Factor Factor

8/9/2019 Factor Factor

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Factor-factor relationships

1. This relationship deals with the resource combination and resource substitution.

2. Cost minimization is the goal of factor -factor relationship.

3. Under factor-factor relationship, output is kept constant, input is aried in !uantit".

#. This relationship guides the producer in deciding $%ow to produce&.'. This relationship is e(plained b" the principle of factor substitution or principle of substitution

between inputs.

). *actor -*actor relationship is concerned with the determination of least cost combination of resources.+. The choice indicators are substitution ratio and price ratio.

. lgebraicall", it is e(pressed as

/ f 0 1, 2

n the production, inputs are substitutable. Capital can be substituted for labour and ice ersa, grain can

be substituted for fodder and ice ersa. The producer has to choose that input or inputs, practice or

practices which produce a gien output with minimum cost. The producer aims at cost minimization i.e.,

choice of inputs and their combinations.

Iso-quant

Definition:

n iso-!uant represents all possible combinations of two resources 01and 2 ph"sicall" capable

of producing the same !uantit" of output.

so!uants are also known as iso-product cures or e!ual product cures or product indifference cures.

n iso-!uant is a conenient method for compressing three ariables in two dimensional graphs.

Tabular form

nput 1 nput 2 4utput

1 2' 155

2 25 155

3 1) 155# 13 155

Graphically


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Iso-quant Map or Iso product Contour

f numbers of iso-!uants are drawn on one graph, it is known as iso-!uant map.

2

1 Fig: Iso-quant map

Characteristics of Isoquants

1. 6lope downwards from left to right or negatiel" sloped.

2. Cone( to the origin.

3. 7onintersecting#. so-!uants l"ing aboe and to the right of another represents higher leel of output.

'. The slope of iso-!uant denotes the marginal rate of technical substitution 089T6.

Type of iso quant

:inear; (2 /

x2

x1

1 2'

2 25 '

3 1) #

# 13 3


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Resource types

Substitutes

Two goods are said to be substitute if decrease in one input are compensated b" increase in the amount ofother inputs. 89T6 is negatie

erfect substitutes

?hen two resources are completel" interchangeable, the" are called perfect substitutes.

so-!uants are linear and negatiel" slopped.

89T6 is constant

@(; *amil" labour and hired labour, *arm produced and purchased seed etc,

Complements

Two resources which are used together are called complements.

n the case of complements reduction in one factor cannot be replaced b" an increase in another

factor.

89T6 is zero

erfect Complements:

Two resources which are used together in fi(ed proportion are called perfect complements. t means

that onl" one e(act combination of inputs will produce a particular leel of output.

The iso-!uant in this case is of a right angle.

@(; Tractor and drier,


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Type of factor-factor relationship !Factor substitution"

Fi#ed proportion combination

n order to get certain !uantit" of output the resource must be combined in fi(ed proportion @. (.


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$lgebraically

x 21

x 11 /

x22

x12 /

x23

x13 DDDDDD.

x2n

x1n

%arying rate of substitution

@ither increasing or decreasing rate of substitution

Increasing rate of substitution

ncreasing rate of substitution means that eer" subse!uent increase in the use of one factorreplaces

more and more of the other than preious unit.

89T6 of 1 to 2 increases subse!uentl" i.e. iso-!uant is concae to origin

7ot common in agriculture

Tabular formCombination 1 2 89T6 (1(2 1 3' -

B 2 2 +

C 3 25

A # 11

@ ' 1 15

Graphically

2

1

$lgebraically

x 21

x 11

E x22

x12

E x23

x13

DDDDDD. x2n

x1n

&ecreasing rate of substitution

Aecreasing rate of substitution means that eer" subse!uent increase in the use of one factorreplaces

less and less of the otherthan preious unit.

89T6 of 1 to 2 decreases subse!uentl" i.e. iso-!uant is cone( to origin

Fenerall" most common in agriculture.


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Tabular form

Combination 1 2 89T6 (1(2 1 3' -

B 2 2' 15

C 3 1)

A #

@ ' 1 +

Graphical form

2

1

$lgebraically

x 21

x 11G x22

x12G x23

x13DDDDDD.

x2n

x1n

Iso-clines

The term isoclineis used to refer to an" line that connects points of the same slope on a series of iso-

quants'

(#pansion ath

The line or cure connecting the points of least cost combination for different leels of output is called

e(pansion path. @(pansion path is isoclines on which slope of iso-!uant 089T6 e!uals the slope of iso-

cost line 0price ratio.

Ridge lines

t represents the points of ma(imum output from each inputs, gien fi(ed !uantit" of other inputs. t

ridge line 8

Factor Factor

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