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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?

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AAEC 2305 Fundamentals of Ag Economics

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

  2. 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?

  3. 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.

  4. 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

  5. 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)

  6. (continued) • Fixed proportions • Perfect complements - occurs when inputs are used in a fixed ratio

  7. 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.

  8. 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

  9. 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.

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