Representative Isoquants for Table 7.1

Each point on an isoquant represents a different combination of inputs X and Y that can be used to produce the same level of output.

input substitution

Systematic replacement of productive factors

In some production systems, input substitution is easily accomplished. In the production of electricity, for example, fuels used to power generators often represent readily substitutable inputs. Figure 7.5(a) shows isoquants for an electric power plant with boilers equipped to burn either oil or gas. Power can be produced by burning gas only, oil only, or varying amounts of each. In this instance, gas and oil are perfect substitutes, and the electricity isoquants are straight lines. Other examples of readily substitutable inputs include fish meal and soybeans to provide protein in a feed mix, energy and time in a drying process, and United Parcel Service and the U.S. Postal Service for package delivery. In each case, production isoquants are linear.

At the other extreme of input substitutability lie production systems in which inputs are perfect complements; exact amounts of each input are required to produce a given quantity of output. Figure 7.5(b) illustrates isoquants for bicycles in which exactly two wheels and one frame are required to produce a bicycle. Wheels cannot be substituted for frames, nor vice versa. Pants and coats for men's suits, engines and bodies for trucks, and chemicals in specific compounds for prescription drugs are further examples of complementary inputs. Production isoquants for complementary inputs take the shape of right angles, as indicated in Figure 7.5(b).

Figure 7.5(c) shows a production process in which inputs can be substituted for each other within limits. A dress can be made with a relatively small amount of labor (La) and a large amount of cloth (Ca). The same dress can also be made with less cloth (C2) if more labor (L2) is used because the dress maker can cut the material more carefully and reduce waste. Finally, the dress can be made with still less cloth (C3), but workers must be so extremely painstaking that the labor input requirement increases to L3. Although a relatively small addition of labor, from L1 to L2, reduces the input of cloth from C1 to C2, a very large increase in labor, from L2 to L3, is required to obtain a similar reduction in cloth from C2 to C3. The substitutability of labor for cloth diminishes from L1 to L2 to L3. The substitutability of cloth for labor in the manufacture of dresses also diminishes, as can be seen by considering the quantity of cloth that must be added to replace each unit of reduced labor in moving from L3 to L1.

Most labor-capital substitutions in production systems exhibit this diminishing substitutability. Energy and insulation used to provide home heating exhibit diminishing substitutability, as do physicians and medical technicians in providing health care services.

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