Principle of substitution and its application

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Principle of substitution

From the principle of substitution, either as producer or as consumer, we all tend to substitute one thing for another. So long as by that act we gain additional utility and we should stop only at that point where we could get no more additional satisfaction by substituting one thim2, for another. It is economic to substitute one factor of production for another, if the cost of first is less than the cost of second. Often in the production of agricultural commodities, it is possible to substitute one factor of production for another. e.g. machineries can be replaced .by animal power. Similarly a farmer can grow either jute or rice in a piece of land.
Two terms are involved in in selecting competitive practices and competitive enterprises.
1)      Substitution ratio (SR): It is the ratio of resource replaced to the resource added.
SR = Quantity of replaced resource/ Quantity of added resource
2)      Price ratio (PR): It is the ratio of unit price of resource added to the unit price of resource replaced.
PR = Price per unit of added resource/ Price per unit of replaced resource
Rule: At first, the substitution ratio and price ratio should be computed. If the price ratio (PR) is greater than the substitution ratio (SR), then farm return can be increased by including new enterprises.
Example: Let jute can be replaced by Aus rice and suppose, their hypothetical yield per acre and price per mound as:
Crops                        Yield/acre                            Unit price/mound                                                         Jute                               20 mound                            Tk.300
Aus rice                          40 mound                          Tk.200
From the table, SR = 20/40 = PR= 200/300 = 2/3
Here PR>SR. therefore substitution is possible, i.e. jute may be replaced by Aus rice.
i)                    Choice of competitive enterprises
ii)                   Choice of competitive  practices

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