– It is economical to substitute one resource (added resource) for another resource ( replaced resource) as long as the decrease in cost resulting from decreased use of replaced resource is more than the increase in cost resulting from increase in use of added resource.
i.e. decrease in cost > Increase in cost
Or ∆X2 × PX2 > ∆X1 × PX1
Or ∆X2 PX1
— > —
– Thus we can say that it is economical to substitute one factor for another until the Marginal rate of technical substitution is greater than or equal to inverse price ratio. After that there incurs loss.
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