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Cost of Production: The Isoquant-Isocost approach/ least cost

WHAT IS ISOQUANT?
ISO- EQUAL/ SAME QUANT- QUANTITY

`ISOQUANTS`
The different combinations of labor and capital used to produce a certain quantity of products are illustrated through Isoquants.

Isoquant curve a curve that represents

combinations of factors of production that results in equal amounts of output. A point on the isoquant curve is technically efficient. An ISOQUANT CURVE shows different combinations of labor and and capital to produce certain output. The isoquant curve is bowed inward because of the law of diminishing marginal productivity.

Labor A B C 1 2 4

Machines 4 2 1

Pairs of shoes 15 15 15

`ISPOOSED SHU` PRODUCTION


m a c h i n e s 5
4 15 (Shoes per day) 21 24 26 27

3
2

13
10

18
15

22
18

24 25
20 21

1
0

4
1

10
2

13 15 16
3 4 5 workers

Isoquant map a set of isoquant curves that show


technically efficient combinations of inputs that can produce different levels of output.

An Isoquant Map
Capital (machines per day)

a 2

c
21 sweaters 15 sweaters 10 sweaters

5
Labor (workers per day)

PROPERTIES OF ISOQUANTS
some of the main properties of isoquants. Isoquants further from the origin represent greater output levels Isoquants slope down to the right Isoquants do not intersect Isoquants are usually convex to the origin/that is, bowed towards the origin.

An Isoquant that Lies Above and to the Right of Another Represents a Higher Output Level:

An Isoquant Slopes Downward from Left to Right:

Isoquants Cannot Cut Each Other:

Isoquants are Convex to the Origin:

The marginal rate of technical substitution


Isoquants are typically convex to the origin reflecting the fact that the two factors are substitutable for each other at varying rates. It measures the reduction in one input per unit increase in the other input that is just sufficient to maintain a constant level of production. For example, the marginal rate of substitution of labor for capital gives the amount of capital that can be replaced by one unit of labor while keeping output unchanged.

The marginal rate of technical substitution


Or Marginal rate of substitution for production the
rate at which one factor must be added to compensate for the loss of another factor, to keep output constant It is the slope of the isoquant curve The absolute value of the slope at a point on the isoquant curve equals the ratio of the marginal productivity of labor to the marginal productivity of machines.

MPlabor Slope MPmachine Marginal rate of substitution

The marginal rate of technical substitution


To move from point A to point B in the diagram, the amount of capital is reduced from Ka to Kb while the amount of labor is increased only from La to Lb. To move from point C to point D, the amount of capital is reduced from Kc to Kd while the amount of labo ris increased from Lc to Ld.

The opposite is true when going in the other direction (from D to C to B to A). In this case we are looking at the marginal rate of technical substitution capital for labour (which is the reciprocal of the marginal rate of technical substitution labour for capital). It can also be shown that the marginal rate of substitution labour for capital, is equal to the marginal physical product of labour divided by the marginal physical product of capital.

The Marginal Rate of Technical Substitution


Capital (machines per day)

MRTS =-1/3 3 2.5

1
0 1 2.5

MRTS =- 3
13 sweaters

5
Labor (workers per day)

Factor Units Units of Units of Output of MRTS of Labor Combi of Capital Commodity X for Capital nations Labor A 1 15 150 B 2 11 150 4:1 C 3 8 150 3:1 D 4 6 150 2:1 E 5 5 150 1:1

Isocost Lines
alternative combinations of factors of production that have the same costs. An Isocost line shows all the combinations of capital(machines) and labor(workers) that can be bought for a given total cost

Isocost line a line that represents

Isocost Line
PL = $25
Capital (machines per day)

PK = $25
4 a
Total Cost = $100

b
c d e 0 4
Labor (workers per day)

The Isocost Equation


The Isocost line can be described by an equation: TC = PLL + PKK To calculate the isocost equation, divide the firms Total Cost by the price of capital and then subtract (PL/PK)L from both sides of the resulting equation. The isocost equation is: K = TC/PK (PL/PK) L This equation tells us how the firm can vary its capital input as it varies its labor input, holding total cost constant.

Isocost Map
M a c h I n e s 5 4 3 2
TC=$75
TC=$100

TC=$125

4 workers

Input Prices and the Isocost Line


Capital (machines per day)

Labor

$50
$25

TC = $100

Capital

Labor

$25

Capital

$25

2
Labor $25 $50 Capital

4
Labor (workers per day)

The Least-Cost Technique of Production

Capital (machines per day)

Least-Cost technique

b c 15 sweaters

5
Labor (workers per day)

Exercise
Q.1.Define Iso-cost line with the help of a diagram.

Exercise
Draw the Iso-cost curve for the TC=$150, L = $25 & K = $50 L = $50 & K = $25 L = $25 & K = $25 L = $50 & K = $50