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    Isoquant & Isocost

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    Fathimah
    1. An isoquant curve represents all combinations of inputs that produce the same quantity of output when used efficiently. 2. The slope of an isoquant curve is its marginal rate of technical substitution, which is the rate at which one input can be substituted for another while maintaining the same level of output. 3. An isocost line connects all combinations of inputs that can be purchased for a given total cost, with the optimal level of employment occurring at the point where the isoquant is tangent to the isocost, indicating equality between marginal rates of substitution and factor price ratios.

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    Isoquant & Isocost

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    Fathimah
    25 views5 pages
    1. An isoquant curve represents all combinations of inputs that produce the same quantity of output when used efficiently. 2. The slope of an isoquant curve is its marginal rate of technical substitution, which is the rate at which one input can be substituted for another while maintaining the same level of output. 3. An isocost line connects all combinations of inputs that can be purchased for a given total cost, with the optimal level of employment occurring at the point where the isoquant is tangent to the isocost, indicating equality between marginal rates of substitution and factor price ratios.

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    Original Title

    ISOQUANT & ISOCOST

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    1. An isoquant curve represents all combinations of inputs that produce the same quantity of output when used efficiently. 2. The slope of an isoquant curve is its marginal rate of technical substitution, which is the rate at which one input can be substituted for another while maintaining the same level of output. 3. An isocost line connects all combinations of inputs that can be purchased for a given total cost, with the optimal level of employment occurring at the point where the isoquant is tangent to the isocost, indicating equality between marginal rates of substitution and factor price ratios.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    25 views5 pages

    Isoquant & Isocost

    Uploaded by

    Fathimah
    1. An isoquant curve represents all combinations of inputs that produce the same quantity of output when used efficiently. 2. The slope of an isoquant curve is its marginal rate of technical substitution, which is the rate at which one input can be substituted for another while maintaining the same level of output. 3. An isocost line connects all combinations of inputs that can be purchased for a given total cost, with the optimal level of employment occurring at the point where the isoquant is tangent to the isocost, indicating equality between marginal rates of substitution and factor price ratios.

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    © All Rights Reserved
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    Download as doc, pdf, or txt
    of 5

    ISOQUANT – A CURVE THAT REPRESENTS ALL DIFFERENT COMBINATIONS

    OF INPUTS THAT, WHEN COMBINED EFFICIENTLY, PRODUCED

    THE SAME QTY OF OUTPUT.

    X
    8

    5 


    3
    Q = 30
    Q = 20
    L
    1 2 3

    Properties of Isoquant :

    1. The higher the level of Isoquant, the higher the level of Qty produced.

    2. The slope of Isoquant is its

    Marginal Rate of Technical Substitution. (= MRTS)


    MRTS = how much capital can be traded for labor
    = rate of substitution between L and K

    K1 slope of Isoquant
    MRTS = - ΔK = MPL
    ΔL MPK
    ΔK

    K2
    Q = 20

    L
    L1 L2

    1
    ΔL

    Shape of Isoquant

    i) K ii) K

    Q = 40
    Q = 30 1
    Q = 30
    L
    L
    Perfect Substitute 1 2

    Zero Substitutability
    - Can’t trade L w/o K

    ISOCOST – the set of all combinations of K and L that can be purchased for a
    specified total cost (TC)

    Pk (Price of Capital) = r & PL (Price of Labor) = w

    TC = r.K + w.L Let K=0, w=RM2 per hour L=? given TC=RM10
    TC = r.K + w.L => 10 = r(0) + 2L
    2L = 10
    L=5
    Let L=0, r=RM5 per hour K=? given TC =RM10
    TC = r.K + w.L => 10 = 5K + 2(0)
    5K = 10
    K=2

    Capital
    Isocost is also know as Budget Line.
    K=2
    TC = rK + wL => 10 = 5K + 2L

    Labour

    2
    0 L=5

    Q1. How much K should you employ given the cost.

    TC => c = r.K + w.L

    r.K + w.L = c

    r.K = c – w.L

    K=c– w.L => Expression of the Isocost must always be in terms of K.


    r r

     i.e Let L = o, K = c
    r

    Capital Set In terms of L :


    c =K
    r C = rk + wL

    rk + wL = c
    Isocost
    wL = c – rk

    L = c – r.k
    w w

    C =L Labor i.e Let K = o, L = c


    w
    w

    Suppose c = 40, r = 3, w = 2

    Isocost : c = rk + wL

    40 = 3k + 2L

    3k = 40 – 2L

    K = 13.3 – 2 L
    3

    Let L = O, K = 13.3

    3
    In terms of L :
    K
    K = 13.3 – 2 L
    c = 13.3 3
    r
    2 L = 13.3 – K
    3

    L = 13.3 ( 3/2 ) – 3 K
    2
    Let K = o
    0 c = 19.9 L L = 13.3 ( 3/2 ) = 19.9
    w

    Optimal Employment for Two Variable Input

    Capital

    C
    r
    Slope of Isoquant = Slope of Isocost

    MPL = w
    K* MPk r

    Q
    Labour
    0 L* c
    - w

    Expansion path

    Expansion path – A line joining all


    the equation points when the output
    increases.
    c
    b
    a

    Q3
    Q2

    4
    Q1 L

    OPTIMAL EMPLOYMENT

    1. OPT. Employment of 1 var. Input

    MRPL = W

    2. OPT. Employment of 2 var. Input

    Focus :- As managers, you would like to find out the most efficient prod n
    How much capital & Labor to employ, given the cost (budget)

    Capital

    *K E

    Q = 30

    Q = 20
    C Q = 10

    *L Labour

    Note : E  the most eff. prodn pt.

     the Isoquant is tangent to Isocost

     slope of Isoquant = slope of Isocost

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