After reading this article you will learn about labour efficiency and capital substitution.

On farms to bring more efficiency of labour capital (machinery and equipment’s) is substituted for labour. The efficiency is measured in terms of rupees profit to the farm.

There are two situations:

(a) Unlimited resources.


(b) Limited resources.

Under the limited resources the economic efficiency is measured if cost of labour saved is more than the capital used as substitute.

Under the limited resources the opportunity cost of labour or displacing labour will prevent him from using capital elsewhere at a greater profit.

The guide for substitution principle is built around the prices and costs of two resources (labour and capital) and the rate of substitution.


If there is a diminishing rate of labour substitution economic efficiency is attained, with ample capital, when balance is struck by combining resources to give lowest cost per given amount of product. Cost is lowest when the substitution ratio is equal to price ratio.

In case of substitution of buildings for labour the same principle is applicable.

In an effort to save labour with machine more and more capital in machinery is required to replace a given amount of labour and each additional input of machine service substitutes for less and less labour. The economics of substituting machinery for labour depends in part upon substitution replacement ratio and in part upon the cost of machine service compared to the cost or price of labour.

Again, while substituting machinery, equipment and building substitutive at diminishing rates. We can substitute capital for labour to lower cost (in case the labour cost is higher than capital) to lower cost up-to a point where substitution ratio equals the price ratio.


This is where the capital and labour are combined to give lowest costs for a given output. This would bring labour efficiency. Thus, we can say that the productivity of a single resource depends on the quantity of other resource used with it.

Inefficient use of labour is found on small farms or with limited farm business because labour on such farms cannot be used with full efficiency. In order to achieve efficiency add more capital to the present labour supply. In case funds are limited use of opportunity cost principles leads to capital use for highest profit enterprises hence achieving maximum labour efficiency and income.

With unlimited resources the farmer can buy machinery and equipment, fertil­izer which may be labour saving and expand the enterprises. But with limited resources he should use both the principles—principle of substitution and opportunity cost when investing capital for greater returns.

In the case of shortage of both labour and capital the opportunity cost of both labour and capital should be considered. When substituting capital in equipment, machinery and time saving buildings for labour to lower costs and to increase income and labour efficiency. And also when the farmer wants to make full use of present labour supplies he should consider investment opportunities for the scarce capital.


Farm size affects labour efficiency, under the Indian conditions, where farm are of small size, intensive cultivation be practiced to increase employment of surplus labour and increase their efficiency. Multiple cropping where irrigation supplies are assured should be practiced.

The organic farming system will increase the opportunity for employment of labour in making preparation for the farming activities, i.e., preparation of organic manures in the form of compost, farm yard manures, poduratte (night soil preparation from the septic tanks), preparation of insecticides and fungicides from the organic sources like neem and other plants which are sources for insecticides and pesticides products.