Economic principles provide guidance on how cattle producers should adjust production in response to wildly fluctuating output and input values. Most production decisions are issues of allocating resources and revolve around the following questions: What to produce? How much to produce? How to produce it? Though the question of what to produce and the general production system that determines how to produce may be largely fixed in the short run, changing market values for outputs and inputs mean that adjustments are necessary to maximize profits.
Taking the decision about what to produce as a given in the short run, the question of how much to produce depends on the value of the output. Most production processes are subject to diminishing returns, which mean that at some point additional inputs will result in less additional output than before. This means, for example, that cow-calf producers need to determine the optimal weaning weight of calves (or better yet, the optimal number of pounds of calf produced per cow exposed to bulls), which may not be the same as the maximum level of production. An obvious example is using creep feed to increase weaning weight. The question is whether the additional pounds are worth more than the cost of the creep feed. The same is true for genetics, nutrition, and health inputs. This principle also implies than when the value of the output increases, the optimal level of production also increases, all else being equal, and vice versa for decreased output value.
A similar principle applies to the use of inputs. Changes in the value (cost) of inputs imply changes in the optimal level of use of the input. For a given output value, input use should increase if input cost decreases and decrease if input cost increases. Following the earlier example, an increase in the cost of creep feed means that less creep feed should be used to maximize profits. In another example, higher fertilizer costs suggest less fertilizer use is optimal for a given forage value. Thus, higher fertilizer prices may mean using less total fertilizer and targeting use to those areas with the highest marginal productivity. The optimal level of input use is the point at which the value of additional output produced equals the cost of the additional input.
The final important economic principle is substitution of inputs when relative values change. As noted above, the production system may be fixed in the short run but there is usually some degree of flexibility to choose among various inputs. A common livestock example is choosing among alternative feed ingredients in a ration. Obviously, when one feed gets more expensive, it makes other feeds more attractive. As with the output and input decisions, it is relative values that matter. If one has a choice of two inputs and both double in price, then the optimal choice between them does not change but the optimal level of use of either one is reduced according to the previous discussion.