Factor-factor relationships

1. This relationship deals with the resource combination and resource substitution.
2. Cost minimization is the goal of factor -factor relationship.
3. Under factor-factor relationship, output is kept constant, input is varied in quantity.
4. This relationship guides the producer in deciding How to produce.
5. This relationship is explained by the principle of factor substitution or principle of substitution
between inputs.
6. Factor -Factor relationship is concerned with the determination of least cost combination of resources.
7. The choice indicators are substitution ratio and price ratio.
8. Algebraically, it is expressed as
Y = f ( X1, X2)
In the production, inputs are substitutable. Capital can be substituted for labour and vice versa, grain can
be substituted for fodder and vice versa. The producer has to choose that input or inputs, practice or
practices which produce a given output with minimum cost. The producer aims at cost minimization i.e.,
choice of inputs and their combinations.

Iso-quant
Definition:
An iso-quant represents all possible combinations of two resources (X 1 and X2) physically capable
of producing the same quantity of output.
Isoquants are also known as iso-product curves or equal product curves or product indifference curves.
An iso-quant is a convenient method for compressing three variables in two dimensional graphs.
Tabular form
Input X1
1
2
3
4
Graphically

Input X2
25
20
16
13

Output
100
100
100
100

Iso-quant Map or Iso product Contour

If numbers of iso-quants are drawn on one graph, it is known as iso-quant map.
X2

X1
Fig: Iso-quant map
Characteristics of Isoquants
1. Slope downwards from left to right or negatively sloped.
2. Convex to the origin.
3. Nonintersecting
4. Iso-quants lying above and to the right of another represents higher level of output.
5. The slope of iso-quant denotes the marginal rate of technical substitution (MRTS).
Type of iso quant
Linear: Perfect substitute
Smooth Convex: good substitute
Kinked: poor substitute
L-shaped: complements
Marginal rate of technical substitution
The MRS indicates amount of one input that must be substituted for another to maintain constant output
Mathematically
MRSx1 x2 =
Or
MRSX1X =
2

x2
x1

MPP 1
MPP 2

Marginal rate of substitution is generally slope of the iso-quant

Tabular form
Input X1

Input X2

1
2
3
4

25
20
16
13

MRTSx1/x2 =
5
4
3

x2
x1

Resource types
Substitutes
Two goods are said to be substitute if decrease in one input are compensated by increase in the amount of
other inputs. MRTS is negative
Perfect substitutes
When two resources are completely interchangeable, they are called perfect substitutes.
Iso-quants are linear and negatively slopped.
MRTS is constant
Ex: Family labour and hired labour, Farm produced and purchased seed etc,
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.
MRTS is zero
Perfect Complements:
Two resources which are used together in fixed proportion are called perfect complements. It means
that only one exact combination of inputs will produce a particular level of output.
The iso-quant in this case is of a right angle.
Ex: Tractor and driver, Pair of bullocks and laborer

Type of factor-factor relationship (Factor substitution)

Fixed proportion combination
In order to get certain quantity of output the resource must be combined in fixed proportion
E. x. Perfect complements (tractor and driver)
Iso-quant is L shaped
Marginal rate of technical substitution is infinite at vertical arm and zero at horizontal arm
No any decision problem because inputs are combined at fixed proportion
X2

X1
Constant rate of substitution
Constant quantity of one resource is sacrificed in order to gain a unit of another resource throughout
process of substitution
Ex. Perfect substitutes (Family labor vs. hired labor, owned seed vs. purchased seeds)
Iso-quant is linear and negatively slopped
Marginal rate of technical substitution is constant
Decision rule: select resource which cost less (low wage labor)
Tabular form
Combination
A
B
C
D
E

X1
1
2
3
4
5

X2
35
27
19
11
3

Graphically
X2

X1

MRTS x1 x2
8
8
8
8

Algebraically

x 21
x 22
x 23
x2n
=
=
.
x 11
x 12
x 13
x1n
Varying rate of substitution
Either increasing or decreasing rate of substitution
Increasing rate of substitution
Increasing rate of substitution means that every subsequent increase in the use of one factor replaces
more and more of the other than previous unit.
MRTS of X1 to X2 increases subsequently i.e. iso-quant is concave to origin
Not common in agriculture
Tabular form
Combination
A
B
C
D
E

X1
1
2
3
4
5

X2
35
28
20
11
1

MRTS x1 x2
7
8
9
10

Graphically
X2

X1

Algebraically

x 21
x 22
<
<
x 11
x 12

x 23
x2n
.
x 13
x1n

Decreasing rate of substitution

Decreasing rate of substitution means that every subsequent increase in the use of one factor replaces
less and less of the other than previous unit.
MRTS of X1 to X2 decreases subsequently i.e. iso-quant is convex to origin
Generally most common in agriculture.

Tabular form
Combination
A
B
C
D
E

X1
1
2
3
4
5

X2
35
25
16
8
1

MRTS x1 x2
10
9
8
7

Graphical form
X2

X1

Algebraically

x 21
x 22
x 23
x2n
>
>
.
x 11
x 12
x 13
x1n
Iso-clines
The term isocline is used to refer to any line that connects points of the same slope on a series of isoquants.
Expansion Path
The line or curve connecting the points of least cost combination for different levels of output is called
expansion path. Expansion path is isoclines on which slope of iso-quant (MRTS) equals the slope of isocost line (price ratio).
Ridge lines
It represents the points of maximum output from each inputs, given fixed quantity of other inputs. At
ridge line MPP is zero, beyond ridge line MPP is negative and between the ridge line MPP is positive.
MRTS is zero