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variable factor proportions


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A production process that permits substitution of one factor of production for another. Factor proportions are not variable for some production processes. For example, if a production process always requires two units of labour for each unit of capital then the factor proportions are fixed at 2 to 1. Where factor proportions are variable, if the elasticity of technical substitution between inputs is high a small change in relative factor prices causes a cost-minimizing firm to shift its use of factors strongly towards whichever has become relatively cheaper. If factor proportions are not easily variable, the elasticity of technical substitution is low, and firms change their relative use of factors very little as relative factor prices change.

Subjects: Economics.


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