stomachs of
Animals, Casings of Other animals, Cattle Casings, Guts for Animal Casings, Sheep
Casings etc.
 The individual products under this sub-head are as below
o Cattle Casings
o Sheep Casings
o Casings of other animals
o Guts for animal casings
o Bladders and stomach of animals
India Facts and Figures
 India’s export of Animal Casing products has reached to Rs 6.84 Crores in 2007-08
Major Export Destinations (2007-08)
 Vietnam, Italy, South Africa, Portugal , Spain.
Processed Meat
 The total processing capacity in India is over 1 million tons per annum, of which 40-50
percent is utilized. India exports more than 500,000 tons of meat, mostly buffalo meat.
 Indian buffalo meat is witnessing strong demand in international markets due to its lean
character and near organic nature.
 Unlike cow slaughter, there is no social taboo in killing buffalo for meat. Goat and lamb
meat are relatively small segments where local demand is outstripping supply.
 The production levels in these two categories have been almost constant at 950,000 tons
with annual exports of less than 10,000 tons.
 The recent trend in India is to establish large abattoirs-cum-meat processing plants with
the latest technology.
 India has already established ten state-of-art mechanized abattoirs-cum-meat processing
plants in various states based on slaughtering buffaloes and sheep.
 These plants are environmentally friendly, where all the slaughterhouse byproducts are
utilized in the production of meat-cum-bone meal, tallow, bone chips and other value-
added products. Several more are under construction.
 The plants follow all the sanitary and phyto-sanitary measures required by the
International Animal Health code of World Organization for Animal Health (O.I.E.).
These plants mostly produce buffalo meat for export.
 India is becoming a major buffalo meat producing country and will be a main player in
the international market with additional establishment of the state-of-art-abattoirs cum
meat processing plants.
Areas of Production
 Andhra Pradesh, West Bengal, Maharashtra, Kerala, Delhi, Uttar Pradesh, Rajasthan are
the key areas of Processed meat production in India.

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 The individual products under this sub-head are as below
o Sausages & Canned Meat
o Homogenized Meat Preparations
o Preserved Meats
o Other Poultry Meat
o Preserved Meat Of Bovine Animals
o Meat Extracts & Meat Juices
India Facts and Figures
 India export of Processed Meat production has increased from Rs. 7.13 Crores in 2006-
07 to Rs.12.96 Crores in 2007-08 and from 860.69 Qty (Mt) in 2006-07 to 1245.47 Qty
(Mt) in 2007-08.
Major Export Destinations (2007-08)
Vietnam, Malaysia, Australia, New Zealand, and Ghana
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TOPIC - 22
GATT, WTO AND AGRICULTURE
To facilitate increased flow of commodities across international border is to eliminate
completely some of the non-tariff barriers. Non-tariff barriers (NTB) in AoA are quantitative
restriction, giving preference to domestic supplies in government purchases, providing subsidy
or advantageous taxation allowance to domestic producer, minimum import prices,
discretionary licensing, variable import levies, voluntary export restrictions, etc.,

GATT
 General Agreement on Tariffs and Trade (typically abbreviated GATT) was the outcome
of the failure of negotiating governments to create the International Trade Organization
(ITO).
 GATT was formed in 1947 and lasted until 1994, when it was replaced by the World Trade
Organization during the final round of negotiations in early 1990s.
 The history of the GATT can be divided into three phases:
o The first, from 1947 until the Torquay Round , largely concerned which
commodities would be covered by the agreement and freezing existing tariff levels.
o A second phase, encompassing three rounds, from 1959 to 1979, focused on
reducing tariffs.
o The third phase, consisting only of the Uruguay Round from 1986 to 1994,
extended the agreement fully to new areas such as intellectual property, services ,
capital , and agriculture . Out of this round the WTO was born.
WTO
 World Trade Organization (WTO) is the only global international organization dealing
with the rules of trade between nations.
 At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s
trading nations and ratified in their parliaments.
 The goal is to help producers of goods and services, exporters, and importers who conduct
their business
 In 1993 the GATT was updated (GATT 1994) to include new obligations upon its
signatories.
 One of the most significant changes was the creation of the World Trade Organization
(WTO). The 75 existing GATT members and the European Communities became the
founding members of the WTO on 1 January 1995.
 The other 52 GATT members rejoined the WTO in the following two years (the last being
Congo in 1997).
 Since the founding of the WTO and 21 new non-GATT members have joined, 29 are
currently negotiating membership. There are a total of 153 member countries in the WTO.
 Whereas GATT was a set of rules agreed upon by nations, the WTO is an institutional
body. The WTO expanded its scope from traded goods to trade within the service sector
and intellectual property rights .
 Although it was designed to serve multilateral agreements, during several rounds of GATT
negotiations (particularly the Tokyo Round) plurilateral agreements created selective
trading and caused fragmentation among members. WTO arrangements are generally a
multilateral agreement settlement mechanism of GATT.
Agriculture
 The WTO’s Agriculture Agreement was negotiated in the 1986–94 Uruguay Round and is
a significant first step towards fairer competition and a less distorted sector.
 It includes specific commitments by WTO member governments to improve market access
and reduce trade-distorting subsidies in agriculture.
 These commitments are being implemented over a six year period (10 years for developing
countries) that began in 1995.

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  Participants have agreed to initiate negotiations for continuing the reform process one year
before the end of the implementation period, i.e. by the end of 1999.
 These talks have now been incorporated into the broader negotiating agenda set at the 2001
Ministerial Conference in Doha, Qatar.
 WTO members agreed to initiate negotiations for continuing the agricultural trade reform
process one year before the end of the implementation period, i.e. by the end of 1999.
 These talks began in early 2000 under the original mandate of Article 20 of the Agriculture
Agreement.
 At the November 2001 Doha Ministerial Conference, the agriculture negotiations became
part of the single undertaking in which virtually all the linked negotiations were to end by
1 January 2005.
Tariff Barriers
 Tariff is a set of proportion of the price of good to increase the price at the border of
importing countries. Aim of levying tariff is to stimulate in import-competing industries
and depressing demand by reducing imports. This is needed to safeguard the domestic
producer. It is specified in money term per unit in the form of excise and custom duties.
 This is of two type ie. optimum tariff and prohibitive tariff.
o Optimum tariff - Tariff which maximizes country's welfare.
o Prohibitive tariff - It is the increased level of tariff when there is no trade.
 Tariff rate Quota (TRQ) - is two tiered tariff structure where minimum access quantity is
charged a low tariff (within quota tariff) while imports above minim access quota are
charged higher tariff (out of quota tariff) which experience prohibitive tariff.
 Special Safeguard Clause (SSC) provides imposition of additional import duty if import
exceeds their average of three preceding years by no more than 5% or if CIF import price
of shipment falls below 90% of average reference price.
Non-Tariff Barriers
 Changes in the form of fees for loading and unloading important products, port charges,
custom processing fees, consular charges to imports are in the form of non-tariff barriers.
 Other specific type of non-tariff barriers are technical barrier to trade (TBT) and sanitary
and phyto-sanitary (SPS) measure.
 TBT covers all technical regulations, voluntary standards and conformity assessment
procedures. Many TBT can result in unnecessary costs increase to exporters. TBT
measures focus on ensuring imported products satisfy domestic taxes, preferences and
requirements with respect to quality, safety or appropriate consideration of environmental
concern during manufacturing, processing and or shipment of product.
 SPS covers all measures whose purpose is to protect human or animal health from food
borne risks, human health from animal or plant carried diseases.
 Remedy for this barrier is to harmonise such requirements or standards within union
members.

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TOPIC - 23
Resource management
ORGANIZATIONAL ASPECTS OF LIVESTOCK FARMS
Organizational aspects of livestock farms
 Promotion of the welfare of the people is one of the major objectives of the modern
livestock farming. For the attainment of this objective the state attach high priority on
their economic development.
 The economic development in turn depends on human, natural and financial resources.
Since in most of the developing countries these resources are not available in
abundance, every care should be taken to make proper use of these resources to obtain
best possible results.
 Hence the management of various types of resources assumes special importance in the
developing countries.
Management of human resources
 Management of human resources is of vital importance for every country and
organization, A pertinent question which deserves our consideration is as to what is the
process of management of human resources.
 This process comprises of four things, acquisition (getting the people), development
(preparing the people), motivation (activating the people) and maintenance (keeping
them).
Management of natural or material resources
 Material or the natural resources also play an important role in the economic
development of a country.
 Effective management of natural or material resources is of prime importance.
Management of financial resources
 Financial resources are as important for the economic development of the country as
natural and human resources.
 It is of vital importance that the limited financial resources should be utilized with
utmost care and all wasteful expenditure be avoided.
 Financial management, according to Hiwad and Uptron "involves the application of
general management principles to a particular financial operation."
Sources and procurement of materials
 Purchasing procedures of materials include various stages: First, the need is to be
ascertained and recognised.
 Accurate statement of quality and quantity of material needed with full descript is to be
prepared.
 Purchase requisitions and negotiations with possible sources of supplies are made.
 This is important in the business, as it is more concerned with the economy of the
company or the firm.
Requirement of materials
 Type of the material to be used in the production process is generally determined by the
production department (engineering dept.) of the company, since it has necessary
knowledge and equipment to check the real physical characteristics.
Making/Buying
 Usually the top management does this. It depends how highly integrated and the
diversified the company is.
Advantages of Making
 Delivery on time in right quantity and quality
 Cost consideration, less inventory
 Emergency
Advantges of Buying
 Less investment in machines and equipment
 Simpler to manage in smaller and less diversified companies

