AAEC 2305 Fundamentals of Ag Economics Chapter 6 Multiple Inputs & Outputs.

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Presentation transcript:

AAEC 2305 Fundamentals of Ag Economics Chapter 6 Multiple Inputs & Outputs

Objectives b How a firm determine the cost-minimizing combination of inputs to use in the production process. b What influences the firm’s demand for inputs? b How a firm decides how much of several products to produce? b About the facotors that influence whether a firm specializes or diversifies. b What influences the quantities supplied by firms?

Production with Multiple Variable Inputs b 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. 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. b Level of output does not  along an isoquant b Isoquant map shows all possible isoquants.

Production with Multiple Variable Inputs b Marginal Rate of Technical Substitution measures the slope of the isoquant. b MRTS is the rate at which on variable input can physically substitute for another variable input in the physical pdn process. b MRTS is calculated by dividing the  in the replaced input by the  in the added input

Production with Multiple Variable Inputs b Types of isoquant relationships Variable Proportions: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 proportionsFixed proportions –Perfect complements - occurs when inputs are used in a fixed ratio

Production with Multiple Variable Inputs b 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.Slope of the isocost line is equal to the negative inverse of the price ratios.

Production with Multiple Variable Inputs b 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)(just as a consumer maximized utility by producing where the indifference curve was just tangent to the budget line) b This tangency provides the Least Cost Combination of inputs to produce a given level of output. b Refer to in class example

Production with Multiple Variable Inputs b Expansion Path - a line connecting the least cost combinations of two inputs used by a firm at various output levels.