Producer’s Equilibrium: Optimum Factor Combination
Least-cost Combination. The producer will try to attain an equilibrium position by hitting at the ‘most economical or the least cost combination of the factors of production. Just as a consumer is faced wild the problem of making a choice between different combinations of two or more goods, similarly a producer is confronted with the problem of choosing between Where MPn is the marginal product of factor A different combinations of two or more factors of production,
A rational entrepreneur would try to maximize his money profits from the production and sale of commodities, just as a consumer tries to obtain maximum satisfaction from the consumption of commodities. 1′(1 produce a given output various combinations of factors of production are possible. But a rational producer or a linen would seek to produce that output with the ‘optimum’ or ‘least-cost’ combination of. factors of production. (In Economics factors of production arc also called ‘inputs.) The producing line will use its productive resources in such proportions or such ratios that whatever the output produced, the cost outlay should be as small as possible for that output. Or, we can say that the linn should use that combination of resources which produces the maximum output for given cost outlay. In arriving at an optimum or least- cost combination. the producer is guided by the principle of substitution or that of equal marginal returns. If a rupee spent of factor A result in a greater output than a rupee spent on factor O. it would pay the producer to divert exit CH1 therefrom fa tor 13 to factor A; that is. he will substitute factor A for factor 13. He will be in equilibrium when the additional output resulting from the marginal rupee spent on factor /I. equals the additional output resulting from the marginal rupee spent on factor B. So long as the additional output due to the marginal rupee spent on factor A is not equal to the additional output resulting from the marginal rupee spent on factor B. it will he advantageous for the producer to go on substituting one factor for the other. In this way the output will he Maximilian,
Out most often, guru of factors cost much more than one rupee each. In such cases. the additional output due to the marginal rupee spent in factor A would he equal to the marginal product of factor A divided by its price. As has been explained earlier, the marginal product of a factor is the additional product resulting from the employment of an additional uni: of the factor. It, therefore, follows that the marginal product of a factor divided by the price of the factor is the additional product resulting from a rupee spent on the factor. Suppose the marginal product of a factor is 120 suitors or output and the price or the factor is Rs. 10. Then. 120 + 10, i.e., 12 is the additional output resulting from the marginal rupee spent on that factor. The condition for the least-cost combination may, neur to employ more of factor A and less of factor B. He will employ more of one factor and less of the other till the above ‘”rul’orticmalit~ rule’ is satisfied, It is in this manner. that the firm is able to discover the least-cost combination which means producing the maximum output with a given cot.
It will have been dearly understood that it is not the marginal products of the various factors ihat are sought to be cqualiscd by the producer for garnishing output. What he seeks to cqualise are the marginal products of the various factors divided by their respective prices. or course. when the prices of all factors are equal. in that case alone will he sed. to equalisc the marginal products of the various factors, In that
case, the denominators “.will all he equal to each other, so that all that the producer is to attempt is to cqualisc the numerators, i.c.. the marginal products of the v.u ious factors (Ml’.” MI'” ….. MP”,). But seldom are the pI ices of the various factors equal to each other.
We can use the iso-product curve technique also for this purpose.