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eco (Delhi10)

eco (Delhi10)

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Published by nischay

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Published by: nischay on Mar 22, 2011
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03/23/2013

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It all input prices change in the same proportion the relative prices of inputs remain unaffected.
Change in input combination result from the substitution effect of change in relative price of
input.
Cost minimizing firms substitution relative cheaper input for costlier one. This is known as
substitution effect.
As a result of change in P reduces K by K1 K2 && increases L1 L2. This is known as input price
effect.
Substitution effect

=

Price effect – budget effect

Price effect

=

L1 L2

Budget effect

=

L1 L2

Substitution effect

=

L1 L2 – L1 L2 = L2 L3
If price of an input ↓ level of output ↑ & vice-versa.
Firm employs more of cheaper input & less of costlier one.

K’

K
K3

K2
K1

L1 L2 L L3 L’

W

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