[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

produce the same output in several different ways. To minimize cost, firms must
therefore weigh the costs of different mixes of inputs.
COST MINIMIZATION
There are usually several ways a good can be produced, using different quantities
of various inputs. Table 6.5 illustrates two alternative ways of making car frames,
one a highly automated process requiring little labor and the other a lessautomated
process that uses more assembly-line workers. The table shows the
daily wage and capital costs for each process. Each method produces the same
quantity of output (say, 10,000 car frames per day). In this simple example, we
assume all workers are identical (of equal skill) and hence get paid the same wage,
and that all machines cost the same. As we can see from the table, the less-automated
process clearly costs more at the given costs of labor ($20 per worker per hour)
and machines (rental costs equal $1,000 per day).
Although this table provides only two stark alternatives, it should be clear that
in some cases the alternative possibilities for production will form a continuum
along which the input of one increases a bit, the input of another falls a bit, and
output remains the same. In other words, the firm can smoothly substitute one input
for another. For instance, in producing cars, different machines vary slightly in their
degree of automation. The less labor required to run a machine, the more it tends
to cost. When firms make their decisions about investment, they thus have a wide
range of intermediate choices between the two described in the table.
THE PRINCIPLE OF SUBSTITUTION
In the case of multiple factors of production, the principle of cost minimization has
a particularly important consequence: when the price of one input (say, labor)
increases relative to that of other factors of production, firms will substitute cheaper
inputs for the more costly factor. This is an illustration of the general principle of
substitution we encountered in Chapter 3.
The principle of substitution can be illustrated using the information in Table
6.5. If the wage is $20 per hour and each machine costs $1,000, output can be produced
at less cost by using the more-automated process. But suppose the price of
Table 6.5
COSTS OF PRODUCTION
Inputs More-automated process Less-automated process
Labor 50 man-hours @ $20 = $1,000 500 man-hours @ $20 = $10,000
Machines 5 machines @ $1,000 = $5,000 2 machines @ $1,000 = $ 2,000
Total $6,000 $12,000
PRODUCTION WITH MANY FACTORS ∂ 147