chapter  5
28 Pages

Optimal input selection

This chapter explains how business fi rms use relative prices when selecting which inputs to use. The relationship between inputs is discussed in detail, illuminating how the choice of techniques depends on relative prices. Isoquants are defi ned, and described for several input types: perfect substitutes, perfect complements, and imperfect substitutes. Real-world examples provide insight into optimal input decisions. The marginal rate of technical substitution and the slope of the isocost line, more tools of economic analysis, help identify optimal responses to price changes. Emphasis is on how relative prices allocate resources in a market-based economy.