ISOCOSTS AND ISOQUANTS PDF

ISOCOSTS AND ISOQUANTS PDF

In economics an isocost line shows all combinations of inputs which cost the same total amount given total cost of inputs. A line joining tangency points of isoquants and isocosts (with input prices held constant) is called the expansion path. Isoquants: An isoquant (equal quantity) is a curve that shows the combinations of certain inputs such as Labor (L) and Capital (K) that will produce a certain. Class 3 isocosts & isoquants. 1. ISOQUANTS Equal Quantity of Production; 2. MEANING OF ISOQUANTS • Isoquants are the curves, which.

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An isocost line is a locus of points showing the alternative isoqunats of factors that can be purchased with a fixed amount of money. Iso quants are equal revenue lines. The absolute value of the slope of the isocost line, with capital plotted vertically and labour plotted horizontally, equals the ratio of unit costs of labour and capital. The marginal rate of technical substitution of labour for capital must be diminishing at the point of equilibrium.

This page was last edited on 20 Novemberat We can see that the shape of isoquant plays an important a role in the production theory as the shape of indifference curve in the consumption theory.

It is also known as the equal product curve. So the condition that the MRTS be equal to the input cost ratio is equivalent to the condition that the marginal product per dollar isocoshs equal ioquants the two inputs. While going through this analysis students may feel it is a revision of the indifference curve and the budget line.

If, in the short run, its total output remains fixed due to capacity constraint and if it is isoquxnts price-taker i. If labour were relatively more expensive, the isocost lines would be steeper in Fig. After reading this chapter, you are expected to learn about: The firm can achieve maximum profits by choosing that combination of factors which will cost it the least.

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The iso quant closer to the origin indicates a lower level of output.

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. With the change in the factor prices the slope of iso cost lien will change. This equals the ratio of marginal productivity of two ane. The essential condition is that the slope of the isocost line must equal the slope of the isoquant.

Isoquant and Isocost Lines (With Diagram) | Economics

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. A cost-minimizing input bundle is a point on the isoquant for the given y that is on the lowest possible isocost line. 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.

The firm can maximize its profits either by maximizing the level of output for a given cost or by minimizing the cost of producing a given output. Isoquants are typically drawn as being convex to the origin because of the assumed substitutability of inputs. isocowts

Isocost-isoquant analysis | economics |

He could do so using the combination represented by points A, B or C in Fig. Views Read View source View history.

Isocosrs the theory of production where only one or two inputs are variable, we proceed to examine cases in which all inputs are variable. All these and other isocotss combinations are shown in Fig. The cost-minimization problem of the firm is to choose an input bundle KL feasible for the output level y that costs as little as possible. Production theory is extended to deal with two variable inputs by the introduction of isoquants. This condition makes sense: 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.

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With right angled or L shaped, isoquantinputs can only be combined in fixed proportion in production. Thus at a point of equilibrium marginal physical productivities of the two factors must be equal the ratio of lsoquants prices.

Isoquant and Isocost Lines (With Diagram) | Economics

Least cost isoquangs is a combination where the slope of isoquant is equal to the slope of isocost. The capacity of the producer is shown by his monetary resources, i. Navigation menu Personal tools Log in Request account. Its slope is given by the ratio of the prices of the two factors.

If the isoquants are smooth and convex to the origin and the cost-minimizing input bundle involves a positive amount isoqyants each input, then this bundle satisfies the following two conditions:. This page has been accessedtimes. The least cost factor combination can be determined by imposing the isoquant map on isocost line.

An isoquant traces out the combinations of any two inputs which yield the same level of output. An isoquant shows the various combination of two inputs that can be used to produce a specific level of output.

So, like the consumer the producer has also to operate under a budget resource constraint. We know that the MRTS is equal to the ratio of the marginal products of the two inputs. The slope depends on the prices of factors of production and the amount of money which the firm spends on the factors.