Estimates of farm output supply and input demand elasticities: The translog profit function approach

Abstract

This study has estimated the elasticities of farmer output supply and input demand by applying the normalised restricted translog profit function to the farm survey data collected from the irrigated areas of Punjab. It proceeded with the estimation of these elasticities on confirmation of the relevance of this functional form for the data set used over the conventional Cobb-Douglas function and estimated the required elasticities from the coefficients of the simultaneously determined translog profit and share equation functions. The elasticities have been derived separately by crop zones and for farmers from all zones put together to ascertain variation in farmer responsiveness to different incentives in different crop belts. The variable inputs of fertiliser and labour used have both elastic demand and are complementary in production. Farm labour application is positively related to capital, livestock and land. Fertiliser demand elasticity with respect to output price is also elastic. By comparison, rice farmers have responded more swifty than farmers from cotton and mixed crop zone to price changes in application of these variable inputs. In general, fertiliser and labour seem to exercise a synergestic effect on production and have potentially positive effect on-farm opportunities. Adequate availability of the needed cooperant factor endowments like capital, farm household education and land especially further enhance employment of labour in agriculture. The output elasticities with respect to the fixed factors were positive implying that their increased availability is likely to positively affect the effectiveness, efficiency and marginal productivity of the variable factors of labour and fertiliser. The analysis performed is fairly conclusive in its showing the farmers as price-responsive and thus making the prevalence of fair output and input prices as essential for preservation of their incentives for higher farm production. The main policy implication is that farmer output prices need to increase over time at least consistent with input prices to assure required application of yield-augmenting technological innovations like fertiliser. Assured supply of irrigation water also needs to accompany the access to modern inputs. Further, there is need to improve household education which increases farm production via increased application of modern technologies and thereby increases on-farm employment.