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Source selection
 Procedure involved in the source selection is the preparation of and exhaustive list of
supplies and then sorting them out the one or ones with when to do the business.
 To prepare the list, a buyer can use the following type of supplier information
o Past experiment with the supplier
o Interview with the sales man
o Technical and descriptive catalogues
o Trade fairs and conventions
o Trade directories and journals
o Trade representatives and agencies
o Periodical advertisement in the press

PROCUREMENT OF INPUTS AND FINANCIAL RESOURCES:

Material procurement activities
 Procurement is a generic term, which includes the purchasing and related activities.
 Procurement activities are the selection of the vendors, establishing prices and services,
preparation of orders and supply contracts, arrangement of scheduled delivery of the
materials, proper maintenance of the records and relation with suppliers.
 Procurement activity also includes effective communication with the user and other
services department as also with the supplier.
 Frequently, however materials management procedures require direct communication
and discussions between the user and the supplier for technical reasons.
Financial resources
 Resources are the inputs we give to the enterprise. Land, labour and capital are the basic
resources. Any form of the capital can be considered as the financial resources.
Types of Financial Resources
Share Capital
 A Company issues shares of its capital to raise the fund for its business.
 This is done at the time of incorporation of the company and also subsequently
as and when the need arises.
 There are two types of share capital
o Preference capital
o Equity capital
 Capital of the company is called the share capital. Those who acquire shares are
called as the shareholders.
 They are the owners of the company. Shareholders cannot withdraw any part of
the capital except under appropriate legal customeric provisions.
 Shareholders can transfer shares held by them to other persons.
Dividends
 Payment of dividend by a company to its shareholders is similar to the
withdrawal made by the owner partners from the business.
Debentures and Bonds
 When large amount of money is required which cannot be obtained from a single source
small amounts are borrowed from large number of people. This is done by issuing
debentures/bonds.
 Each debenture has a face value which is the amount supposed to be borrowed from the
debenture holder.
 Rate of interest, date of issue and date of maturity are indicated on the debentures.
Borrowings
 Based on the purpose and duration of the borrowings agricultural credits may be
divided into
o Short term credit: Loan for paying wages, hiring labour, purchasing feeds, seeds
and fertilizers. They are payable out of the income of the next immediate
harvest.
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 o Medium term loan: Comparatively bigger loans required for the purchase of
cattle, pump sets, implements etc., spanning 2-7 years for repayment.
Repayment cannot be made at the next harvest.
o Long term credit: Still larger sums to purchase land, wells, etc., It will take
many years to repay.
Sources of Agriculture finance
 Finance for agriculture can be obtained from
o Money lender
o Credit co-operatives
o Commercial banks
o Government
o Regional Rural Banks
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TOPIC - 24
Break even analysis

Introduction:
The success of any business is measured in terms of profit and profit is dependent on three
basic factors viz. Cost of production, selling price and volume of sales. The cost of production
determines the selling price required to be fixed to realise the desired level of profit, the selling
price determines the volume of sales, the volume of sales directly influences the volume of
production and the volume of production intern influences the cost of production. Thus costs of
production, volume of production, sales, selling price and profits are interrelated. The most widely
known form of cost-volume-profit analysis is the break-even analysis.
Break-even analysis indicates costs-volume-profit relations in the short run. This analysis
relies on the assumption of constant factor prices, constant technology and constant selling prices.
Despite, this limitation, break-even analysis is very important because in the short run, the cost
and revenue structure is reasonably stable. Apart from helping to spot the break-even point, this
analysis helps to develop an understanding of the relationship of costs, price and volume within a
farm’s range of operations. A given farm is said to be at break-even point, when its costs are equal
to revenue i.e. when the contribution margin is exactly equal to the fixed costs. Contribution
margin is estimated by deducting variable costs per unit, from price per unit of output. At
quantities smaller than break-even point, there is a loss and at larger quantities there is a profit.
Breakeven point:
Break-even point is the output level corresponding to minimum point of average total cost.
Whatever is produced above this point will be the profit for the farmer. The breakeven point
indicates the level of production at which the producer neither loses money nor makes profit. Point
where the farmer recoups his investment is the Break-even point. Break-even analysis determines
the level at which the gains and losses are equal. This level of values and quantities is known as
the break-even point. A farmer must produce at least this amount of product to cover the total cost
of production. Investment is in the form of fixed cost and variable cost, which constitutes the total
cost. When the total cost is equal to total revenue it is Break-even point.
This point is called the “point of no profit & no loss”, “balancing point”, “neutral point”,
“equilibrium point”, “loss ending point” and “profit beginning point”.
e.g. The dairy farmer is interested to know at what age the maintenance cost of the cow
will be equal to the value of milk from the cow. Break-even point indicates the time at which a
farmer should sell the cow. At break-even point, benefits=costs, above break-even point, benefits
> costs and below break-even point benefits < costs.
Graphic approach:
y
Profit
Break-even point Total cost
Costs & Revenue (Rs.)

Loss

Fixed cost

Break-even Output

0
Units of Output x
Break-even point analysis

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 Break-even point nearer to the origin indicates less loss and more profit zones. Break-even
point away from the origin indicates more and more loss zone and less and less profit zone.
Nearness of Break even point to the origin also indicates whatever the farmer is producing is
market worthwhile. Due to this the farmer will recoup his investment even by producing less
number of units of output. Break even point away from the origin indicates to recoup the
investment the farmer has to produce larger number of units of output which is an indication that
whatever the farmer is producing is not so market worthwhile.
Use of Break-even analysis:
1. Ascertainment of Break-even point
2. Determination of costs and revenues at different levels of output
3. Product planning – i.e. add or remove the product
4. Activity planning – i.e. planning expansion or reduction of business
5. Profit planning
6. Make or buy decisions
7. Equipment selection and replacement decisions.
8. Methods of business promotion
9. Decisions on distribution channels
10. Price decision
11. Suspension or permanent closing down
12. Forecasting
13. Performance evaluation
14. Cost control

Estimation of Break-even Output by using contribution per unit:

Fixed cost
Break-even Output =
Contribution per unit
Contribution per unit = Sales revenue (P) - Variable cost (V)
F
Break-even Output =
P-V
Illustration 1: Calculate Break-Even Point from the following particulars.
Rs.
Fixed expenses 1,50,000
Variable cost per unit 10
Selling price per unit 15
Solution:
Calculation of Break-even point:
Fixed expenses
BEP (in units) =
Contribution per unit
Contribution per unit = Selling price p.u. – Variable cost p.u.
Rs.15 – Rs.10 = Rs.5
150000
BEP (in units) =
5
BEP (in units) = 30000 units
B.E.P. (in rupees) = B.E.P. in units x Selling price per unit
= 30,000 x Rs.15 = Rs.4, 50,000
Illustration 2: Calculate Break-even point:
Rs.
Sales 6,00,000
Fixed expenses 1,50,000
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Variable costs:
Direct Material 2,00,000
Direct Labour 1,20,000
Other Variable expenses 80,000
Solution:
Fixed expenses
BEP (in Rs) = X Sales
Contribution
Contribution = Sales – Variable cost
= Rs.6, 00,000 – Rs.4, 00,000 = Rs.2, 00,000
150000
BEP (in Rs) = X 600000 = Rs.4,50,000
200000
Note: When per unit cost and selling price are not given, B.E.P. can be calculated only in terms of
Rupees.
Illustration - 3: From the following particulars find out the B.E.P. What will be the selling price
per unit if B.E.P. is to be brought down to 9,000 units?
Rs.
Variable cost per unit 75
Fixed expenses 2,70,000
Selling price per unit 100
Solution:
Fixed expenses
BEP (in units) =
Contribution per unit
Contribution = Selling price p.u. – Variable cost p.u.
= Rs.100 – Rs.75 = Rs.25
270000
BEP (in units) = = 10,800 units
25
If break-even point is brought down to 9,000 units, fixed expenses are to be recovered from 9,000
units to have no profit and no loss.
Fixed expenses 270000
Fixed expenses per unit = = Rs.30
No. of units 9000

When B.E.P. is 9,000 units, Selling price p.u. is calculated as follows:

Selling price = Fixed expenses + Variable expenses per unit.
= Rs.30 + Rs.75 = Rs.105
Illustration 4: From the following information relating to Live-care Pvt. Ltd., you
are required to find out (a) P.V. ratio (b) BEP (c) Profit (d) Margin of safety
Total Fixed Costs Rs. 4,500
Total Variable cost Rs. 7,500
Total sales Rs. 15,000
(e) Also Calculate the Volume of sales to earn profit of Rs.6,000.
Solution:
Contribution
Profit Volume Ratio (PV ratio) = X 100
Sales
7500
Profit Volume Ratio (PV ratio) = X 100 = 50 %
15000

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 Fixed expenses 4500
BEP (in rupees) = = X100 = Rs. 9000
PV ratio 50
Profit = Sales - Total cost = 15000 - 12000 = Rs. 3000

(or) = Contribution – Fixed expenses= Rs.7,500 – Rs.4,500 = Rs.3,000

(d) Margin of safety = Present sales – Break even sales
= Rs.15,000 – Rs.9,000 = Rs.6,000
(or) =

Profit 3000
= X 100= Rs.6000
PV ratio 50
(e) Sales required to earn a profit of Rs.6,000
Fixed expenses + desired profit
=
PV ratio
4500 + 6000
= X100=Rs.21000
50
Find out the break even point of a sheep herd with following information.
o Total fixed cost =Rs.10000, Number of sheep =100. Variable cost of production = Rs.60000,
Gross return =Rs.100000
o Break Even point or output= 10000/{(100000/100)-(60000/100)}= 25 sheep.

