Farm Management. Chapter 8 Economic Principles Choosing Input and Output Combinations. Chapter Outline. Input Combinations Enterprise Combinations. Input Combinations. Most products require two or more inputs, and the manager may choose the input combination or ratio to use.
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Choosing Input and Output Combinations
Most products require two or more
inputs, and the manager may choose
the input combination or ratio to use.
The economic question is whether
one input can be substituted for
another to reduce the cost.
for output Q1.
Isocost curve C0 shows
all combinations of K and L
that can produce Q1at this
CO C1 C2 are
L3Producing a GivenOutput at Minimum Cost
Isocost C2 shows quantity
Q1 can be produced with
combination K2L2or K3L3.
However, both of these
are higher cost combinations
Labor per year
changes, the isocost curve
becomes steeper due to
the change in the slope -(w/L).
This yields a new combination
of K and L to produce Q1.
Combination B is used in place
of combination A.
The new combination represents
the higher cost of labor relative
to capital and therefore capital
is substituted for labor.
L1Input Substitution When an Input Price Change
Labor per year
Input substitution ratio =
amount of input replaced
amount of input added
the least-cost combinations of
labor and capital that can be
used to produce each level of
output in the long-run.
$3000 Isocost Line
300 Unit Isoquant
IsoquantA Firm’s Expansion Path
Labor per year
Input price ratio =
price of input being added
price of input being replaced
input substitution ratio = input price ratio
If they cannot be exactly equal because
of the choices available in the table, get
as close as possible without letting
the price ratio exceed the substitution
grain at 4.4¢ and hay at 3.0¢
Another decision that must be made
is the combination of enterprises
to produce to maximize profits. If one
or more inputs is limited, there is an
upper limit on how much can be
The first step in determining the
profit-maximizing combination of
enterprises is to determine the
physical relationship among the
Output Substitution Ratio =
quantity of output lost
quantity of output gained
Output Price Ratio =
price of output gained
price of output lost
output substitution ratio = output price ratio
If no available combination makes these
exactly equal, get as close as possible
without letting the price ratio drop below
the substitution ratio.
corn at $2.80/bu, wheat at $4.00/bu
This chapter emphasizes the use of
substitution principles to decide how
and what to produce. To decide
how to produce, the manager finds
the least-cost combination of inputs.
To decide what to produce, the manager
finds the profit-maximizing combination