Substitution. Switching of Techniques

Abstract

In the first part of these lecture notes we considered substitution in the context of more than one original factor of production. We saw how the ratio of the wages of the primary inputs determined the choice of the technique of production. We are now interested to apply an analogous analysis in a context where one of the primary inputs is replaced by “capital” and the corresponding input wage rate is replaced by the rate of interest. We know from the preceding chapters that the wage interest curve for a given technique of production is not necessarily a straight line. Thus the concept of employment intensities of the two inputs labour and capital does not have an unambiguous meaning. The problems for analysis therefore become more complicated.