Least cost Combination (LCC)
•There are innumerable possible combination of factors which can be used to produce a particular level of output.
•The problem is to find out the combination of inputs which should cost least, a cost minimization problem.
• There are three methods to find out the least cost combination of inputs.
They are:
•Arithmetical Method:
•Algebraic Method:
•Graphic Method:
1. Arithmetical Method:
•One possible way to determine the least cost combination is to compute the cost of all possible combinations of inputs and then select one combination with minimum cost.
•This method is suitable where only a few combination produce a particular level of output. 

•The product produced is 100 kg,
•Price of x1 input is Rs 3 per unit and price of x2 is Rs 2 per unit

2.Algebraic  method:
a. Compute marginal rate of technical substitution.
•MRS = Number of units of replaced resources/Number of units of added resources.
•MRS X1 X2 = Δ X2/Δ X1
•MRS X2 X1 = Δ X1/Δ X2
b. Compute price ratio (PR)
•PR = Price per unit of added resource/Price per unit of replaced resource
•PR = PX1/PX2 if MRS X1 X2 or PR = PX2/PX1 if MRS X2 X1
c. Work out least cost combination by equating MRS and PR.
 i.e. Δ X2/ Δ X1 = PX1/PX2 or Δ X1/ Δ X2 = PX2/PX1.
•The same can be expressed as Δ X2 PX2 = PX1 Δ X1 or Δ X1 PX1 = Δ X2 PX2
•The least cost combination is obtained when MRS = PR.
3. Graphical method:
•Since the slope of isoquant indicates MRTS and the slope of isocost line indicates factor price ratio, minimum cost for given output will be indicated by the tangency of these isolines.
• For this purpose isocost line and isoquant are drawn on the same graph for different levels of production.
•The least cost combination will be at the point where isocost line is tangent to the isoquant.
•i.e. slope of isoquant = slope of isocost line.
• i.e. MRS = PR


Comments

Post a Comment

Popular posts from this blog

Agriculture: a major source of pollution

Agriculture: a major source of pollution                       The history of human civilization started with development in Agriculture. Agriculture provides food, raw materials and employment opportunities to very large percentage of population. No matter, how much we get sophisticated, we can’t ignore the importance of agriculture. The ever increasing population pressure has increased food requirement. The traditional way of farming is not meeting the demand of large population, as small change in weather pattern or incidence of certain disease or pest destroys all crops which lead to famine and hunger. In order to meet food requirement of large population encroachment of forest lands for agricultural use has increased which is a major cause of environment degradation. Moreover, to maintain food security without expansion in land and resources the modern high input technology is in use. The modern technology initiated in late 1960s by   Norman Borlaug , save over a billio
Read more
Monopolistic competition Somewhere between perfect competition and monopoly, also known as imperfect competition. It describes many real-world markets. Perfectly competitive markets are extremely rare, and few firms enjoy a pure monopoly; oligopoly is more common. In monopolistic competition, there are fewer firms than in a perfectly competitive market and each can differentiate its products from the rest somewhat, perhaps by advertising or through small differences in design. These small differences form barriers to entry. As a result, firms can earn some excess profits, although not as much as a pure monopoly, without a new entrant being able to reduce prices through competition. Prices are higher and output lower than under perfect competition. The characteristics of Monopolistic market in detail: Large number of sellers : Number is so large that there is no mutual interdependence –each farm acts independently Large numbers of buyers: Large number of buyers are offered d
Read more

Rice-cum-fish farming: opportunities in Nepal

The practice of rearing fish along with paddy is as old as paddy farming. In the traditional farming practice the rice cum fish farming was mainly on capture basis. Rice is an agricultural crop cultivated in the largest land area of the world after wheat. The rice cum fish farming is in practice in several countries including China, Philippines, Bangladesh, Thailand, Korea, India, Malaysia, and Indonesia. Rice is grown in almost all districts of Nepal excluding trans-Himalayan region. Fish catching is the main occupation of Pode, Majhi, Danuwar, Derai and Damar communities of Nepal The country has great potential for the development of rice cum fish farming sector as Out of the total cultivated area of 3.091 million ha, rice cultivation occupies 47.91% and fish is favored food by several ethnic communities. If only rice cum fish farming practice is adopted properly in Nepal it can be way too helpful in reduction of protein energy malnutrition of the country. Rice cum fish farmin
Read more