1. Unit 2: Economic Principles in Agribusiness Lesson: EP3
Substitution
Unit 2: Economic Principles in Agribusiness
Lesson: EP3

2. Objectives Lesson Objective:
After completing the lesson on substitution, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Substituting for an Improved School Project.
Enabling Objectives:
Define substitution and describe the two methods of substitution.
Determine maximum profit.
Determine and calculate the best rate of substitution.

3. Key Terms Substitution Maximum profit Constant substitution
Variable substitution
Marginal rate of substitution
Price ratio

4. What could we use instead?

5. What could we use instead?

6. What could we use instead?

7. What could we use instead?

8. What could we use instead?

9. Substitution Replacing one input with another
Attempt to maximize profit

10. Two Methods of Substitution
Constant Substitution
Substitution at the same rate, one for one
Variable Substitution
One resource substitutes for part of another
Different rates for each additional unit of input

11. Maximize profits

12. Maximum Profit Determined by the best combination of inputs
Organized in a way so the manager can neither add nor subtract from the business without decreasing profit
Determining maximum profit is related to the principle of diminishing returns, in which inputs can only be added up to a certain level without decreasing profit.

13. Best rate of substitution

14. Marginal Rate of Substitution
Represented as MRS
Number of units replaced
Number of units added
Number of Workers
Number of Workers Replaced
Number of Machines
Number of Machines Added
Marginal Rate of Substitution 25 18 7 1
7/1 = 7 13 5 2
5/1 = 5 10 3
3/1 = 3 8 4
2/1 = 2

15. Price Ratio Represented by PR Price of added unit
Price of the replaced unit
The cost of a worker is $250 a week, and the cost of owning and operating a machine is $1000 a week.
Price ratio is 250/1000 = 4
Number of Workers
Number of Workers Replaced
Number of Machines
Number of Machines Added
Marginal Rate of Substitution
Price Ratio 25 18 7 1
7/1 = 7 4 13 5 2
5/1 = 5 10 3
3/1 = 3 8
2/1 = 2

16. Best Rate of Substitution
Most profitable combination
MRS = PR
MRS should always be greater than or equal to PR
MRS ≥ PR
How many machines should the firm substitute?
Number of Workers
Number of Workers Replaced
Number of Machines
Number of Machines Added
Marginal Rate of Substitution
Price Ratio 25 18 7 1
7/1 = 7 4 13 5 2
5/1 = 5 10 3
3/1 = 3 8
2/1 = 2
2 – if they substitute more, MRS will be less than PR

17. More practice

18. Hogs grow best when grain and protein are mixed to obtain the proper protein level. However, they will grow on most any mix of corn and protein. The following rations will all produce about 950 pounds of grain when fed to a pen of ten, 155-pound pigs.
If corn costs 3.5 cents/pound and supplement costs 9 cents/pound, what is the least cost ration?
Ration
Lbs. Corn
TC of Corn (.035)
Lbs. Protein
(.09)
TC of Protein
Total Cost of Ration A
3500
3500 x .035 = 122.5
100
100 x .09 = 9
131.5 B
2990
104.65
300 27
131.6 C
2560
89.6
500 45
134.60 D
2200 77
700 63
140 E
1900
66.5
900 81
147.5
Ration A

19. If corn costs 4.3 cents/pound and supplement costs 8 cents/pound, what is the least cost ration?
Lbs. Corn
TC of Corn (.043)
Lbs. Protein
(.08)
TC of Protein
Total Cost of Ration A
3500
150.5
100 8
158.5 B
2990
128.57
300 24
152.57 C
2560
110.08
500 40
150.08 D
2200
94.6
700 56
150.60 E
1900
81.7
900 72
153.70
Ration C

20. A farmer typically uses dried distillers grain that has 10% moisture; however, he has decided to try substituting this grain for wet distillers grain that has 70% moisture. He would like to know the nutrient equivalent price for the wet distillers grain before he makes the switch. The dry distillers grain sells for $140 per ton.
If the dried distillers grain has 10% moisture, there is 90% dry matter.
If the wet distillers grain has 70% moisture, there is 30% dry matter.
.90 = .30 x
.90x = 42
x = $46.67 per ton

21. If dried distillers grain has 10% moisture and sells for $130 per ton, what would be the nutrient equivalent price for wet distillers grain which has 65% moisture?
If the dried distillers grain has 10% moisture, there is 90% dry matter.
If the wet distillers grain has 65% moisture, there is 35% dry matter.
.90 = .35 x
.90x = 45.5
x = $50.55 per ton

22. Conclusion
An efficient manager may be able to increase a firm’s profits through substitution.
The level of substitution is determined by comparing the MRS with the PR and substituting when MRS > PR.
The best rate of substitution is when MRS = PR.

23. What could we use instead?

24. What could we use instead?

25. What could we use instead?

26. What could we use instead?

27. What could we use instead?

28. Exit Card What did you learn today about substitution?
What questions do you still have about substitution?