In managerial economics, the concept of optimal input combination refers to the combination of inputs (such as labor, capital, and raw materials) that a company uses to produce a product or service in the most cost-effective and efficient manner. Finding the optimal input combination is an important goal for firms, as it can help them to minimize production costs and maximize profits.

There are several factors that can influence the optimal input combination for a firm. One important factor is the production function, which describes the relationship between inputs and output. For example, a production function might indicate that increasing the amount of labor used will result in a larger increase in output than increasing the amount of capital. In this case, the firm would want to use more labor and less capital in order to achieve the optimal input combination.

Another important factor is the price of the inputs. If the price of one input, such as labor, increases significantly, the firm may need to find ways to substitute other inputs, such as capital, in order to maintain the optimal input combination. This can be done through the use of technology or other process improvements.

In addition to the production function and input prices, firms also need to consider other external factors when determining the optimal input combination. These can include market demand for the product or service, competition from other firms, and regulatory requirements.

One approach to finding the optimal input combination is through the use of linear programming, a mathematical method that involves setting up a model of the production process and optimizing it based on certain constraints and objectives. This can be a complex process, but it can provide valuable insights into the most cost-effective and efficient input combinations.

In conclusion, the optimal input combination is an important concept in managerial economics that refers to the combination of inputs that a firm uses to produce a product or service in the most cost-effective and efficient manner. Finding the optimal input combination requires considering a range of factors, including the production function, input prices, and external factors such as market demand and competition. Linear programming is one approach that can be used to find the optimal input combination, but it can be a complex process.

The Optimum Factor Combination

Under this method, the company asks its salesmen to submit estimate for future sales in their respective territories. Demand for comfort and luxury good are elastic. Expansion in the size of the firms beyond a particular limit , too much specialization, inefficient supervision, Improper labour relations etc will lead to diseconomies of scale. Output Maximisation for a Given Level of Outlay I. Factors affecting Export trade EXIM control, EXIM policy, terms of export, export finance etc. All the users of such factors can employ larger quantity in the short run.

The iso-cost line will also change if the prices of factors change, outlay remaining the same. Objectives of pricing policy. The animations in these slides have been removed. Concept of Revenue For the purpose of demand analysis, it is considered useful to distinguish between various types of revenue: Average Revenue AR ; AR means the total receipts from sales divided by the number of unit sold. Higher degree of specialization, falling cost etc will lead higher efficiency which result increased returns in the very first stage of production.

d The optimal input combination is 20 units of labor and 60 units of capital The

The increase in output may be proportionate , more than proportionate or less than proportionate. With the larger number of firms and homogeneous products, no individual firm is in a position to influence the price. As we saw above expansion path represents optimal factor combinations as firm expands its output, given the prices of factors. It will be observed from Fig. Therefore the management always tries to find out the optimum combination of price and output which offers the maximum profit to the firm. The knowledge of various economic theories viz, demands theory, supply theory etc.

Hence elasticity of demand helps to fix the level of output. Sales Experience Approach: The demand is estimated by supplying the new product in a sample market and analyzing the immediate response on that product in the market. There is a functional relationship between demand and its various determinants. Follow up pricing : this is the most popular price policy. They consist of transactions of internationally liquid assets such as gold, SDR, key currencies, and government loans and deposits B.

Cost of production consists of fixed and variable costs. This method is also called acceptance pricing or parity pricing. . In this method, statistical and mathematical techniques are used to forecast demand. Expenditure or Outlay Method : This method was developed by Marshall.

To discourage new competitors. Pricing strategy is a policy determined to face a specific situation and is of temporary nature. A fall in UK inflation rate B. But it does not tell us the rate at which demand changes to change in price. Therefore, the entrepreneur will further substitute labour for capital and will go down further on the isoquant Q.

How do you find the optimal combination of inputs?

The price will change only when the cost changes significantly. Shift in demand cannot be shown in same demand curve. If now the price of labour falls to Rs. ADVERTISEMENTS: The entrepreneur may desire to minimize his cost for producing a given level of output, or he may desire to maximize his output level for a given cost or outlay. In other words, production means transforming inputs labour ,machines ,raw materials etc. Growth curve Approach: On the basis of the growth of an established product, the demand for the new product is estimated.

This is used as a measure of the change in quantity demanded in response to a very small change in the price. ADVERTISEMENTS: Thus, above the line OA, marginal product of capital has become negative, which means output can be increased by using less capital, while the amount of labour is held constant. It is assumed that the entrepreneur aims at maximising his profits. This optimal combination is called the least cost combination of inputs. Before determining the price itself, the management should decide the objectives.

Short term Demand forecasting : Short term Demand forecasting is limited to short periods, usually for one year. In certain circumstances demand curve may slope upward from left to right positive slopes. This method is ideal and it gives firsthand information, but it is costly and difficult to conduct. In demand curve, the area a to c is extension of demand and the area a to b is contraction of demand. Hence we conclude that the entrepreneur will choose factor combination E that is, OM units of labour and ON units of capital to produce 500 units of output. The substitute goods tea and Coffee have positive cross elasticity because the increase in the price of tea may increase the demand of the coffee and the consumer may shift from the consumption of tea to coffee.