fm6e-chapter08 - Farm Management Chapter 8 Economic...

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Farm Management Chapter 8 Economic Principles Choosing Input and Output Combinations
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farm management chapter 8 2 Chapter Outline Input Combinations Enterprise Combinations
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farm management chapter 8 3 Chapter Objectives 1. Explain the use of substitution in economics and decision making 2. Demonstrate how to compute a substitution ratio and a price ratio for two inputs 3. Use the input substitution and price ratios to find the least-cost combination of two inputs 4. Describe the characteristics of competitive, supplementary, and complementary enterprises 5. Show the use of the output substitution and price ratios to find the profit-maximizing combination of two enterprises
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farm management chapter 8 4 Input Combinations Most products require two or more inputs, and the manager may choose the input combination or ratio to use. The economic question is whether one input can be substituted for another to reduce the cost.
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farm management chapter 8 5 Input Substitution Ratio Input substitution ratio = amount of input replaced amount of input added
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farm management chapter 8 6 Types of Input Substitution Constant rate (perfect substitution) Decreasing rate No substitution
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farm management chapter 8 7 Figure 8-1 Three possible types of substitution
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farm management chapter 8 8 Input Price Ratio Input price ratio = price of input being added price of input being replaced
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