Transcript AAEC 2305 Fundamentals of Ag Economics

AAEC 2305
Fundamentals of Ag Economics
Chapter 6
Multiple Inputs & Outputs
Objectives
How a firm determine the cost-minimizing
combination of inputs to use in the production
process.
 What influences the firm’s demand for inputs?
 How a firm decides how much of several products
to produce?
 About the facotors that influence whether a firm
specializes or diversifies.
 What influences the quantities supplied by firms?

Production with Multiple
Variable Inputs
Isoquant - shows all of the combinations of two
inputs that can be used to produce a given
quantity of an output. (the isoquant is analogous
to the consumer’s indifference curve)
• An efficient firm will be on the isoquant. An
inefficient firm will use more than inputs than
necessary and be operate at a point above the
isoquant.
 Level of output does not  along an isoquant
 Isoquant map shows all possible isoquants.

Production with Multiple
Variable Inputs
 Marginal Rate of Technical Substitution
measures the slope of the isoquant.
 MRTS is the rate at which on variable input
can physically substitute for another
variable input in the physical pdn process.
 MRTS is calculated by dividing the  in the
replaced input by the  in the added input
Production with Multiple
Variable Inputs
 Types of isoquant relationships
• Variable Proportions:
– Imperfect substitutes (Diminishing MRS) occurs when one unit of an input can be
substituted for another, but at a decreasing
rate.
– Perfect substitutes - occurs when one unit
of input can be exchanged for another input
on a consistent basis. (MRS is constant &
isoquant is linear)
(continued)
• Fixed proportions
– Perfect complements - occurs when inputs
are used in a fixed ratio
Production with Multiple
Variable Inputs
 Isocost line- indicates the combination of
two inputs that can be purchased with a
given amount of money. (The isocost line is
analogous to the consumer’s budget line.)
• Slope of the isocost line is equal to the
negative inverse of the price ratios.
Production with Multiple
Variable Inputs
 Firm minimizes costs by operating where
the isocost line is tanget to the isoquant
• (just as a consumer maximized utility by producing
where the indifference curve was just tangent to the
budget line)
 This tangency provides the Least Cost
Combination of inputs to produce a given
level of output.
 Refer to in class example
Production with Multiple
Variable Inputs
 Expansion Path -
a line connecting the
least cost combinations of two inputs used
by a firm at various output levels.