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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Where the isoquant touches but does not cross the lowest isocost line is the least cost position. In fact, every point on a given isocost line represents the same total cost. 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. Economic region of Production:. 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.
The choice is based on the prices of factors of production at a particular time. So the condition that the MRTS be equal to the input cost ratio is equivalent to the condition that the marginal product per dollar is equal for the two inputs.
Retrieved from ” http: Thus, profit maximisation and cost minimisation are the two sides of the same coin. The producer must have sufficient capacity to buy necessary factor inputs to be able to reach its desired production level.
The least cost factor combination can be determined by imposing the isoquant map on jsoquants line.
A change in factor price makes changes in the slope of isocost lines as shown in the figure. The marginal rate of technical substitution of labour for capital must be diminishing at the point of equilibrium. Iso quant map shows all the possible combinations of labour and capital that can produce different levels of output. In both cases the factors will have to be employed in optimal combination at which the cost of production will be minimum.
Production theory is extended to deal with two variable inputs by the introduction of isoquants.
Views Read View source View history. Only if a dollar spent on each input is equally productive is the input bundle optimal. Least cost input is a combination where the slope of isoquant is equal to the slope of isocost.
The minimum-cost points are A, D and E.
Each curve shows the alternative combinations of labour and capital that would produce 8 and 10 units of output, respectively. And isoquant must be convex to the origin.
If, in the short run, its total output remains fixed due to capacity constraint and if it is a price-taker i. In this section we examine the characteristics of isoquants, define the economic region of production and consider the special cases where the commodities can only be produced with least isocists factor combination.
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. Isoquant is also called as equal product curve or production indifference curve or constant product curve. This condition makes sense: A cost-minimizing input bundle is a point on the isoquant for the given y that is on the lowest possible isocost line. Each such point shows the equilibrium factor jsocosts for maximising output subject to cost constraint, i.
Specifically, the point of tangency between any isoquant and an isocost line gives the lowest-cost combination of inputs that can produce the level of output associated with isoquannts isoquant.
Iso quants are equal revenue lines. To find the least cost combination of inputs to produce a given output, we need to construct such equal cost lines or isocost lines.
Navigation menu Personal tools Log in Request account. Thus at a point of equilibrium marginal physical productivities of the two factors must be equal the ratio of their prices.
The slope depends on the prices of factors of production and the amount of money which the firm spends on the factors. This page was last edited on 20 Novemberat 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.
When the amount of money spent by the firm changes, the isocost line may shift but its slope remains the same. In economics an isocost line shows all combinations of inputs which cost the same total amount. It is also known as the equal product curve. 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. Alternative Objectives of Business Firms Economics.
The iso cost line will shift to the right when money spent on factors increases or firm could buy more as the factor prices are given. Moreover, supply depends on cost of production. But, the desire to produce a commodity is not enough. Top 14 Peculiarities of Labour Production Economics. From Wikipedia, the free encyclopedia. For example, the cost would be Rs. These lines are straight lines because factor prices are constant and they have a negative slope equal to the factor-price ratio, i.
Cost minimisation occurs when an isoquant is just tangent to but does not cross an isocost line. Put differently, a cost-minimizing input bundle must satisfy two conditions:.