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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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 isocoosts and capital.

Isoquants, abbreviated as IQs, possess the same properties as those of the indifference curves. The slope of iso cost line indicates the ratio of the factor prices. If the isoquants are smooth and convex to the origin and the cost-minimizing input bundle involves a positive amount of each input, then this bundle satisfies the following two conditions:.

But, the desire to produce a commodity is not enough.

The minimum-cost points are A, D and E. Isoquant is also called as equal product curve or production indifference curve or constant product curve. An isoquant shows the various combination of two inputs that can be used to produce a specific level of output. The iso quant closer to the origin indicates a lower level of output.

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A change in factor price makes changes in the slope of isocost lines as shown in the figure. When the amount of money spent by the firm changes, the isocost line may shift but its slope remains the same. This combinations must be the most efficient ones — i.

Isocost-isoquant analysis | economics |

All the isocost lines in the diagram have the same slope because the relative prices of labour and capital are the same. Alternative Objectives of Business Firms Economics. Then an outlay of Rs. Suppose, the producer wants to produce six units of output. Iso quants are equal revenue lines. To find the least-cost combination of factors for fixed level of output we combine Fig.

Isocost-isoquant analysis

For example, suppose, the price of labour is Re. The firm would not operate on the positively sloped portion of an isoquant because it could produce the same level of quantity with less capital and isocosrs. Its slope is given isocostx the ratio of the prices of the two factors.

And isoquant must be convex to the origin. 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. Production theory is extended to deal with two variable inputs by the introduction of isoquants.

We could draw as many isoquants as we like. The chapter examines the theory of production or how firms organize production i. Least cost input is a combination where the slope of isoquant is equal to the slope of isocost.

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The marginal physical product isqouants rupee of one factor must be equal to tht of the other factor. To find the least cost combination of inputs to produce a given output, we need to construct such equal cost lines or isocost lines.

This page was last modified on 16 Aprilat Only if a dollar spent on each input is equally productive is the input bundle optimal. He could do so using the combination represented by points A, B or C in Fig.

ISO QUANT AND ISOCOST – WikiEducator

The choice is based on the prices of factors of production at a particular time. These lines are straight lines because factor isoquaants are constant and they have a negative slope equal to the factor-price ratio, i. The decision to supply an extra unit depends on the marginal cost of producing that unit. This condition makes sense: If, izoquants the short run, its total output remains fixed due to capacity constraint and if it is a price-taker i.

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