Margin of Safety (MOS) :

Margin of safety is defined as the difference between actual sales and sales at breakeven
point. In other words it is the amount by which the actual volume of sales exceeds the sales at
breakeven point.
Margin of safety = Actual sales – Break even sales
Margin of safety is an indication of profitability of a business. Since the fixed costs are
covered by the break even sales, the margin of safety or the additional sales over break even sales
would naturally add to the profits of organization. The size of margin of safety indicates the amount of
profit. A large margin of safety indicates high profits and low margin of safety indicates low profits.
When the margin of safety is low, the following steps may be taken.
1) Increase the volume of sales,
2) Increase the selling price,
3) Decrease the fixed costs,
4) Decrease the variable costs,
5) Improve the sales mix i.e. substitute unprofitable products by profitable ones.
Break even chart and Angle of incidence:
When total sales and total costs are graphically represented, the point at which the total sales line
(TS or TR) intersects the total costs line is called the breakeven point and the angle formed at this
point between the two lines to the right side of the breakeven point is called angle of incidence. Such a
chart is called Break Even Chart. A large angle of incidence indicates that profits are made at a high
rate and a small angle of incidence indicates that the profits are made at a relatively lower rate. A
large margin of safety with wide angle of incidence indicates most favourable position of a business
and even the existence of monopoly positions.
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TOPIC - 25
Personnel (Labour) Management
Identification of work and work (job) analysis / Division of labour

Personnel (Labour) Management:

A manager gets things done through other people. These people (human resources) use
material resources such as land, money, machinery, equipments, materials, etc. It is the
responsibility of managers to ensure that the employees utilize these resources in optimum
manner. There should be minimum wastages of resources and maximum returns on investment
made in resources. Similarly an enterprise spends considerable amount of money on acquisition,
training, remuneration, motivation etc., of its employee. Unless the employee works with
devotion, their performance will be poor. They will not make effective utilization of material
resources. Therefore, the effective utilization of human resources is even more important.
Management is said to be effective, of when enterprise is utilizing its human and natural
resources effectively to achieve its objectives. But at the same time it does not mean that human
resources should be utilized only as a resources. Employees are human being with emotions and
aspirations of their own. It is also the duty of management to treat employees with dignity and
sense of belongings.
“Personnel management is the planning, organizing, directing and controlling of
procurement, development, compensation, integration and maintenance of people for the purpose
of contributing to organisation, individual and social goals.
The various functions of personnel management includes:
Personnel manager has to perform the managerial functions such as planning, organising,
directing, motivating and controlling personnel working in his department. In addition to these
managerial functions he has to perform the following operative functions also.
a) Recruitment of staff,
b) Giving proper training to the staff,
c) Putting the right man to the right job,
d) Making decisions of wage structure, promotional policy, merit rating of employees etc.
e) Taking care of health, safety and recreation of employees,
f) Maintenance of records of service,
g) Payment of gratuity, pension, provident fund, encashment of leave, etc. of the employees
at the time of retirement.
Division of labour:
In the modern industrial type of production activity, the production of a good or article is
divided into several processes (operations) and sub-processes, and each sub-process is entrusted to
a worker or group of workers, who are specialised in that work. The splitting up of production of
an article or good into several operations and the entrustment of each operation to a worker or
group of workers specialised in that work is called division of labour. The division of labour is
associated with efficiency of labour.
Simple division of labour
 A work is done by the combined efforts of a group of workers. It is difficult to say how
much Work each one did. Ex. carrying a heavy object, led by a number of people.
Complex division of labour
 Work is split up into different processes and each worker is assigned a definite part of the
work.
 This is the division of labour proper. Ex. Manufacturing of pins, making of bread etc.,
Territorial division of labour
 This term refers to certain localities or cities or towns specialising in the production of
some commodities.
 Eg. Lock -making in Dindugul and match factories in Sivakasi.

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Merits of Division of Labour:
Increases Productivity: In the modern industrial system, division of labour is found to augment
the labour productivity to a large extent. Besides, it helps to improve the productivity of other
resources such as capital and management in industry.
Improvement in Dexterity (handiness): Specializing in a particular activity and performing it
continuously make the workers perfect. This perfection of work helps them to devise improved
methods to perform the activity. In the production of goods and services, the entrepreneurs lay
more emphasis on reduction of labour costs. In this process they devise many labour saving
techniques such as providing adequate skill and necessary equipment to do the maximum with
minimum time and cost.
Saving of time: Since the worker is concentrating in only one activity there is a saving of time,
which otherwise would have been wasted, had he been attending to several activities in the
manufacturing of a commodity. To perform such specific activities, the workers can be well
trained. To save the time, the workers are to be given enough expertise to perform a work. They
should be given incentives like bonus to put forth maximum concentration on the allotted work.
Saving in Tools and Implements: As a worker, he has to perform a specific function, he need
only a particular type of implements. In construction of wallowing tank, milking, chaff cutting of
fodder, transport of feed and fodder etc. the labourers should be provided with suitable
implements and machinery for turning out the work efficiently with minimum cost and time.
Employment of Specialists: In the populous country the demand for goods and services would be
ever increasing. This leads to production of more goods and services. In response to this,
entrepreneurs use more labour and technology intensively. The firm working for six hours earlier,
would now work for more than 6 hours. Hence, 2 to 3 shifts have to be taken up by the firms to
produce adequate goods for satisfying the increasing demand. Firms under such situations employ
specialized labourers through intensification of work using requisite technology. Labourers are
given adequate training to develop the requisite skills for executing the work efficiently.
Large scale production: Division of labour helps to produce goods on large scale. Further the
goods can be produced at cheaper rates.
Demerits of Division of Labour:
Monotony: The work which is performed again and again becomes monotonous for the workers.
Interest is not sustained in the work. It becomes boring for the workers.
Retards Human Development: Continuous performance of the same work, narrows his overall
outlook. Since his faculties are tuned to perform a set work, his overall growth is stunted.
Lack of general responsibility: Since many people are involved in producing a good, nobody
takes the general responsibility in correcting a defect, if it occurs. Everybody thinks that it is not
his duty. Thus the workers become careless and irresponsible.
Problem of Distribution: Several people involve in production of a product. Based on the
contribution, they should get their due share of product which is not an easy task. This complicates
the problems of distribution. This means distribution of dividend/bonus should be done
scrupulously for satisfying the labour working in various divisions.
Characteristics of Indian farm labour:
1. The farm labourers in India are under employed due to the seasonal nature of farm
production.
2. There is a predominant problem of disguised unemployment. It means that more number of
persons appear to be engaged than required in livestock farming.
3. The productivity of labourers is low due to imbalance in the availability and use of
resources on the farms.
4. Unlike industrial workers, farm workers lack organization leading to poor bargaining
capacity.
5. Most of the Indian farm workers are unskilled
6. Low wages are prevailing for farm labourers because of their excess supply.
7. Labour force is increasing in India particularly, in low income groups due to non-adoption
of family planning measures.
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Farm Labour Efficiency:
Farm labour efficiency refers to the amount of productive work accomplished by a worker
on the farm per unit of time. In other words, amount of output per unit of labour input indicates
the efficiency of labour.
This can be judged by working out average and marginal productivities of labour input in
hours in the production of crops and livestock products. The marginal productivity of skilled
labourers is more and hence higher wages are offered. On the contrary, unskilled labourers are
being paid less wages.
Factors Affecting Farm Labour Efficiency:
Efficiency means the ability to do work so that the productivity is increased with minimum
cost. Higher the efficiency greater is the returns of the farm and vice versa. Efficiency of labour is
a great national asset.
The following are some important factors, which affect efficiency of labour:
Racial qualities
 Efficiency of labour depends on hereditary and racial stocks to which he belongs.
 Punjabis work harder than other Indians.
Natural and climatic factors
 A cool bracing climate is more conducive to work hard than tropical climate.
 Hence a labourer in Europe will be more efficient than a labourer in Asia.
Education
 Education stimulates and strengthens the right type of instincts and builds up character.
 A technically trained man is naturally more efficient.
Personal qualities
 If a worker has a strong physique, is mentally alert and intelligent, his efficiency will be
greater.
 Resourcefulness and initiative also increases efficiency.
Organisation and equipment
 Labour efficiency also depends on how labour is organised and what quality of machinery
is placed at his disposal.
 First-rate work cannot be expected from a third-rate labourer using second-rate equipment.
Environment
 If the surroundings are depressing, labour efficiency is bound to low.
 On the other hand, cheerful and bright environments are conducive to better work.
Working hours:
 Workers must have sufficient intervals for relaxation.
 Long working hours with no suitable rest or recreation will reduce the efficiency of labour.
Fair and prompt payment
 A well-paid worker is generally contended and puts his heart and soul into his job.
 He must also be paid promptly.
Labour organisation:
 An organised effort is more effective.
 If labourers are properly organised both inside and outside the place of work in the form of
strong trade union, their efficiency will undoubtedly go up.
Social and political factors:
 Social security scheme guaranteeing freedom from want and fear, and sympathetic state
attitude towards labourer will go long way in improving labour efficiency.

