Page 748 - Krugmans Economics for AP Text Book_Neat

What you will learn
in this Module:
• How firms determine the
optimal input mix
• The cost-minimizing rule for
hiring inputs
706 section 13 Factor Markets
Module 72
The Cost-Minimizing
Input Combination
In the past three modules we discussed the markets for factors of production—land,
capital, and labor—and how firms determine the optimal quantity of each factor to
hire. But firms don’t determine how much of each input to hire separately. Production
requires multiple inputs, and firms must decide what combination of inputs to use to
produce their output. In this module, we will look at how firms decide the optimal
combination of factors for producing the desired level of output.
Alternative Input Combinations
In many instances a firm can choose among a number of alternative combinations of
inputs that will produce a given level of output. For example, on George and Martha’s
wheat farm, the decision might involve labor and capital. To produce their optimal
quantity of wheat, they could choose to have a relatively capital-intensive operation by
investing in several tractors and other mechanized farm equipment and hiring rela-
tively little labor. Alternatively, they could have a more labor-intensive operation by hir-
ing a lot of workers to do much of the planting and harvesting by hand. The same
amount of wheat can be produced using many different combinations of capital and
labor. George and Martha must determine which combination of inputs will maxi-
mize their profits.
To begin our study of the optimal combination of inputs, we’ll look at the relation-
ship between the inputs used for production. Depending on the situation, inputs can
be either substitutes or complements.
Substitutes and Complements in Factor Markets
In Section 2 we discussed substitutes and complements in the context of the supply
and demand model. Two goods are substitutes if a rise in the price of one good makes
consumers more willing to buy the other good. For example, an increase in the price
of oranges will cause some buyers to switch from purchasing oranges to purchasing