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    Isoquants and Isocosts: Appendix To Chapter 7

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    Indirasari Cynthia SetyoParwati

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    Isoquants and Isocosts: Appendix To Chapter 7

    Uploaded by

    Indirasari Cynthia SetyoParwati
    25 views13 pages

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    25 views13 pages

    Isoquants and Isocosts: Appendix To Chapter 7

    Uploaded by

    Indirasari Cynthia SetyoParwati

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 13

    Isoquants and Isocosts

    Appendix to Chapter 7

    1 Copyright 2002, Pearson Education Canada


    Isoquants

    An isoquant is a graph that shows all the


    combinations of capital and labour that can be
    used to produce a given amount of output.

    2 Copyright 2002, Pearson Education Canada


    Properties of Isoquant Maps

     There are an infinite number of combinations of labour


    and capital that can produce each level of output.
     Every point lies on some isoquant.
     The slope of an isoquant is equal to:
    - MPlabour / MPcapital = - MPL / MPK = ΔK / ΔL
     The slope of the isoquant is called the marginal rate of
    technical substitution which can be defined as the rate at
    which a firm can substitute capital for labour and hold
    output constant.

    3 Copyright 2002, Pearson Education Canada


    Isoquants Showing All Combinations of Capital and
    Labour That Can Be Used to Produce 50, 100, and
    150 Units of Output (Figure 7A.1)

    4 Copyright 2002, Pearson Education Canada


    The Slope of an Isoquant Is Equal to
    the Ratio of MPL to MPK (Figure 7A.2)

    5 Copyright 2002, Pearson Education Canada


    Isocosts

    An isocost is a graph that shows all the


    combinations of capital and labour available for
    a given cost.

    6 Copyright 2002, Pearson Education Canada


    Isocost Lines Showing the Combinations of
    Capital and Labour Available for $5, $6, and $7
    (Figure 7A.3)

    7 Copyright 2002, Pearson Education Canada


    Isocost Line Showing All Combinations of
    Capital and Labour Available for $25 (Figure 7A.4)

     The slope of an
    isocost line is
    equal to - PL / PK.

     The simple way to


    draw an isocost is
    to calculate the
    endpoints on the
    line and connect
    them.

    8 Copyright 2002, Pearson Education Canada


    The Cost Minimizing Equilibrium
    Condition

    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

    9 Copyright 2002, Pearson Education Canada


    Finding the Least-Cost Combination of Capital
    and Labour to Produce 50 Units of Output
    (Figure 7A.5)

     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

    10 Copyright 2002, Pearson Education Canada


    Minimizing Cost of Production for qx
    = 50, qx = 100, and qx = 150 (Figure 7A.6)

     Plotting a series of
    cost- minimizing
    combinations of
    inputs - shown
    here as A, B and C
    - enables us to
    derive a cost
    curve.

    11 Copyright 2002, Pearson Education Canada


    A Cost Curve Showing the Minimum
    Cost of Producing Each Level of Output
    (Figure 7A.7)

    12 Copyright 2002, Pearson Education Canada


    Review Terms & Concepts

     isocost line
     isoquant
     marginal rate of technical
    substitution

    13 Copyright 2002, Pearson Education Canada

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