Measuring the Labour Efficiency:

Different criteria are used to measure the labour efficiency. For example, on a dairy farm,
labour efficiency is measured by considering the number of cows maintained per unit of labourer
or quantity of milk produced per labourer. On a poultry farm, the number of egg laying hens
maintained per labourer tells about the labour efficiency. The following formulae are used to
measure the labour efficiency.
Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 109
 Gross income – cost of all inputs excluding labour
The returns per labour per day =
Number of workers in days
Labour Efficiency Index:
In most of the farming areas, labour efficiency standards are being set on the basis of past
experiences of labour use for various crops and livestock enterprises. The efficiency index is
worked out as follows for a hypothetical farm activity. The average labour cost in the locality is,
say Rs. 500, but the actual labour cost incurred by the given farm is Rs. 400. Then based on this
cost, the labour efficiency index is
500 500
X 100 = = 125%
400 4
Here labourers are efficiently employed
Requirement of labour on the farm as per the Wage
X
Labour Efficiency performance standard rate
= X 100
Index Actual labour employed on the farm X Wage
rate
Identification of work:-
Identification of work is the process by which information is collected about the quantity
and quality of work, different kinds of works or skills required to be performed in an industry or
enterprise. It is some kind of listing of different minute works involved in a production enterprise.
Organization structure is developed to achieve objectives. Therefore works necessary for
the accomplishment of objectives are determined. Total work is classified or divided
systematically because no one can handle total work alone. Identification and classification of
work enables managers to concentrate attention on important works, to avoid duplication of work
and to avoid overlapping or wastage of efforts. While identifying and classifying works,
management must ensure that:
 All necessary works are performed
 There is no unnecessary duplication in performing activities and
 Different workers are performed in a co-ordinated manner.
Work Study:
 Work-study can conveniently be defined as the tool in the hands of the management for
achieving higher productive efficiency in the organisation.
 Work-study can be broadly classified into
o Methods study and
o Work measurement
 Methods Study
 This can be defined as the systematic procedure for analysing the existing methods of
doing work including the various human movements involved in it with the main
objective of evolving the best or the most economical methods of doing the work.
 Procedure adopted can be categorized stage by stage as follows:
o Selection of the work to be studied
o Collection of data and recording of the relevant facts about the existing methods
o Critical examination of the data collected
o Development of most practical, economic and effective method, having due
regard to all contingents circumstances.
o Installation of the new methods and maintaining it by regular routine check.
 Work Measurement
 This is the technique of assessing the time content of the work performed by an
operator.
 The technique involves the determination of the proper time required for the work and
so popularly known as time study.

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Job analysis:
Work of job analysis is the process by which pertinent information about job contents and
job duties, qualifications required for each job, etc are obtained. Job analysis involves job
description and job specification.
Job description: It describes the job and duties involved in the job and also indicate the
magnitude and specific details of the job.
Job specifications on the other hand specify the qualifications and qualities of the job holder for
the successful performance of the job. The difference between job description and job
specification can be illustrated with the following example:
Considering the example of milking a cow, the job description gives the details regarding
the correct method of milking like the full hand milking and not milking by stretching the teat
between thumb and index finger or by pressing the teat between the thumb knuckle and index
finger. Details regarding the number of animals to be milked, number of times milking in a day,
the timings of milking, maximum time allowed for the completion of milking process in each cow,
etc. all go into the job description.
Job specification specifies the qualifications of the job holder. That is in the specific
example of a milk man, the qualifications include that he should have prior experience in milking,
he should have some knowledge of clean milk production, he should be free from communicable
diseases like tuberculosis, he should pay attention towards personal hygiene, like cleanliness,
clipping of nails etc.
Optimization of labour input
Optimization of labour in the actual sense means to obtain the most efficient or optimum use of
labour. Labour must be confined with the other factors of production and cannot be discussed in
isolation. Proper labour management policy will depend on particular farming situation.
According to Alfred Marshall " labour is any exertion of mind or body undergone partly or wholly
with a view to earning some good or other than pleasure derived directly from work.
o Labour is not a commodity
o Labour is inseparable from the labourer
o Labour is more perishable than any other commodity
o Labour is less mobile
o Supply of labour is independent of its demand
o It is difficult to calculate the cost of production of labour
o Labourer sells his service and not himself
o Labourer does not have same bargaining power as their employers
o Labourer is not a machine - have ones own liking , feelings , wishes, thoughts etc.,
o Labourers differ in efficiency
Types of Labour
 Hired/Casual - Seasonal /For special jobs
 Temporary - Skilled & Unskilled
 Permanent - Skilled (e.g. Milkers, Clerks) & Unskilled (eg.workers, attendants)

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TOPIC - 26
Accounting: Common terms
Account: A summary of business transactions is an account.
Book keeping and accounting although appear to be same, in reality, they are two different
terms. Book keeping refers to merely recording of business transactions in a set of books in a most
systematic manner. Accounting on the other hand refers to not only book keeping, but also
extends its scope to summarising, analysing, classifying, interpreting and finally reporting the
results to the concerned for decision making.
Accounting:
Accounting is the art of recording, classifying and summarizing the business transactions.
Recording refers to writing in journal. Classifying means, writing in ledger and summarizing
relates to preparation of trading account, profit and loss account and balance sheet.
Accountancy: Accountancy means the art of keeping books of accounts in a regular and
systematic manner.
Book keeping:
It is science and art of correctly recording in the books of accounts all those business
transactions that result in the transfer of money or money’s worth.
Single entry system:
An incomplete double entry can be termed as a single entry system. It is a system of book
keeping in which only records of cash and personal accounts are maintained, it is always
incomplete double entry, varying with circumstances.
Double entry system:
It is the only system of recording two – fold aspect of each transaction.
Journal:
Journal is the basic book of prime entry wherein transactions are first recorded with their
date, amounts and brief explanations. It is also called as a book of original entry. The process of
analyzing the transactions under the heads of debit and credit and recording them in a journal is
termed as journalizing.
Ledger :
Ledger is the main book of account, which contains various accounts. It is a collection of
all accounts debited and credited in the journal and the subsidiary books. In other words, ledger
contains accounts in a classified and summarized form.
Cashbook :
The transactions relating to only cash are recorded in one book called cashbook. The
principle here is, cash coming in is placed on debit side and cash going out is entered on credit
side.
Trading account:
It is a good account (real account) prepared mainly to know the profitability of the goods
bought and sold by the businessman. It is an account that shows the result of trading that is buying
and selling known as gross profit.
Profit and loss account:
Profit and loss a/c is one which shows either the net profit or net loss or the ultimate profit
or ultimate loss. The primary aim of profit and loss account is to ascertain the net profit or net loss
of a particular accounting period.
Balance sheet:
Balance sheet is a simple statement about a business enterprise, prepared at regular
intervals showing what a business owns and what it owes. In other words, it is a sheet of all those
ledger balances, pertaining to the properties and assets owned and liabilities owed by the business
on a particular day. Balance sheet is a statement prepared with the values of assets and liabilities.
Assets:
These are the material and non-material things or possessions or properties of the business
including the amounts due to it from others. Eg. Land, building, furniture, equipment, plant,
machinery, fixtures, cash, bank balance, debtor’s bills receivable, stocks of goods, investments etc
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are all assets. Assets are classified into fixed assets, current assets or floating assets, intangible
assets and fictitious assets.
1. Fixed assets or long term assets : Assets of permanent nature having long period of
life and cannot be converted in cash in a short period. eg.Land, machinery etc.
2. Current or floating assets: Can be converted into cash in the ordinary course of
business and are held for a short period. eg. cash and other liquid items
3. Intangible assets: are defined as identifiable non-monetary assets that cannot be seen,
touched or physically measured. eg. trademark, patent, copyright, goodwill etc.
4. Fictitious assets: are those assets which are created or brought into accounts books by
accounting entry, in other words these assets are not tangible assets in the sense that fictitious
assets cannot be seen and also fictitious assets have no real value unlike intangible assets like
goodwill which have value attached to them. Eg. Discount which is given by the firm when it
issue shares, preliminary expenses etc
Liability: A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits.
1. Current liability: these liabilities are reasonably expected to be liquidated within a year.
They usually include payables such as wages, accounts, taxes etc
2. Long term liability or fixed liability: these liabilities are reasonably expected not to be
liquidated within a year. They usually include issued long-term bonds, notes payables,
long-term leases, pension obligations, and long-term product warranties etc.
Management accounting is concerned with the provisions and use of accounting information to
managers within organizations, to provide them with the basis to make informed business
decisions that will allow them to be better equipped in their management and control functions.
Financial accountancy (or financial accounting) It provides information about financial
performance and financial position of the business. It classifies records, presents and interprets
transactions in terms of money. Financial accounting reports are prepared for the use of external
parties such as shareholders and creditors.
Cost Accounting - Cost accounting establishes budget and actual cost of operations, processes,
departments or product and the analysis of variances, profitability or social use of funds. Managers
use cost accounting to support decision-making to cut a firm's costs and improve profitability.
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TOPIC - 27
Different systems of book keeping – single and double entry system
Meaning
 Book keeping is an art of recording pecuniary or business transactions in a regular and
systematic manner.
 This recording of transactions may be done by the following two systems
o Single entry system
o Double entry system
Single entry system:
 An incomplete double entry can be termed as a single entry system.
 It is a system of book keeping in which only records of cash and personal accounts are
maintained, it is always incomplete double entry, varying with circumstances.
 This system has been developed by some business houses, who keep only essential
records.
 Since all records are not kept, the system is not reliable and can be used only by small
business firms.
Double entry system:
 This system is believed to have originated with the Venetian merchants of fifteenth
century and it is the only system of recording two – fold aspect of transaction.
 This system recognises that every transaction has a two – fold effect.
 If someone receives something then either some other person must have given it, or the
first mentioned person must have lost something, or some service etc. must have been
rendered by him.
ADVANTAGES OF DOUBLE ENTRY SYSTEM:
 Complete record of transactions: Double entry system records both aspects of a
transaction. Thus, a complete and reliable record of all business transactions is
provided.
 Arithmetical accuracy: As both debit and credit aspects of a transaction are recorded,
a trial balance can be prepared and arithmetical accuracy can be easily verified.
 Ascertainment of financial result: Profit and loss account can be prepared to find out
profit earned or loss suffered during a given period.
 Ascertainment of financial position: Balance sheet of business can be prepared to
ascertain financial position on a particular date, i.e., amount of assets, liabilities and
capital.
 Helps in comparison: Double entry system enables businessmen to ascertain
purchases, sale, expenditure, income, assets, liabilities of the current year as well as
those of previous years to make simple comparison which helps management to take
appropriate decisions.
 Detection of frauds if any: Double entry system is a scientific and reliable system. It
prevents commission of frauds, but if it has been committed, it can be easily detected.
DISTINCTION BETWEEN DOUBLE ENTRY AND SINGLE ENTRY SYSTEM
 Under double entry system both the aspects, i.e., debit and credit, of all the transactions
are recorded. But under single entry system, there is no record of some transactions;
some transactions are recorded only in one of their aspects whereas some other
transactions are recorded in both of their aspects.
 Under double entry system, various subsidiary books like sales book, purchases book,
etc. are maintained.
 Under single entry system, no subsidiary books except cash book which is also
considered as a part of ledger is maintained.

