Input substitution and technological development on Finnish dairy farms for 1965-1991: Empirical application on bookkeeping dairy farms

Abstract

The study presents an attempt to gain a better understanding of the input substitution and technological development on Finnish dairy farms. The dual approach of the neoclassical production and cost theory is applied. A system of derived demand and cost functions is estimated using a representative dairy farm data and panel data of bookkeeping Finnish dairy farms. The flexible translog cost function is utilized to solve the empirical research problem. The cost function study is chosen, because it makes it possible to study production of farms operating in the area of decreasing average costs. According to the results, inputs are for the most part substitutes with each other. With the existing production technology, the substitution of inputs for other inputs is inelastic. The own price elasticities are also inelastic. Technical change is purchased feed-saving and other inputs-using. The average annual rate of technical change was 1.3 percent. The new production chains resulting from technical change have made it possible to increase the size of dairy farms. Increasing the size of dairy farms should be allowed so in order to make it possible to utilize the advantages related to the economies of size.