TOPIC 7: ENTERPRISE COMBINATION

Factors Affecting Enterprise Combination

1. Availability of Farming Resources

• Land: Limited land due to population growth makes enterprise combination difficult.

• Labour: Some enterprises like tobacco require a lot of labour. A shortage of labour affects enterprise success.

• Capital: More capital makes it easier for the farmer to combine enterprises.

• Managerial Ability: Good decision-making and knowledge about enterprises help in combining them effectively.

2. Farmer’s Food Requirements

• Farmers must keep some land for growing food crops, especially maize.

• On average:

  • Adults need 300 kg of maize per year.

  • Children (under 18 years) need 150 kg per year.

3. Profitability of Enterprises

• Farmers should choose enterprises that bring the highest profits.

4. Nature of the Enterprise

• Competitive Enterprises: Compete for the same resources. Increasing one reduces the other (e.g. maize and tobacco).

• Supplementary Enterprises: Do not compete for resources. One may benefit the other (e.g. groundnuts and maize).

• Complementary Enterprises: Help each other in production (e.g. poultry and vegetable production).

5. Opportunity Cost

• Refers to the benefit lost when choosing one enterprise over another.

  • Example: Choosing to rear animals instead of growing crops.

6. Comparative Advantage

• Focus on enterprises best suited to the area in terms of:

  • Soil type

  • Climate

  • Distance to market

7. Risks and Uncertainty

• Risk: The difference between expected and actual outcome (e.g. price changes).

• Uncertainty: Not knowing what will happen in future (e.g. drought, floods).

How Farmers Can Safeguard Against Risks and Uncertainties

• Choose reliable enterprises.

• Practice crop diversification (grow different crops).

• Be flexible in production methods.

• Use input substitution (e.g. manure instead of chemical fertilisers).

• Keep food reserves for poor seasons.

• Insure crops to reduce losses.

8. Farmer’s Skills and Abilities

• Farmers should understand the required techniques to manage the enterprise successfully.

9. Changes in Prices and Technology

• Farmers should evaluate new technology before adopting it.

• Be aware of price changes in the market.

Other Considerations

• Type of crop rotation to be used.

• Expected yield from each enterprise.

• Input requirements (e.g. fertilisers, seeds).

• Market prices expected for the products.

Economic principles

1. Opportunity Cost

Definition:
Opportunity cost is the value of the next best alternative that is forgone when a decision is made to use resources for a particular purpose.

Example:
If a farmer uses a piece of land to grow maize instead of groundnuts, the profit that could have been earned from groundnuts is the opportunity cost.

Key Point:
Opportunity cost helps farmers make decisions that maximize their returns by comparing different possible uses of their resources.

2. Comparative Advantage

Definition:
Comparative advantage is when a farmer or region can produce a certain crop or product more efficiently or at a lower opportunity cost than others.

Example:
If Region A can produce tobacco more efficiently due to good soil and Region B is better at producing rice due to suitable water conditions, each should specialize in what they produce best.

Key Point:
Focusing on enterprises with comparative advantage leads to better productivity and profitability.

3. Substitution of Inputs

Definition:
This refers to the replacement of one input with another in the production process, especially when the substitute is cheaper or more available.

Example:
Using organic manure instead of chemical fertilizers, or using family labour instead of hired workers.

Key Point:
Substituting inputs helps reduce production costs and maintain or increase productivity when certain inputs are scarce or expensive.

4. Diminishing Marginal Returns

Definition:
This principle states that as more units of a variable input (e.g. fertilizer or labour) are added to a fixed input (e.g. land), the additional output (marginal return) from each new unit eventually decreases.

Example:
Applying 50 kg of fertilizer increases maize yield significantly. Applying 100 kg gives more yield, but applying 150 kg may not increase the yield much further. Beyond a certain point, extra fertilizer may even harm the crop.

Key Point:
There is an optimal level of input use, beyond which returns begin to decrease, and resources may be wasted.