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  Under double entry system there is a ledger which contains personal, real and nominal
accounts. But under single entry system, the ledger contains some personal accounts
only.
 Under double entry system preparation of trial balance is possible.
 It is not possible to prepare a trial balance under the single entry system. Hence,
accuracy of work is uncertain.
 Under double entry system, Trading and Profit and Loss Account and Balance Sheet are
prepared in a scientific manner.
 Under single entry system, it is not possible; only a rough estimate of profit or loss is
made and a Statement of Affairs is prepared which resembles a balance sheet in
appearance but which does not present an accurate picture of the financial position of
the business.
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TOPIC - 28
Various types of account books: Journal, ledger, cashbook
Journal:
Journal is the primary or original book of entry in which all transactions are recorded in the form
of ‘entries’. These entries are entered in the order of their occurrence in a chronological order.
From these journals, entries are transferred to ledger. The process of analyzing the transactions
under the heads of debit and credit and recording them in a journal is termed as journalizing.
Entry: Entry is the record of a transaction of a business in a journal.
Format of a Journal:
Date Particulars L.F. Debit Credit
Date A/c to be debited Page No. of A/c Amount Amount
Month A/c to be credited in ledger
Year (Narration)

 Date: The date on which the transaction has taken place is recorded here.
 Particulars: The two aspects of transaction namely debit and credits are recorded here.
 L.F: It means Ledger Folio. The transactions entered in the journal are later on posted to the
ledger.
 Debit: In this column the amount to be debited is entered.
 Credit: In this column the amount to be credited is shown.
Steps in journalizing:
1. Find out the accounts involved/ affected in the transactions.
2. Identify the nature of the accounts which are involved in the transactions.
3. Apply the rules of debit and credit to find out which a/c is to be debited and which a/c is to be
credited.
4. Enter the date of transactions, Name of the accounts in the particular column and amount as
indicated above.

Ledger:
A book in which a trader’s all transactions are recorded in a classified permanent form is called
the ledger. A summarized record of all the transactions relating to a particular person, thing (i.e. an
asset) or a service (i.e. an expense or an income) which have taken place during a given period of
time is called an account. Hence, ledger is the book where transactions of the same nature (i.e.
transactions to a particular person, thing or service) are classified and grouped together in one
place in the form of an account through a process called posting. Posting or ledger posting is a
process of transferring entries from the journal to a ledger. Ledger is also called as analytical
record or principle book of entry or main book of entry.
Steps in posting
1. Locate or open in the ledger, the account to be credited or debited as entered in the journal.
2. If an account is to be debited, enter the date of transaction in the date column of the debit side.
3. In the particulars column, write the name of the account through which it has been debited in
the journal. Every entry made on the debit side of an account should begin with the word ‘To’
in the particulars column and on credit side ‘By’.
4. Enter the page number of the journal folio column on which a particular account appears in
journal folio.
5. Enter amount in the relevant amount column.
Format of a ledger account:
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F Amount

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  Dr : Debit side is meant for recording the debit aspect of a transaction
 Cr : Credit side is meant for recording the Credit aspect of a transaction
 Date: Date of transaction
 Particulars: Details of the transaction, i.e. the name of the other account involved in the
transaction.
 L.F: It means Journal Folio. Page number of the journal from where the transaction is
posted or transferred.
 Amount : Amount of the transaction
Balancing of account
At the end of accounting period, the businessman is interested in knowing the posting of a
particular account. For this, he has to total the debit and credit of the accounts separately and find
out the net balance. This technique of finding out the net balance of an account is known as
Balancing of account.
Steps in balancing
1. Total the two sides of an account.
2. Enter the higher amount on the side obtained.
3. Extend the higher amount (same amount) on the other side also.
4. Find out the difference between the two sides and place it on the lesser side writing in the
particulars column ‘To balance c/d’- if it is in the debit side or ‘By balance c/d’-if it is in the
credit side.
5. Bring down the balance amount on the heavier side of the account on the first of next period as
‘To balance b/d’ or ‘By balance b/d.’
Cash book:
It is a book to record only and all the cash transactions, i.e. cash receipts and cash payment of the
business concern. Although cash book is a book of original entry, the use of cashbook as a
subsidiary book is often dispensed with. It is written in the form of ledger.
Types of Cash book: can be maintained in 4 types as follows.
Simple Cash book / Single column cash book:
This is a cash book which contains only one amount column, i.e. an amount column only
for cash on either.
Specimen of a Simple Cash book / Single column cash book
Cash Book

Dr. Cr.
Receipt No.
Particulars

Particulars

Voucher
Amount

Amount
Ledger

Ledger
Folio

Folio
Date

Date

No.

9
1 2 4 5 6 7 8 10
3

1. Date: Date on which cash is received

2. Particulars: Name of the person from whom cash is received or name of the ting for which
cash is received or the name of the income for which cash is received
3. Receipt No. : Serial number of the receipt which is issued at the time of the receipt of cash
4. Ledger Folio: Page number of the ledger to which a particular item from the cash book is
posted
5. Amount: Amount of cash received
6. Date: Date on which cash is paid

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 7. Particulars: Name of the person to whom cash is paid or name of the ting for which cash is
paid or the name of the expense for which cash is paid.
8. Voucher No. : Serial number of the voucher which is received at the time of payment of
cash
9. Ledger Folio: Page number of the ledger to which a particular item from the cash book is
posted
10. Amount: Amount of cash paid.
Double column cash book:
This is a cash book which contains two amount columns, i.e. one discount column and
another cash column.
Specimen of a double column Cash book
Cash Book
Dr. Cr.

Voucher No.
Receipt No.
Particulars

Particulars
Discount

Discount
Ledger

Ledger
Folio

Folio
Cash

Cash
Date

Date
1 2 3 4 5 6 7 8 9 10 11 12

Discount Column is meant for recording the amount of the cash discount allowed to customers
or received from the creditors.
Triple column cash book:
This is a cash book which contains three amount columns, i.e. discount, cash and bank
columns.
Specimen of a triple column cash book

Cash Book
Dr. Cr.
Voucher No.
Receipt No.
Particulars

Particulars
Discount

Discount
Ledger

Ledger
Bank

Bank
Folio

Folio
Cash

Cash
Date

Date

3 9 11 1 1
1 2 4 5 6 7 8 10 12
3 4

Bank Column is meant for recording the amount of the cash or cheque withdrawn or deposited
in the bank
Contra entry:
The entries made on opposite sides or both sides of the three column cash book, one in
the cash column and the other in the bank column, for a transaction which affects both cash
and bank are known as contra entries.

