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Optimum factor production
1. Optimum factor production
Definition
In the long run, all factors of production can be varied. The profit maximization
firm will choosethe least cost combination of factors to produce at any given
level output. The least cost combination refer to the combination of factors
with which a firm can producea specific quantity of output at the lowest
possiblecost.
Explanation
There are two method of explanation combination of factors.
The marginal product approach,
The isoquant / isocost approach.
The marginal product Approach
In the long run, a firm carry vary the amounts of factors which it is uses for the
production of goods. It can choose whattechnique of production to use, what
design of factors to build, what type of machinery to buy. The profit
maximization will obviously wantto usethat mix of factor of combination
which is least costly to it. When a firm uses different factors of production or
least cost combination.
Formula;
Mppa = Mppb =Mppc =Mppn
In above equation a, b, c, n are different factors of production. Mpp is
the marginalphysicalproduct. A firm compares the Mpp / P ratio with that of
another. A firm will reduceits cost by using moreof those factors which are
high Mpp / P ratio and less of those with a low Mpp / P ratios until they all
become equal.
The isoquant / isocost approach
Iso; mean same
Quant; mean output
The least costcombination of factors or producer equilibrium is now explained
with the Iso productcurveand Isocost. Theleast costcombination refer to
combination of factors with which a firm can produce a specific quantity of
2. output at the lowest cost. The least costcombination of factors for any level of
output is that where the Iso products curveis tangent to an Isocostcurve. The
analysis of equilibrium is based on the following assumption.
Assumptionof optimum factors combination
a) There are two factors X and Y in the combination.
b) All the units of factors X are homogenous and so is the case of factor Y.
c) The price of factors X and Y are given and constants.
d) The total money outlay is also given.
e) In the factor market, it is the perfect completion which prevails. Under the
condition assumed above, the producer is in equilibrium when the following
two condition are fulfilled.
1:- The Isoquantmustbeconvert to the origin.
2:- The slope of Isoquantmustbe equal to the slope of Isocostline.