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Current Category » Economics of Natural Resources & Farm Management

Law of Comparative Advantage

The concept of comparative advantage is associated with
i) Resource productivity and ii) cost of production of enterprise
The principle (law) of comparative advantage directs a farmer in the selection of crop and live stock enterprise in the production of which available resources have the greatest relative advantage and not absolutes advantage. Types of advantages - On the maximum net returns per hectare basis there are two types of advantages.
1) Absolute advantage.   2) Relative or comparative advantage.

Absolute advantage: Net return per hectare
i.e. Total returns - Cost of production.

Comparative advantage: Refers to relative advantages of growing different crops in a region. The following table gives idea about these two advantages.
Table: Net returns of different crops in a region.


Sr. No.

Crop Account

Bajara

 Groundnut

Cotton

  1.  

Total income (Rs.)

3500

5000

9000

  1.  

Total expenses (cost)

2000

2500

3000

  1.  

Net returns ( Rs)

1500

2500

6000

  1.  

Returns per rupee

1.75

2.00

3.00

  1.  

%returns

175%

200%

300%

From the above figures it can be said that farmers of that region can make profit by growing any of the three crops as they can get absolute advantages to the tune of Rs.1500, 2500 and 6000 from bajara, Groundnut and cotton respectively. But for making the greatest profit they will have to allocate the largest possible area under cotton alone as it has given the maximum relative returns. Thus if a cultivator ants to earn greatest possible returns he should produce those crops in which their relative advantage is greatest.

The specialized or diversified farming depends largely on this principle e.g. fruits & vegetables are grown largely in the vicinity of the big Cities.

Current Category » Economics of Natural Resources & Farm Management