Annex 1: - Summary of the Nethergill Associates ‘MSO’ approach

THE THEORY: According to the ‘standard theory of the firm’, variable costs are assumed to have a linear relationship with output volumes (see Figure 1), implying that the greater the output volumes, the greater the revenue. [...] The standard theory of the firm break−even output farm revenue fixed costs total variable costs support output (indexed) Fig 1: The Standard Theory of the Firm However, the reality in farming is that variable costs are not • Corrective variable costs (CVC) – avoidable or non- linearly related to outputs. [...] revenue/costs (indexed) ii THE SWEET SPOT HOW FARMING WITH NATURE CAN MAKE YOU HAPPIER, HEALTHIER, AND WEALTHIER The point at which the PVC resources are exhausted and It should be noted that: the CVCs cut in is the point that Nethergill Associates call the point of maximum (economically) sustainable output • The MSO for a farm is not a single number that (MSO). [...] The standard theory would suggest expansion as the route • The MSOs calculated are designed to provide a to improved returns but when the two types of variable direction for farms to move towards, the scale of the costs are taken into consideration, this shows that in reality task involved and the likely economic benefits. [...] This is the pattern NB: Because the formulae are empirical, based on a set of observed in the standard model of the firm.