AGRICULTURAL PRODUCTION ECONOMICS

FACTOR-FACTOR RELATIONSHIP
INTRODUCTION

 Agricultural production requires different

inputs to produce a given quantity of
output.

 Production process requires combination

of input resources or production
technology.

 There are many ways of combining these

resources.
 Agricultural production facilitates the
substitution of resources.

 To produce a product in agriculture, a

farmer does make a choice b/w input
resource combination.

 The managerial problem here is to find out

the least cost combination of inputs for
producing a given level of output.
ISO-QUANT

 The curve representing all combinations

of X1 & X2 that produce a same level of
output.

 If a number of Iso-quant are drawn in one

graph, it is known as Iso-quant map.
ISO-QUANT

X1

O ADDED INPUT X2 X
ISO-QUANT MAP

X1

O ADDED INPUT X2 X
PROPERTIES OF ISO-QUANTS

 If the quantity of input X1 is increased, the

quantity of other input X2 is decreased.

 No two iso-quants intersect each other.

MARGINAL RATE OF TECHNICAL
SUBSTITUTION
 Rate of exchange b/w two productive
resources, which are equally preferred.

 It indicates the absolute amount by which one

productive resource is decreased to gain a unit
of another productive resource.

 MRTS of X1 for X2 can be written as :

MRTS X1X2 = DELTA X1/DELTA X2

 MRTS of X1 for X2 is the amount by which
X2 must be decrease to maintain the same
level of input, when X1 is increased by one
unit.
DETERMINATION OF MRTS

UNITS OF X1 UNITS OF X2 DELTA X1 DELTA X2 MRTS

1 12
1 -3

2 9
1 -2
3 7
1 -1
4 6
1 -0.5
5 5.5
1 0.25
6 5.25
PHYSICAL RELATIONSHIP AMONG
INPUTS
 Input resources are of two types:
 SUBSTITUTES:
Two resources are said to be substitute when
decrease in the amount of one input is
compensated by increase in the amount of other
input.
MRTS –Ve
 Perfectly substitute:
 When two inputs are completely
interchangeable.
Owned bullock or hired bullock labor.
Linear & negatively sloped Iso- quant

O ADDED INPUT X
 COMPLEMENTS:
 Two resources are said to be complements,
when increase in the price of one leads to
decrease in the demand for other.

 Decrease in the amount of one cannot be

compensated by increasing the amount of
other.

 MRTS = 0
 Perfectly complements.:
 When two inputs are used together in fixed
proportions.
Tractor & Driver
‘L’ shaped Iso -quant

O ADDED INPUT X
TYPES OF FACTOR
SUBSTITUTION
 Fixed proportion combination of inputs

 Constant rate of substitution

 Decreasing rate of substitution

 Fixed proportion combination of inputs:
 Only one way of combining inputs factors (No
alternatives)
 MRTS = 0
 ‘L’ Shaped Iso quant
Tractor & driver
Fixed proportion combination of inputs

O ADDED INPUT X
 Constant rate of substitution:
 Constant amount of one resource is sacrificed
to gain an unit quantity of another resource.
 Combination may not result in cost
minimization.
 Economical to use only one of the resource.
 Choice depends upon relative prices.
 Linear & negatively sloped Iso- quant.
Different brands of Urea.
Constant rate of substitution

X1 X2 DELTA X1 DELTA X2 MRTS

0 40
1 30
2 20
3 10
4 0
Constant rate of substitution

O ADDED INPUT X
 Decreasing rate of substitution:
 Lesser quantity of one resource is reduced so
as to gain another resource by one unit.
 Iso - quant is convex.
 MRTS = Decreases numerically
Machinery & labor.
Decreasing rate of substitution

X1 X2 DELTA X1 DELTA X2 MRTS

1 12
2 7
3 4
4 2
5 1
Decreasing rate of substitution

X1

O ADDED INPUT X2 X
ISO COST LINE

 Represent various combination of two inputs

that can be purchased with the given fund.
 Price line or Iso outlay line or budget line.
 Quantity OA & OB

O ADDED INPUT X
CHARACTERISTIC OF ISO COST
LINE
 DISTANCE FROM ORIGIN
ISO COST LINE MOVES AWAY FROM ORIGIN
WHEN BUDGET INCREASES.
 ISO COST LINES ARE PARALLEL TO ONE
ANOTHER.
LEAST COST COMBINATION

TABULAR METHOD

X1 (UNITS) X2 (UNITS) X1 @ Rs.4 X2 @ Total

Rs.2 AMT
50 219 200 438 638
55 206 220 412 632
60 194 240 388 628
65 182 260 364 624
70 171 280 342 622
LEAST COST COMBINATION

GRAPHIC METHOD

X1

O ADDED INPUT X2 X