Agricultural Economics Department


Date of this Version

January 2004


Published in Cornhusker Economics, 01/07/2004. Produced by the Cooperative Extension, Institute of Agriculture and Natural Resources, Department of Agricultural Economics, University of Nebraska–Lincoln.


Efficiency in crop and livestock production has always been considered to be the key to understanding the economic competitiveness of different farm sizes. Differences in efficiency is considered to be the driving force behind farm consolidation and resulting changes in farm size structure. The tool used to portray efficiency is termed a long-run average cost function, showing the cost per unit of production at different farm sizes. The long-run average cost function is conventionally shown as "L" shaped with significantly large decreases in cost of production until moderate sizes are reached, with little decline thereafter. Under this framework we might expect that small farms would largely disappear because of their competitive cost disadvantage, yet this has not occurred. In fact, even though average farm size continues to increase, small farms show evidence of remaining a permanent fixture in agriculture. This suggests that some processes used in estimating long-run cost functions by size of farm may need to be re-examined.