Output output relationship

Output output relationship

1. Output-Output Relationship or Product Relationship vaibhav

2. Product-Product Relationship  Product-Product relationship deals with resource allocation among competing enterprises .  Inputs are kept constant while products (outputs) are varied. Guides the producer in deciding ‘What to produce ’  Explained by the principle of product substitution and law of equi marginal returns .  This relationship is concerned with the determination of optimum combination of products (enterprises ).  The choice indicators are substitution ratio and price ratio .  Profit maximization .  Algebraically it is expressed as Y1=f (Y2 Y3, ……. Yn )

3. The substitution between products or outputs takes place in two ways : According to the principle of equi marginal Return where each enterprise is independent i.e. the two products are not inter related. Input _________ products x _____________y1,y2,y3 (Different Enterprises ) According to the principle of product-product relationship where the different products are interdependent or inter related Input________________ products X___________________ y1,y2 (inter-dependent products)

4. Types of Product-Product Relationships 1. Joint Products  These are produced through single production process .  The level of production of one decides the level of production of another .  All farm commodities are mostly joint products. Ex: Wheat and Straw, paddy and straw, groundnut and hulms cotton seed and lint, cattle and manure , butter and buttermilk, beef and hides, mutton and wool etc . Graphically the quantities of Y1 and Y2 that can be produced at different levels of resources will be shown as points AB in the figure.

5. 2. Competitive Products: Products are termed competitive when the output of one product can be increased only by reducing the output of the other product. Outputs are competitive because they require the same inputs at the same time. E.g. the manager can expand production of one output only by divert inputs-land, labour, capital and management-from one enterprise to another.

6. 3 Complementary Products: Two products are complementary, if an increase in one product causes an increase in the second product, when the total amount of inputs used on the two are held constant. Complementary usually occurs when one of the products produces an input used by the other product. An example of this is the use of a legume in rotation with cash crop. The legume may add nitrogen and improve soil structure or tilth and improve weed and insect control. These factors, in turn, serve as “inputs” for cash crops thus causing, over a period of time required by the rotation, an increase in the production of cash crop. The complementary products may eventually become competitive. For example, while one year of alfalfa in a four-year rotation may be complementary, two, three or four years of alfalfa could be produced only by successive reductions in the cash crops.

7. 4 Supplementary Products:  Supplementary exists between enterprises when increase or decrease in the output of one product does not affect the production level of the other product .  They do not compete for resources but make use of resources when they are not being utilized by one enterprise .  The marginal rate of product substitution is zero .  For example, small poultry or dairy or piggery enterprise  All supplementary relationships should be taken advantage by producing both products up to the point where the products become competitive.

8. Antagonistic Products May not be desirable to rise together due to attack by the same pest

9. PRODUCTION POSSIBILITY CURVE (ISO-RESOURCE CURVE) The production possibility curve or product transformation curve is the locus of maximum amounts of two products, say Y1 and Y2, that can be produced from a given quantity of resources (X(0)). Mathematically , such product transformation curve is represented by: Y1 = f (Y2, X(0) ) or Y2 = f ( Y1, X(0) ). The Rate of Product Transformation (RPT) (or) Marginal Rate Product Substitution (MRPS) between two products, Y1 and Y2, is given by the negative slope of this curve. The RPT of Y2 for Y1 can either be expressed as: dY1 / dY2 , the slope of the product transformation curve can be defined as the change (increase or decrease ) in the level of Y1 that must be accompanied by a unit change (decrease or increase ) in the product (Y2) at a given level of resource.

10. Marginal Rate of Product Substitution or Rate of Product Transformation RPT is nothing but the slope of production possibility or opportunity curve . The marginal rate of product substitution means the rate of change in quantity of one output (Y1) as a result of unit increase in the other output (Y2), given that the amount of the input used remains constant. As the amount of Y2 produced increases, the amount of Y1 sacrificed steadily increases. This is due to the decreasing marginal physical products displayed by the production functions.

11. Iso Revenue Line It is the line which defines all possible combinations of two commodities which would yield an equal revenue or income. Iso revenue line indicates the ratio of prices for two competing products. The point on Y2 axis is always equal to TR/PY2 while the point on the Y1 axis equal TR/PY1. The distance of the Iso revenue line from the origin is determined by the magnitude of the total revenue. As total revenue increases, the iso revenue line moves away from the origin. The slope of the iso revenue line is determined by the output prices.

12. Revenue Maximizing Combination of Outputs The maximum revenue combination of outputs on the production possibility Py1(ΔY1 ) = - Py2(ΔY2 ). This criterion states that at the maximum revenue point , the increase in revenue due to adding a minute quantity of Y2is exactly equal to the decrease in revenue caused by the reduction in Y1. Thus, there is no incentive to change the output combination. WhenPy1 (ΔY1) > - Py2 (ΔY2), the amount of Y2 should be decreased in favour of Y1. When Py1 (ΔY1) < - Py2 (ΔY2), then Y2 should be increased at the expense of Y1. As could be seen in the Figure 12.7, the line connecting maximum revenue points is called output expansion path. For each level of input, the maximum revenue combination of outputs will fall on the expansion path.