4. Production and Optimisation with Two or More Inputs

In the real world, no production is carried out using only one input. Normally, several (controllable) inputs are used. Hence, when growing cereal crops, land, seeds, labour, fertiliser, pesticides, machinery, etc. are used. A car manufacturer uses steel, labour, leather, plastic, paint, tyres, fuel, etc. Various inputs can often replace each other so that it is possible to replace some of the expensive ones with cheaper alternatives if the price of one input increases. For example, if the price of pesticides, which are used to chemically control weeds in the field, rises, then the use of labour might be considered as an alternative to control the weeds. If the price of fuel used for heating factory or office buildings increases, it may be cheaper to use electricity for heating instead. The question as to the extent to which the various inputs can replace each other becomes the key question in this connection. This chapter deals with the instruments which can be used to address such issues. As in Chap. 3, we assume competitive input and output markets.