Marginal Rate Of Technical Substitution
It is possible to substitute one factor for the other in production process. For example, we can substitute labor for machinery or machinery for labour. Especially this is possible in a firm like cigarette packing. Cigarettes can be packed either with the help of labourers or machinery. Factor elasticity of substitution measures the rate of substitution on between two factors of production. Factor elasticity of substitution will be infinite if we completely substitute Factor ‘A’ in place of factor ‘B’. It will be zero, if we can’t substitute factor ‘A’ in place of factor ‘B’. But in reality infinite substitution or zero substitution of one factor for the other is not possible. Factor elasticity of substitution will be in between the two situations. So, substitution or one factor for another will be possible at the margin. The marginal rate of technical substitution can be measured on the basis of the following formula:
MRTSLC = MPL/MPC
In the above equation, MRTSLC denotes Marginal Rate of Technical Substitution between Labour and Capital, MPL denotes Marginal Physical Product of Labour and MPC denotes Marginal Physical Product of Capital.
Isoquant curves are used for indicating the trends in production. They show the various combinations of the two factors of production which give the same level of output. These curves are also known as production indifference curves or equal product curves. Isoquant curves are explained by the help of the following table:
|Units of Factor X||Units of Factor Y||Total Output|
The above table shows that a firm can produce a total output of 40 units with the combinations of 1X + 12Y, or with 2X + 8Y or with 3X + 5Y or 4X + 3Y units. We can measure the elasticity of substitution between two factors of production from the Iso-product curves.