Principle of Combing Enterprise
This principle is very important as it describes the product – product relationship. Here, instead of considering the allocation of inputs among enterprises, we discuses enterprise combination or product mix involving product relationship. Algebraically the relationship can be written as under.
Y1 = f (Y2) or Y1 = f (Y 2. Y3 ….Yn)
There can be various relationships that can exist between enterprises or products.
1) Joint product: Two or more than two products are produced in the same production process Eg. Production of Jowar crop gives us Jowar grain and fodder or production of butter from curd gives butter milk also.
2) Complementary Production: In this case relationship is directly proportionate. With the increase in one product there is also increase in other product Eg. The cultivation of leguminous crop followed by cereals gives this relationship.
3) Supplementary Production: In this case one product does not depend up on another. They are independent and if relationship is there it is supplementary Eg. Crop production and dairy enterprise,
4) Competitive Relationship: Here two products are said to be competitive when increase one needed to be reduction in other product eg. Two cereal crops
Most of the decisions regarding the choice of products are needed to he taken when these products are having competitive relationship. When two products are competitive they may substitute at constant rate, increasing rate or decreasing rate.
Determination of optimum production combination: Optimum combination of two products can he obtained by following allegoric and graphic method
1) Algebraic Method; Algebrical1y, the combination can be determined by calculating MRPS and Price ratio.
MRPS : It is marginal rate of product substitution
Units of replaced products
Hence MPLPS =————————————-
Units of added products
Price ratio (inverse) = ————-
Therefore, optimum combination of two Products for a given level of input can he obtained by equating MRPS with inverse price ratio.
i.e. MRPS = Price ratio = Py1/Py2
2) Graphic Method: For obtaining optimum combination of two competitive products, we have to depict two curves by taking added quantities (y1) on horizontal axis and replaced quantities (y2) on vertical axis
Production Possibility curve: It is a locus of all possible combinations of two products which can be obtained from a given amount of input. Production possibility curve are sometimes called as Iso-resource curve or opportunity curve because.
i) Each output com1ination on this curve has the same resource requirement and
ii) It represents all possible production opportunities. The shape of the production possibility curve (PC) depends up on the types of product relationship involved-
A. the PP curve is straight line when two outputs substitute at a constant rate.
B. The curve is convex to the origin when two products substitute at decreasing rate.
C. The curve is concave to the origin when two products substitute at increasing rate. It implies that more of one product is increased; the sacrificed of the other product becomes larger & larger.
D. The slope of PP curve represents MRPS.
Iso-revenue Curve: It is the line which indicates the different combinations of two products which gives the same amount of revenue or income.
Properties of ISO-revenue line:
It is always straight line because the output prices do not change with the quantity sold.
The position of Iso revenue line shows the magnitude of the total revenue. As total revenue increases, the line moves away from the origin and vis-a-visa.
3. The slope of Iso-revenue curve represents the price ratio of two competing products.
Determination of optimum product combination:
The criteria for determining the optimum combination of two products is MBPS = Inverse Price ratio
Since the slope of PPC represents MRPS and the slope of Iso-revenue line represents price ratio, the optimum combination of two products will he at the point whore slopes of PPC and Iso-revenue line are equal. Hence optimum combination of two products can he obtained where those two curves tangent each other. From the tangency point perpendiculars are taken on both axis, it will give the quantities of y2 and y1 which will be optimum one.