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, outputis 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 Principleof 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
Iso-quant curves are downward / negatively sloping.
 Iso quant's are convex to the origin
 They never intersect each other.
 Higher Iso-quants represent higher level of output.

6. Marginal Rate of Technical Substitution
 It refers to the amountby 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 1I dX 2
 MRTS = Number of units of replaced resource Number of units of added resource

7. 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

8. lso-cost Line
 It al so known as price line, budget line, iso-outlay line, factor cost
line.
 Iso-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
1. As the total outlay increases, the iso-cost line moves further away from the
origin.
2. Price line is a straight line because input prices do not change with the
quantity purchased.
3. The slope of price line indicates the ratio of factor prices (price ratio)

9. 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.

10. 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.

11. Ridge lines