In the last article, it was learnt and noted that rational allocation of resources requires careful consideration of the principle of diminishing returns to determine the optimal level of resources to apply.
Agribusiness enterprises strive to minimize costs by adopting the least-cost approach in their operations one of which is the principle of substitution in the choice of agribusiness practices.
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The Principle of Substitution in the Choice of Agribusiness Practice
In this principle of substitution in choice of practice, we consider the better competing variance in agribusiness practices. Hence, two types of resources, which can be used in producing a given output, are considered. In doing so, decisions are made regarding which is more profitable and which has a minimal cost of production.
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For instance, a farm manager may weigh the options between weeding with hand tools and applying herbicides, or between buying a tractor for land preparation and hiring one for the same purpose.
A farm manager who is always aiming to make the highest possible profit must try as much as possible to minimize production costs. To achieve this, the manager should adopt a better competing variance or practice that reduces costs while still achieving appropriate returns on investment.
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Such considerations may arise in any field of agriculture. For example, in livestock production, there may be a comparison between formulating feed on the farm and acquiring commercial feed.
Based on the goal of profit minimization, a manager must make the choice between two or more methods or competing inputs, choosing the one that will cost the least while still ensuring efficiency and profitability in the agribusiness.
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