What is the limit rate of technical substitution?
The limit rate of technical substitution is an economic term that shows a ratio in which one input can be replaced as another while holding the total production constant. This allows analysts to identify the most cost-effective method of production for a particular item and to balance the competitive needs of two separate-only-esteem parts. The calculation of this ratio is the easiest to achieve the input amounts to the X-Y graph to visually represent the speed of the shift in a number of potential input combinations. This is not one fixed value and requires recalculation for each shift up or down on a variable continuum.
For example, it can be assumed that the production of 100 units of X products requires one unit of work and 10 capital units. The calculation of the technical replacement limit rate will indicate how many capital units can be "rescued" by adding to the next unit of work, while the total product will maintain the total unitconstant per 100. If you can produce 100 units of product x with two units of work and only seven units of capital, then the work ratio is for capital 3: 1.
However, this number is specific to each particular set of input values. Although in this case - when switching from 1 to 2 units of work - there was a substitution rate of 3: 1, it does not mean that it will continue to be 3: 1 for all combinations of work and capital. If it produces 100 units of product x using three units of work only requires the use of five capital units, the ratio has changed to 2: 1 for this specific work/capital combination.
This specificity explains why the limit rate of technical substitution is best visually brought into the graph using all possible combinations of work and capital. It allows rapid visual consumption of changing rates throughout the possible spectrum of work/capikombination TAL. That in conjunction with information about prices for rAny parts of the components allow someone to quickly find out which work/capital combination provides the most effective method for the production of a specific amount of product.
When creating these calculations, it is necessary to assume that the work units are equally expensive compared to capital units. The aim is to find a production point where the total combined units of work and capital are minimized, saving the highest costs. Continuation of the previous example, in combination with one one unit of work and 10 capital requires 11 combined working/capital units to product 100 X product. The combination of two, consisting of two units of work and seven capital, to nine units, while three, employing three units and five capital, drop it to seven. The combination of three then becomes the most cost -effective method of production of 100 units of X product.