Isocost Curve & Isoquant

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Presentation transcript:

Isocost Curve & Isoquant Done by: Hariharasudhan R Divya Jothi

What is isoquant? Isoquant is also called as equal product curve or production indifference curve or constant product curve. Isoquant indicates various combinations of two factors of production which give the same level of output per unit of time.

The significance of factors of productive resources is that, any two factors are substitutable e.g. labor is substitutable for capital and vice versa. No two factors are perfect substitutes. This indicates that one factor can be used a little more and other factor a little less, without changing the level of output.

Assumptions There are two factor inputs labor and capital The proportions of factor are variable. Physical production conditions are given The state of technology remains constant

Isocost line Isocost line shows various combinations of inputs that a firm can purchase or hire at a given cost. By the use of isocosts and isoquants, a firm can determine the optimal input combination to maximize profit.

It is a graphical representation of various combinations of inputs say Labor(L) and capital (K) which give an equal level of output per unit of time. Output produced by different combinations of L and K is say, Q, then Q=f (L, K). A higher isoquant refers to a larger output, while a lower isoquant refers to a smaller output.

Isocost line Suppose a firm uses only labor and capital in production. The total cost or expenditures of the firm can be represented by: C = wL + rK

Isocost line

Cost minimization Slope of isoquant = - MPL / MPK Slope of isocost = - PL / PK For cost minimization we set these equal and rearrange to obtain: MPL / PL = MPK / PK

The Least-Cost Combination of Capital and Labour to Produce 50 Units of Output Profit-maximizing firms will minimize costs by producing their chosen level of output with the technology represented by the point at which the isoquant is tangent to an isocost line. Point A on this diagram

Minimizing Cost of Production for qx = 50, qx = 100, and qx = 150 Plotting a series of cost- minimizing combinations of inputs - shown here as A, B and C - enables us to darw a cost curve.

Copyright 2002, Pearson Education Canada A Cost Curve Showing the Minimum Cost of Producing Each Level of Output Copyright 2002, Pearson Education Canada

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