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Isocost-isoquant analysis: theory of production: The production function: a figure known as an isoquant diagram (Figure 1). In the graph, goldsmith-hours per. Finding the conditions for cost minimization is a little bit different for Isoquant and Isocost lines. Instead of finding the optimal quantity level for a. 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.

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This is used to prevent bots and spam. The equilibrium position of the firm can also be explained in terms of the equality between MRTS and the factor price ratio.

Least cost input is a combination where the slope of isoquant is equal to the slope of isocost. This service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles.

Google provides ad serving technology and runs an ad network. Iso quant is also known as Production indifference curve. Isoost total outlay isofost the firm wants to make on the two factors of production.

Isoquant and Isocost Lines (With Diagram) | Economics

It follows that while in equilibrium. The marginal rate of technical substitution of labour for capital must be diminishing at the point of equilibrium. In this equationPL is the price of labour and Pk is the price of capital. The prices of the factors of production 2. Capital and labor are the two factors involved in production. This page was last modified on 16 Aprilat After reading this chapter, you are expected to learn about: Therefore, the only way to maximise profit is to minimise cost.


The chapter examines the theory of production or how firms organize production i. The long-run production analyais of a firm isocot the usage of two factors, say, capital and labour is represented by equal-product analysls or isoquant.

He could do so using the combination represented by points A, B or C in Fig.

Equivalently, it gives the maximum level of output that can be produced for a given total isoqant of inputs. In the words of Prof. When a set of isoquants are depicted on a graph it is called an isoquant map. Isoquants are typically drawn as being convex to the origin because of the assumed substitutability of inputs.

The cost function for a firm with two variable inputs

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. 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 that isoquant. An isocost line shows the alternative quantities of two factors viz. For each level of output, there will be a different isoquant. Some articles have YouTube videos embedded in them.

Profit Maximization Through the Technique of Isoquant and Isocost Line

In other words, it is the problem of getting the highest amount of output from the given outlay. So, like the consumer the producer has also to operate under a budget resource constraint.

Navigation menu Personal tools Log in Request account. Isoquants are negatively sloped in the economically relevant range, convex to the origin and do not intersect. Table 1 illustrates, by using analysi numbers, seven alternative methods of producing six units of output.

If, in the short run, its total output remains fixed due to capacity constraint and if it is a price-taker i. Isoquants indicate various possibilities of combining two inputs.



Some articles have Google Maps embedded in them. OM in the diagram represents 50 workers and ON represent 5 machines. All these and other various combinations are shown in Fig. For example, the cost would be Rs.

This is used to collect data on traffic to articles and other pages amd our site. A cost-minimizing input bundle is a point on the isoquant for the given y that is on the lowest possible isocost line.

Andd the theory of consumer behavior, we analyze the equilibrium of a consumer with the help of the indifference curve analysis. Assumptions The principle of least-cost combination rests on the following assumptions: The firm can achieve maximum profits by choosing that combination of factors which will cost it the least.

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Production theory is extended to deal with two variable inputs by the introduction of isoquants.

A change in factor price makes changes in the slope of isocost lines as shown in the figure. Likewise, the isocost line will shift to the right if the outlay of the firm increases. If labour were relatively more expensive, the isocost lines would be steeper in Fig.