these countries are inefficient because they are using methods long ago
discarded in the West is missing the truth about efficiency in the use of
resources: Where factor scarcities and thus factor prices differ across
nations, so will the cost-minimizing methods of production.
The principle of substitution also shows that firms can be induced to
substitute between capital and material inputs, such as fuel. With
increases in the world price of oil, airlines have reduced their reliance on
expensive jet fuel (derived from oil) by substituting toward planes that
are constructed with lighter materials and have more fuel-efficient jet
engines. In these situations, the increase in the price of fuel leads the
airlines to change their type of capital equipment—to substitute away from
jets that use a lot of fuel toward ones that are more fuel efficient.
In many developing countries, labour is used much more intensively in
agriculture than is the case in richer, developed countries. This does not
mean methods are somehow “backward” in the developing countries; the
intensive use of labour reflects a cost-minimizing response to low wages.
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