Scribd
Upload
105 views22 pages

Input Combination

This chapter discusses economic principles for farm management decisions around input and enterprise combinations. It covers determining the least-cost input combination using input substitution and price ratios to select combinations that equalize the ratios. It also addresses finding the profit-maximizing combination of enterprises by analyzing enterprise relationships and using output substitution and price ratios to select combinations that equalize those ratios. The goal is to explain how to analyze input and enterprise combinations from an economic perspective to minimize costs and maximize profits.

Uploaded by

Chiko Egonu
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
105 views22 pages

Input Combination

This chapter discusses economic principles for farm management decisions around input and enterprise combinations. It covers determining the least-cost input combination using input substitution and price ratios to select combinations that equalize the ratios. It also addresses finding the profit-maximizing combination of enterprises by analyzing enterprise relationships and using output substitution and price ratios to select combinations that equalize those ratios. The goal is to explain how to analyze input and enterprise combinations from an economic perspective to minimize costs and maximize profits.

Uploaded by

Chiko Egonu
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 22

Farm Management

Chapter 8
Economic Principles Choosing Input and Output Combinations

Chapter Outline
Input Combinations Enterprise Combinations

farm management chapter 8

Chapter Objectives
1. To explain the use of substitution in economics and decision making 2. To demonstrate how to compute a substitution ratio and a price ratio for two inputs 3. To use the input substitution and price ratios to find the least-cost combination of two inputs 4. To describe the characteristics of competitive, supplementary, and complementary enterprises 5. To show the use of the output substitution and price ratios to find the profit-maximizing combination of two enterprises
farm management chapter 8 3

Input 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.

farm management chapter 8

Types of Input Substitution


Constant rate (perfect substitution) Decreasing rate No substitution

farm management chapter 8

Figure 8-1 Three possible types of substitution

farm management chapter 8

Input Substitution Ratio


Input substitution ratio =
amount of input replaced amount of input added

farm management chapter 8

Input Price Ratio


Input price ratio =
price of input being added price of input being replaced

farm management chapter 8

Decision Rule
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 ratio.
farm management chapter 8 9

Table 8-1 Selecting a Least-Cost Feed Ration


Feed ration A B C D E F G Grain (lbs) 825 900 975 1050 1125 1200 1275 Hay (lbs) 1350 1130 935 770 625 525 445 Input Input Substitution Price Ratio Ratio 2.93 2.60 2.20 1.93 1.33 1.07 1.47 1.47 1.47 1.47 1.47 1.47

farm management chapter 8

grain at 4.4 and hay at 3.0

10

With Different Types of Substitution


With a constant rate of substitution, the least-cost combination will be all of one input and none of the other (unless the price ratio is exactly equal to the constant rate of substitution). With a decreasing rate of substitution, the least-cost combination will usually include some of each input.
farm management chapter 8 11

Enterprise Combinations
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 produced.

farm management chapter 8

12

Enterprise Relationships
The first step in determining the profit-maximizing combination of enterprises is to determine the physical relationship among the enterprises.

farm management chapter 8

13

Types of Relationships
Competitive: output of one enterprise cannot be increased unless output of the other decreases Supplementary: more output from one enterprise can be added without a change in the level of the other enterprise Complementary: as output of one enterprise increases, output of the other increases also
farm management chapter 8 14

Competitive Enterprises
Competitive enterprises may have constant substitution or increasing substitution.

farm management chapter 8

15

Figure 8-2 Production Possibility Curves for Competitive Enterprises

farm management chapter 8

16

Figure 8-3 Supplementary & complementary enterprise relationships

farm management chapter 8

17

Output Substitution Ratio


Output Substitution Ratio =
quantity of output lost quantity of output gained

farm management chapter 8

18

Output Price Ratio


Output Price Ratio =
price of output gained price of output lost

farm management chapter 8

19

Decision Rule
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.

farm management chapter 8

20

Table 8-2 Profit-Maximizing Enterprise Combination


Combination number 1 2 3 4 5 6 7 Corn (bu) 0 2,000 4,000 6,000 8,000 10,000 12,000 Wheat (bu) 6,000 5,600 5,000 4,100 3,000 1,700 0 Output Output substitution price ratio ratio 0.20 0.30 0.45 0.55 0.65 0.85 0.70 0.70 0.70 0.70 0.70 0.70

corn at $2.80/bu, wheat at $4.00/bu


farm management chapter 8 21

Summary
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 of enterprises.
farm management chapter 8 22

You might also like