1. Chapter 8 Economic Principles  Choosing Input and Output Combinations
Farm Management
Chapter 8
Economic Principles 
Choosing Input and Output Combinations

2. Chapter Outline Input Combinations Enterprise Combinations
farm management chapter 8

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

4. 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

5. Types of Input Substitution
Constant rate (perfect substitution)
Decreasing rate
No substitution
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6. Figure 8-1 Three possible types of substitution
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7. Input Substitution Ratio
amount of input replaced
amount of input added
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8. Input Price Ratio Input price ratio = price of input being added
price of input being replaced
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9. 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.
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10. Table 8-1 Selecting a Least-Cost Feed Ration
grain at 4.4¢ and hay at 3.0¢
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11. 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.
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12. 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.
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13. Enterprise Relationships
The first step in determining the
profit-maximizing combination of
enterprises is to determine the
physical relationship among the
enterprises.
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14. 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
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15. Competitive Enterprises
Competitive enterprises may have
constant substitution or increasing
substitution.
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16. Figure 8-2 Production Possibility Curves for Competitive Enterprises
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17. Figure 8-3 Supplementary & complementary enterprise relationships
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18. Output Substitution Ratio
quantity of output lost
quantity of output gained
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19. Output Price Ratio Output Price Ratio = price of output gained
price of output lost
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20. 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.
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21. Table 8-2 Profit-Maximizing Enterprise Combination
corn at $2.80/bu, wheat at $4.00/bu
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22. 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