THE USE OF PROFIT FUNCTION TO EVALUATE RELATIVE ECONOMIC EFFICIENCY IN AGRICULTURE

The purpose of this paper is first to examine why a profit function approach is methodologically more flexible and statistically better suited for estimation than a production function model. Then it is to present a brief theoretical overview underlying the profit function approach. Thirdly and most importantly, it is to demonstrate how a profit function model can be empirically estimated to derive input demand and output supply elasticities (functions) and to evaluate economic efficiency of various groups of farmers such as large vs. small or tractorized vs. non-tractorized farms