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Purchase book or Purchase Day book or Daybook of purchase
 This book records only credit purchase of goods in which trends deals.
Sales book or Daybook of sales or Sales daybook
 In this book only credit sales of goods dealt by the traders are entered.
Purchase returns book
 It contains the records of returns of goods purchased by the trader for which no cash is
received.
 This happens when the goods are purchased but, the purchased goods are;
o Defective
o Damaged during transit
o Qualities delivered or received may not agree with invoice
o The price charged may be too high
o Goods may have been received quite later
o Substandard
o Terms and conditions may not be suitable
Sales returns book
 It records the goods returned by customers out of the sales already made and for which
no cash is paid.
Bills payable book
 In this book bills passed or pronotes passed or accepted are recorded.
Bills receivable book
 In this book bills already drawn or acceptance received are entered.
Journal Proper
 This is the journal in which (this is like miscellaneous journals) those entries are
entered, which cannot be entered in any of the above listed subsidiary journals or books.

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TOPIC - 29
Classification of account and rules of debit and credit

Before dealing with types of accounts we must know how to identify the transactions. The
transactions related to various business activities can be classified into three categories in double
entry book keeping system.
1. Transactions relating to individuals and organizations.
2. Transactions relating to properties, goods and cash
3. Transactions relating to expenses or losses and incomes or gains.
As the transactions are three types, accounts are also of three types.
Accounts which are relating to persons (individuals) and organizations are called as
Personal Accounts. Accounts which are relating to properties, goods and cash are called as Real
Accounts. Accounts which are relating to expenses or losses and incomes or gains are called as
Nominal Accounts. The real and nominal accounts are referred to as Impersonal accounts
ACCOUNTS

Personal Impersonal

Real Nominal

a) Natural personal a) Tangible a) Expenses & Losses

b) Artificial personal b) Intangible b) Incomes & Gains
c) Representative personal

PERSONAL ACCOUNTS
Personal Accounts
 It includes the accounts of persons with whom the business deals. There are three
categories.
Natural Personal Accounts
 The term ‘Natural Persons’ means persons who are creation of GOD. For e.g. Raja’s
account, Kumar’s account.
Artificial Personal Accounts
 These accounts include account of corporate bodies or institutions which are recognised
as persons in business dealings. E.g. The account of a club, the account of Government,
the account of an insurance company etc.
Representative Personal Accounts
 These are accounts which represent a certain person or group of persons.
 E.g: For salaries due to employees (not paid), an outstanding salaries account will be
opened. This outstanding salaries account represents the accounts of the persons to
whom the salaries have to be paid.
 The rule is
o Debit the receiver
o Credit the giver
 E.g: Ravi is giving cash to Rama.
 Then the account of Ravi will have to be credited and Rama’s account will have to be
debited.

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REAL ACCOUNTS
Tangible real accounts
 Tangible real accounts are those which relate to such things which can be touched, felt,
measured etc.
 E.g. Cash account, building account, furniture account, stock account etc.
Intangible real accounts
 These accounts represent such things, which cannot be touched, though they can be
measured in terms of money.
 E.g. patient’s account, good will account etc.
 The rule is
o Debit what comes in
o Credit what goes out
 E.g. when furniture is purchased for cash, furniture account should be debited while the
cash account should be credited
NOMINAL ACCOUNTS
 These accounts are opened in the books to simply explain nature of transactions.
 They do not really exist. For e.g. in a business, salary is paid to manager, rent is paid to
landlord, while salary, rent as such do not exist.
 The accounts of these items are opened simply to explain how the cash has been spent.
 In the absence of such information, it may be difficult for a person concerned to explain
how cash was utilised.
 Nominal accounts include accounts of all expenses, losses, incomes and gains.
 The examples of such accounts are rent, insurance, dividends, and loss by fire etc.
 The rule is
o Debit all expenses and losses
o Credit all gains and incomes

RULES FOR DEBIT AND CREDIT

Personal account
Debit the Receiver
Credit the Giver

Real account
Debit what comes in
Credit what goes out

Nominal account
Debit all Expenses and Losses
Credit all Gains and Incomes

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TOPIC - 30
Recording of business transactions
NATURE OF BUSINESS OPERATIONS
 Whatever may be the form of organization business operations follow a certain
common pattern.
 Operations are all directed towards the accomplishment of pre-determined business
goals.
 To achieve these goals the firm requires economic resources or assets, as they are called
in accounting terminology.
 Cash is an important asset. Assets are economic resources which a firm acquires in the
course of its operations for the accomplishment of its goals.
 Liabilities are the equity or interests of the creditors in the assets of a firm. Assets are
equal to capital plus liabilities.
BUSINESS TRANSACTIONS
 A business transaction is an economic event that has some effects on the resources of a
firm or on the sources of a firm’s assets.
 These economic events are important and therefore must be recorded and reported to
decision makers.
 The following list summarises the business transactions that a firm might have.
 Observe the cycle of business operations reflected in these transactions.
o A firm acquires assets from its owners.
o The firm acquires assets from creditors.
o The firm invests resources in buying assets needed to produce goods or services
o The firm uses the resources to produce goods or services.
o The firm sells the goods or services produced.
o The firm returns assets to the creditors.
o The firm returns assets to the owner’s.
SOURCE DOCUMENTS
 Documents on the basis of the above transactions are recorded in the books of account
are known as source documents.
 Examples of source documents are bills, invoices, receipts, cash memos, vouchers etc.
 These documents provide written evidence of a transaction or event that has taken
place.
Accounting Equation
Assets = Equities
 The properties owned by business are called “Assets”.
 The rights to properties are called “Equities”.
 Equities may be subdivided into two types: the rights of creditors and the rights of the
owners.
 The equity of creditors represents debts of the business and are called liabilities.
 The equity of the owner is called capital.
o So,
 Assets = Liabilities + Capital (or)
 Assets – Liabilities = Capital.
 The Accounting Equation can be understood with the help of following transactions.
Transaction 1
 A starts a business with a capital of Rs. 10,000.
 There are two aspects of transactions. The business has received a cash of Rs. 10,000.
 It is its asset but on the other hand it has to pay a sum of Rs. 10,000 to A. Thus:
Capital and Liabilities Rs. Assets Rs.
Capital 10,000 C ash 10,000

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Transaction 2
 A purchases furniture for cash worth Rs. 2,000. The position of his business will be as
follows:
Capital and Liabilities Rs. Assets Rs.
Capital 10,000 Cash 8,000
Furniture 2,000
10,000 10,000
Transaction 3
 A purchases cotton bales from B for Rs. 5,000 on credit.
 He sells for cash cotton bales costing Rs. 3,000 for Rs. 4,000 and Rs. 1,000 for Rs.
1,500 on credit to P.
o As a result of these transactions the business makes a profit of Rs 1,500 (i.e.
Rs.5,500 - Rs.4,000), this will increase A’s Capital from Rs.10,000 to
Rs.11,500.
o The business will have a liability of Rs.5,000 to B and two more assets in the
form of a debtor P for Rs.1,500 and stock of cotton bales of Rs.1,000. The
position of his business will now be as follows:
Capital and Liabilities Rs. Assets Rs.
Creditor (B) 5,000 Cash(Rs.8000+4000) 12,000
Capital 11,500 Stock of cotton bales 1000
Debtor (P) 1500
Furniture 2000
16,500 16,500
Transaction 4
 A withdraws cash of Rs 1,000 and cotton bales of Rs 200 for his personal use.
 The amount and the goods withdrawn will decrease relevant assets and A’s capital. The
position will be now as follows.
Capital and Liabilities Rs. Assets Rs.
Creditor (B) 5,000 Cash (Rs 12000-Rs 1000) 11,000
Capital 10,300 Stock of cotton sales
(Rs 11500-Rs 1200 Debtor (P) Furniture 800
___________ 1,500
15,300 2,000
___________
15,300
 The result of applying the system of double entry system may be summarized in the
following rule:
o “For every debit there must be equivalent credit and vice versa.”
Journal
 Journal records all daily transactions of a business into the order in which they occur.
 A journal is defined as a book containing a chronological record of transactions.
 It is the book in which transactions are recorded under the double entry system. Thus
journal is the books, of original record.
 The journal does not replace but preceds the ledger.
 The process of recording transaction in a journal is termed as Journalising. A proforma
of Journal is given below.

