ISOCOSTS AND ISOQUANTS PDF

Typically inputs X and Y would refer to labor and capital respectively. A Example of an isoquant map with two inputs that are perfect substitutes. B Example of an isoquant map with two inputs that are perfect complements. An isoquant derived from quantity and the Greek word iso, meaning equal is a contour line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two or more inputs. Isoquants are typically drawn along with isocost curves in capital-labor graphs , showing the technological tradeoff between capital and labor in the production function , and the decreasing marginal returns of both inputs.

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If, in the short run, its total output remains fixed due to capacity constraint and if it is a price-taker i. Therefore, the only way to maximise profit is to minimise cost.

Thus, profit maximisation and cost minimisation are the two sides of the same coin. Moreover, supply depends on cost of production. The decision to supply an extra unit depends on the marginal cost of producing that unit. The long-run production function of a firm involving the usage of two factors, say, capital and labour is represented by equal-product curve or isoquant.

An isoquant traces out the combinations of any two inputs which yield the same level of output. Isoquants are typically drawn as being convex to the origin because of the assumed substitutability of inputs. Isoquants: An isoquant is a locus of points showing all the technically efficient ways of combining factors of production to produce a fixed level of output. It is also known as the equal product curve. In case of two variable factors, labour and capital, an isoquant appears as a curve on a graph the axes of which measure quantities of the two factors.

Table 1 illustrates, by using hypothetical numbers, seven alternative methods of producing six units of output. These alternatives are shown also in Fig. Each curve shows the alternative combinations of labour and capital that would produce 8 and 10 units of output, respectively.

We could draw as many isoquants as we like. Isocost Lines: An isoquant shows what a firm is desirous of producing. But, the desire to produce a commodity is not enough. The producer must have sufficient capacity to buy necessary factor inputs to be able to reach its desired production level.

The capacity of the producer is shown by his monetary resources, i. So, like the consumer the producer has also to operate under a budget resource constraint. This is picturised by his budget line called isocost line. To find the least cost combination of inputs to produce a given output, we need to construct such equal cost lines or isocost lines.

An isocost line is a locus of points showing the alternative combinations of factors that can be purchased with a fixed amount of money. In fact, every point on a given isocost line represents the same total cost. To construct isocost lines we need information about the market prices of the two factors. For example, suppose, the price of labour is Re. Then an outlay of Rs. All these and other various combinations are shown in Fig.

These lines are straight lines because factor prices are constant and they have a negative slope equal to the factor-price ratio, i.

To find the least-cost combination of factors for fixed level of output we combine Fig. Suppose, the producer wants to produce six units of output. He could do so using the combination represented by points A, B or C in Fig.

For example, the cost would be Rs. In Fig. It looks for that factor combination that is on the lowest of the isocost lines. Where the isoquant touches but does not cross the lowest isocost line is the least cost position. The minimum-cost points are A, D and E. Each such point shows the equilibrium factor combination for maximising output subject to cost constraint, i.

The slope of an isoquant gives the marginal rate of technical substitution MKTS defined as the increase in the quantity of one factor that is required to replace a unit decrease in another factor, when output is held constant along any isoquant.

It is also known as the desired rate of factor substitution, i. MKTS is, in fact, the ratio of the marginal products of the factors. To see this, consider an example. If the firm is to maintain the same level of output while reducing capital by one unit, it needs to replace one unit of capital by one unit of labour. An isocost line shows the alternative quantities of two factors viz.

Its slope is given by the ratio of the prices of the two factors. It is known as the actual rate of factor substitution, the rate at which the firm can substitute labour by capital in the market place. Thus, in Fig. All the isocost lines in the diagram have the same slope because the relative prices of labour and capital are the same. If labour were relatively more expensive, the isocost lines would be steeper in Fig.

When this happens the ratio of the prices of factors is the same as the ratio of their marginal products.

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Isoquant and Isocost Lines (With Diagram) | Economics

Specifically, the point of tangency between any isoquant and an isocost line gives the lowest-cost combination of inputs that can produce the level of output associated with that isoquant. Equivalently, it gives the maximum level of output that can be produced for a given total cost of inputs. A line joining tangency points of isoquants and isocosts with input prices held constant is called the expansion path. A cost-minimizing input bundle is a point on the isoquant for the given y that is on the lowest possible isocost line. Put differently, a cost-minimizing input bundle must satisfy two conditions: it is on the y-isoquant no other point on the y-isoquant is on a lower isocost line. The case of smooth isoquants convex to the origin[ edit ] If the y-isoquant is smooth and convex to the origin and the cost-minimizing bundle involves a positive amount of each input, then at a cost-minimizing input bundle an isocost line is tangent to the y-isoquant. We know that the MRTS is equal to the ratio of the marginal products of the two inputs.

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Isoquant and isocosts

Thus, an isoquant schedule is a schedule of different combinations of factors of production yielding the same quantity of output. An iso-product curve is the graphic representation of an iso-product schedule. Thus, an isoquant is a curve showing all combinations of labor and capital that can be used to produce a given quantity of output. Isoquant Map An isoquant map is a set of isoquants that shows the maximum attainable output from any given combination inputs.

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Isoquant - Meaning and Properties

An isoquant shows all combination of factors that produce a certain output An isocost show all combinations of factors that cost the same amount. Isocosts and isoquants can show the optimal combination of factors of production to produce the maximum output at minimum cost. Definition isoquant An isoquant shows all the combination of two factors that produce a given output In this diagram, the isoquant shows all the combinations of labour and capital that can produce a total output Total Physical Product TPP of 4, In the above isoquant, this could be 20 capital and 18 labour or more capital intensive 9 capital and 35 labour. With fixed capital employing extra workers gives a declining increase in the marginal product MP Marginal rate of factor substitution The marginal rate of substitution is the amount of one factor e. K that can be replaced by one factor e.

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If, in the short run, its total output remains fixed due to capacity constraint and if it is a price-taker i. Therefore, the only way to maximise profit is to minimise cost. Thus, profit maximisation and cost minimisation are the two sides of the same coin. Moreover, supply depends on cost of production. The decision to supply an extra unit depends on the marginal cost of producing that unit. The long-run production function of a firm involving the usage of two factors, say, capital and labour is represented by equal-product curve or isoquant. An isoquant traces out the combinations of any two inputs which yield the same level of output.

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