Factor factor Relationship

Factor Factor Analysis

1. Factor-Factor Relationship vaibhav

2. introduction It also known as "Input - Input relationship and principle of least cost combination ". It concerned with managerial problem " How to produce " and determination of least cost combination of resources . The goal of this relationship is to minimization of input costs. This relationship deals with resource combination & substitution. In this relationship, output is kept constant, input is varied in quantity to achieve given level of output. It can be expressed as - Y= f (X1. Xi IX3, X4................. Xn ) This relationship can be explained by the Principle of Factor Substitution

3. Important Basic Terms & Concepts ISO-QUANT - It is made from two words i.e. ISO means equal and quant means quantity. It is "A curve representing all the possible combinations of two inputs/ resources (x1,x1) that can produce the same (given) level of output". See following table

4. Properties of Iso -quant I so -quant curves are downward / negatively sloping. I so quant's are convex to the origin They never intersect each other. Higher I so -quants represent higher level of output.

5. Marginal Rate of Technical Substitution It refers to the amount by which one resource is reduced as another resource is increased by one unit . It may be defined as the rate at which marginal unit of an input can be substituted for another input making the level of output remain the same . It may be expressed as : MRTS of Xl for X2 MRTS of X2 for Xl X1X2 = dX 2/ dX 1 X2X1= dX 1 I dX 2   MRTS = Number of units of replaced resource Number of units of added resource

6. Substitutes and Complements Substitutes: A range of input combinations which will produce a given level of output. When one factor is reduced in quantity, while another factor must always be increased. Ex: Tea & coffee, Manure & fertilizer, FYM & Vermi compost Complements : Two resources which are used together are called complements. In the case of complements, reduction in one factor cannot be replaced by an increase in another factor. Ex: Tractor and driver, pair of bullocks and laborer

7. lso -cost Line It al so known as price line, budget line, iso -outlay line, factor cost line. I so -cost line defines all possible combinations of two resources ( X1 and Xi ) which can be purchased with a given outlay of funds . Characteristics of Price line As the total outlay increases, the iso -cost line moves further away from the origin. Price line is a straight line because input prices do not change with the quantity purchased. The slope of price line indicates the ratio of factor prices (price ratio)

8. Example - suppose that a producer has a total budget of Rs 120 and for producing a certain level of output (100 Kg), he has to spend this amount on 2 factors A and B. Price of factors A and B are Rs 15 and Rs . lO respectively.

9. ISO-CLINE A line connecting all the least cost combination of inputs for all output levels is called iso -cline. The iso -cline passes through all the iso -quants at points where they have the same slope .

10. Ridge lines