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Journal
Date Particulars L.F Debit Rs Credit Rs
(1) (2) (3) (4) (5)
 Date: The date on which the transaction was taken place is recorded here.
 Particulars: The two aspects of transaction namely debit and credit are recorded here.
 L.F: It means Ledger Folio. The transactions entered in the journal are later on posted to
the ledger.
 Debit: In this column the amount to be debited is entered.
 Credit: In this column the amount to be credited is shown.
Closing of accounts: (Closing entries)
 Closing entries are entries passed at the end of accounting year to close different
accounts.
 These entries are passed to close accounts relating to incomes, expenses, gains and
losses.
 In other words, these entries are passed to close the different accounts pertaining to
Trading and Profit and Loss account.
 The accounts relating to assets and liabilities are not closed but they are carried forward
to next year.
 Hence no entries are to be passed regarding those accounts which relate to the balance
sheet.
 The principle of passing a closing entry is very simple.
 In case an account shows a debit balance, it has to be credited in order to close it.
 For e.g. if the Purchases Account is to be closed, the Purchases Account will have to be
credited so that it may be closed because it has a debit balance.
 The closing entries are passed in the journal proper.
LEDGER:
 Ledger is a book, which contains various accounts.
 In other words, Ledger is a set of accounts. It contains all accounts of the business
enterprise whether Real, nominal or Personal.
 It may be kept in two forms
o Bound Ledger
o Loose leaf Ledger
 The term posting means transferring the debit and credit items from the journal to their
respective accounts in the Ledger.
 Book keeping is mainly concerned with recording of financial data relating to business
operations in a significant and orderly manner.
 A bookkeeper may be responsible for keeping all records of a business or only of a
minor segment, such as a position of Customers’ accounts in a departmental store.
 A substantial portion of bookkeepers work is of a clerical nature and is increasingly
being accomplished through the use of mechanical and electronic devices.

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TOPIC - 31
Analysis of financial accounts
Income and expenditure accounts

Financial analysis (also referred to as financial statement analysis or accounting

analysis or Analysis of finance) refers to an assessment of the viability, stability and profitability
of a business, sub-business or project.
It is performed by professionals who prepare reports using ratios that make use of information
taken from financial statements and other reports. These reports are usually presented to top
management as one of their bases in making business decisions.
 Continue or discontinue its main operation or part of its business;
 Make or purchase certain materials in the manufacture of its product;
 Acquire or rent/lease certain machineries and equipment in the production of its goods;
 Issue stocks or negotiate for a bank loan to increase its working capital;
 Make decisions regarding investing or lending capital;
 Other decisions that allow management to make an informed selection on various
alternatives in the conduct of its business.
Financial analysts often assess the following elements of a firm:
1. Profitability - its ability to earn income and sustain growth in both the short- and long-term.
A company's degree of profitability is usually based on the income statement, which reports on
the company's results of operations;
2. Solvency - its ability to pay its obligation to creditors & other third parties in the long-term;
3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate
obligations;
Both 2 and 3 are based on firm’s balance sheet, which indicates the financial condition of a
business as of a given point in time.
4. Stability - the firm's ability to remain in business in the long run, without having to sustain
significant losses in the conduct of its business.
Some of the financial statements useful to know the financial structure and position of any
livestock enterprise are listed below.
 Balance Sheet
 Profit and Loss Statement
 Cash Flow Statement
BALANCE SHEET (Net worth statement):
 A balance sheet is a summary statement of all the assets and liabilities of a business at a
given point of time.
 To be precise, it presents the net value of assets and liabilities in a concise form at a
given time and is usually prepared towards the end of the financial year.
 In a typical Balance sheet, the assets are listed on the left hand side and liabilities are
listed on the right hand side.
 Apart from this, at the bottom of right hand side of balance sheet Net worth or Equity is
mentioned.
 Generally the left hand side values are equal or balances the right hand side values and
hence this statement is called as Balance sheet.
An Asset may be defined as a property which a farmer/firm owns. A Liability is the amount
of money owed by the farmer/firm to others. On the basis of liquidity, assets/liabilities are
classified into
 Current assets
The assets which are used up in one production cycle and which can be easily converted
into cash. eg. Cash on hand, accounts receivable, market securities, inventories etc.,
 Medium term assets
The assets which are used up in production process for more than one year and upto 5
years. eg. Animals, equipments etc.,

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  Fixed assets
The assets which are used up in production process over a long period and which cannot be
easily converted into cash. eg. Land, buildings, machinery etc.,
 Current Liabilities
They refer to short time commitments of the business/farmer which has to be repaid within
the current year. eg. Accounts payable, taxes payable, interest payable.
 Working/Medium term loans
They refer to commitments of the business farmer which could be deferred at present but
the due falls in the next season and their time period ranges from 1 – 5 years. eg. Medium
term loans for Animals or small machinery such as chaff cutter loans etc.,
 Deferred Liabilities
They refer to long term loans and other such commitments which could be repaid over a
period of 5-15 years. eg. Long term loans for land, feed mill, hatchery etc.
 Net Worth/Equity
It is the difference between the total assets and total liabilities in the business.
o The most liquid current asset is cash in hand and the least liquid current asset is
inventory.Eg. Milk can.
o The most liquid current liability is money at call and the least liquid asset is long term
loans.
Model of balance sheet
Assumptions
An entrepreneur has a land of 2 acres, worth of Rs.500000/- He has khoa producing unit
worth of Rs.50000/- In his current account in Indian Bank he has Rs. 25000/- Taxes
payable for this year is Rs. 20000/- Wealth tax is Rs. 5000/- He borrowed Rs. 10000/- from
his neighbour. He has inventory worth of Rs.30000/- He has ice cream mix unit worth of
Rs. 100000/- He has bank deposit of Rs.25000/- He bought loan from bank which must be
paid within 3 years. He also borrowed loan for land development of Rs. 200000/-.
Balance sheet of Dairy processing unit business as on – 31 March 2014
Liabilities Amount in Rs. Assets Amount in Rs.
Current Liability Current assets
1. Taxes payable 20000 1. Current account balance 25000
2. Wealth tax 5000 2. Inventories 30000
3. Neighbour borrowing 10000 3. Bank deposit 25000
35000 80000
Medium term liability Working assets
1. Bank loan 100000 1. Khoa unit 50000
2. Ice cream unit 100000
100000 150000
Long term Liability Fixed assets
1. Land development loan 200000 1. Land 500000
200000 500000
Total Liability 335000 Total Assets 730000
Networth = Total Assets – Total Liability = Rs. 395000/-

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TEST RATIOS:
The balance sheet is analysed by estimating various ratios to understand the exact financial
position and stability of the farm business.
 Current Ratio
o Current Ratio = Total current assets/ Total current liabilities
o Current ratio indicates the capacity of the farmer to meet immediate financial
obligations (liquidity).
o A ratio of more than one indicates a favourable position of the farm business.
 Intermediate or working Ratio
o Intermediate Ratio =Total current assets + Total intermediate assets/ Total
current liabilities+ Total intermediate liabilities.
o Working ratio indicates the liquidity position of the farm business over an
intermediate period of time, ranging from 2 to five years.
o Here, there is time for the farmer to build up the farm business to improve his
liquidity position.
o The ratio should be more than one.
 Net Capital Ratio
o Net Capital Ratio= Total assets/ Total current liabilities.
o NCR indicates the solvency position of the farmers and more than one indicates
that the funds of the institutional agencies are safe.
o A consistently increasing ratio over the years reveals the sound financial growth
of the farm business.
 Acid test ratio or Quick ratio
o Acid test ratio or Quick ratio= Cash receipts +Accounts receivable + marketable
securities available in more than one year/ Total current liabilities.
o Indicates adequacy of cash and income surpluses to cover all current liabilities
during the period of one to two years.
 Current liability Ratio
o Current liability Ratio = Current liabilities/Owner’s equity which indicates the
farmer’s immediate financial obligations against the net worth and a ratio of less
than one indicates a healthy performance of the farm business.
 Debt-equity Ratio (Leverage Ratio)
o Debt-equity Ratio = Total debts/Owner’s equity which reflects the capacity of
the farmer to meet the long term commitments also.
 Equity-value Ratio
o Equity-value Ratio = Owner’s equity/Value of assets.
o Highlights the productivity gained by the farmer in relation to the assets.
INCOME STATEMENT (Profit and loss statement)
 Profit and Loss statement is an important financial statement employed to assess the
performance of farm business.
 It shows the operational efficiency of the farm business in terms of receipts, expenses,
profits and losses.
 Generally it is prepared by the entire farm for one agricultural year.
 However, it may also be prepared over a period of time.
 So, we can know the trend in receipts and expenses which indicates the success or
failure of a farm business.
 Thus it contains basically three important items, namely, Receipts, Expenses and Net
income.
Receipts
 They include returns from all the enterprises in the farm.
 It also includes the appreciation in the value of assets, gifts, many other types of
receipts etc.,
 However the returns from the sale of capital assets such as land, buildings, machinery,
etc. are not counted as receipts.
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Expenses
 All the expenses and the variable inputs are taken as operational expenses which
includes the interests on working capital.
 The fixed expenses include, depreciation, interests on fixed capital, rental value of
owned land, land revenue, etc.
 The amount spent on the purchase of any capital asset does not come under expenses.
Net Income
 It is calculated in three different ways.
o Net Cash Income
 This is worked out by reducing total cash expenses from the total cash
receipts.
o Net Operating Income
 It is calculated by reducing the total operational expenses from the gross
income.
o Net Farm Income
 It is worked out by deducting total fixed expenses from the net operating
income.
 Of the three types of net incomes, net farm income is the best measure and is most
frequently used for assessing the performance of farm business.

Total Operating Expenses

1. Opening Ratio:
Gross Income
Total Fixed Expenses
2. Fixed Ratio :
Gross Income
Total Expenses
3. Gross Ratio / Input – Output Ratio :
Gross Income
CASH FLOW STATEMENT:
 This is also known as cash flow summary or cash flow budget or flow of funds
statement.
 Cash flow statement is a summary of cash inflows and cash outflows of a business
organization in a particular period, say a season or a year.
 It is usually prepared for the future, hence the name cash flow budget.
 The merit of this particular statement is that, it helps to assess the time at which the
funds are required for farming and other allied enterprises, sources from which these
can be raised, the purpose for which the loan is required, the need of sale and purchase
of capital assets, the time and quantum of repayment, etc.
 Cash flow statement is prepared at the beginning of the agricultural year and checked
every quarterly.
 For convenience, quarterly checks are made
 Cash Receipts
o Cash Balance
o Total Operating Sales
o Total Capital Sales
o Non-farm income
o Borrowings
Total
 Cash Expenses
o Operating Expenses
o Capital Investment
o Family Living Expenses
o Payment of Previous year’s Debts

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 Payment of ST Loans and Instalments on Investment Loans
o
Total
 Cash Balance is the difference between Cash Receipts and Cash Expenses
Advantages of Cash Flow Budget
 It is a summary of all the financial matters of the farmer in a comprehensive report.
 This helps
o to estimate the total credit needs (Short term, Medium term and Long term) of
the farmer along with time and quantum;
o to plan the repayment schedule,
o in making purchases and sales at the appropriate time thereby helping to
minimize the credit dependence, so that the farmers can keep limits to avoid
wastages
o to keep ready input requirements well in advance so that the last minute rush
can be avoided
o to know the farm household’s expenditure pattern and enable the farmer to
exercise a check on farm costs,
o the farmer in preparing the farm business plans for the ensuing years,
o the banker for revising the scale of finance, rescheduling loans, etc., and
o finally, as a tool of financial control to the farmer.

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TOPIC - 32
Trading account, Profit and Loss accounts
After the business transactions are entered in journals, ledgers and after the completion of
trial balance, the trader prepares the final accounts to know the net profits or loss of the business.
This is done by (a) Trading account (b) Profit and loss account and (c) by balance sheet.
 Trading account is prepared to find out the Gross Profit or Loss during the period
 Profit and loss accounts is prepared to find out the net profit/loss for the period and
 Balance sheet indicates the overall position of the business at the every end of the period.
Trading account (real account):
It is a good account prepared mainly to know the profitability of the goods bought and sold
by the businessman. It is an account that shows the result of trading that is buying and selling
known as gross profit. The difference between selling price and cost price of the goods is the gross
earning.
Preparation of trading account:
Trading account is a ledger account. As the trading account contains the results of
operations over a period, the reading should be Trading account for the period.
The format of trading a/c:
………………………….
(Name of the business or proprietor)
Trading a/c for the period ended………
Dr. Cr.
Particulars Amount Particulars Amount

What to debit in a trading a/c?

1. Opening stock.
2. Purchases done during the period – returns outwards.
3. Purchase expenses.
4. Manufacturing expenses.
What to credit in a trading a/c?
1. Sales during the period – returns inwards.
2. Issue of goods as samples.
3. Goods damaged or lost or destroyed or consumed personally.
4. Closing stock.

Procedure for the preparation of Trading Account :

1. Debit Trading Account with the opening stock, net purchases and their direct expenses on
the goods by transfer of balances from the respective ledger accounts. Thus, Trading
Accounts will be debited with the total cost of the goods sold and unsold.
2. Credit the Trading Account for the transfer of net sales from the sales Account.
3. Since the profit can be found out only in regard to goods sold, the stock at close is credited
to Trading Account on the basis of an Adjusting Journal Entry.
4. The Profit and Loss (gross) on the Trading Account is transferred to the Profit and Loss
Account by means of a Journal Entry.

Example:
In January Mr. Ravikumar bought 120 kg. of certain goods at Rs.5.50 per kg and sold the same
during the half year ending on 30th June at average price of Rs. 7.50 per kg. Find the gross profit
taking Rs. 7 as purchase expenses.

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 Mr. Ravikumar
Trading a/c for the period ending 30th June
Dr. Cr.
Particulars Amount Particulars Amount
To purchases 660 By sales 900
To purchase expenses 7
To profit and loss a/c 233
(gross profit transfer)
900 900

Profit and loss account:

Profit and loss a/c is one which shows either the net profit or net loss or the ultimate profit
or ultimate loss. The Gross Profit or Loss will be brought down from the Trading Account to
Credit or Debit side respectively of Profit and Loss Account.
To find out net profit, a trader has to deduct many expenses other than for goods purchase
and manufacture, from gross profits. These other expenses include;
1. Administrative expenses – salaries, bonus, bank charges, stamps.
2. Selling expenses – Salesman’s commission etc.
3. Distribution expenses – delivery van etc.
4. Depreciation costs
Therefore the net profit is the surplus remaining after deducting from the gross profit all
expenses, including depreciation and other provisions, properly attributable to the normal
activities of a business. When the total of all these expenses exceeds the gross profit the difference
between the two is ‘net loss’.
Format of profit and loss a/c
(Name of the proprietor)
Profit and loss account for the year ending ……
Dr. Cr.
Particulars Amount Particulars Amount

What to record on the Dr side of Profit and loss a/c:

1. Administrative expenses: (a)Office salaries & wages (b)insurance, rent, printing stationary,
heating & lighting, repairs & renewals, telephone charges, a/c fees, legal fees, audit fees,
bank charges, bank commission, interest paid & int.on capital etc.
2. Selling expenses: Salesman’s salaries, travelling expenses, advertising, discount allowed,
bad debts, rates and taxes, selling commission, brokerages, free samples, trading expenses,
etc.
3. Distribution expenses: Carriage outward, warehouse expenses, warehouse insurances,
delivery van expenses, packing expenses etc.
4. Depreciation and other provisions: (a) Depreciation of different assets, (b) provision or
reserve for doubtful debts, (c) discount on debtors, (d) provision or reserve for any other
expenses.
On the credit side:
1. Miscellaneous incomes: (a) Discount received, (b) commission received, (c) rent received,
(d) interest received, (e) bonus received, (f) profit on sale of assets, and (g) bad debts
recovered etc.
2. Provision or reserve for discount on creditors.
Procedure for preparing Profit and Loss Account
 Gross Profit or Loss will be brought down from the Trading Account to the Credit or
Debit side respectively of Profit and Loss Account.
 Debit the Profit and Loss Account and Credit the various nominal Accounts for
bringing the various expenses of the business proper into the Profit and Loss Account.

Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 131

  Credit the Profit and Loss Account and Debit the various nominal Accounts for
bringing the various business incomes into the Account.
 The difference between the two sides of Profit and Loss Account will represent the
Profit or Loss Account and since the Losses and Gains have to be borne by the
proprietor, Profit and Loss Account will be closed by means of credit (net profit) and a
debit (net loss).
 It is most important to note that all business expenses other than those transferred to
Trading Account will have to be transferred to the Profit and Loss Account.
 Likewise, all business incomes will have to be brought into profit and Loss Account
after making adjustments and Provisions if any.
 The indirect or selling expenses which find a place in profit and Loss Account after
include, among others, the following:
o Unproductive wages, wages and Salaries, Carriage on sales, Carriage outwards,
Freight on sales/ outwards, all office expenses, trade expenses not accompanied
by office expenses, export duties and taxes other than income tax.
Example:
Mr. Ram found his gross profit on 31st March 2014 to be Rs. 5,600. His other expenses were as
under:
Salaries - 1,200
Lighting - 120
Rent and taxes - 625
Bank charges - 26
Postage’s - 15
Find out the profit for the year ending 31st March 2014.
M/s. Ram
Profit and loss account for the year ending 31.03.2014
Dr. Cr.
Particulars Amount Particulars Amount
To Salaries 1200 By trading a/c 5600
To Rent and taxes 625 (gross profit transferred)
To Lighting 120
To Bank charges 26
To Postage 15
To Capital a/c 3614
(net profit transferred)
5600 5600

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REFERENCES –

1. S.Subba Reddy , P.Raghu Ram, T.V.Neelakanta Sastry and Bhavani Devi,

Agricultural Economics
2. K.S.Gangadhar, K.Satyanarayan and K.C.Veeranna, Livestock Economics
3. http://www.elearnvet.net/
4. L.N.Chopde and D.H. Choudhari, Book Keeping and Accountancy
5. www.apeda.gov.in
6. G.N.Singh, D.S.Singh, and R.I. Singh, Agricultural Marketing in India
7. K.K.Dewett, Modern Economic Theory
8. S. S.Johi & T.R.Kapur, Fundamentals of farm business management

Dept. of V. & A. H. Extension Education, COVAS, Udgir Page 132