Chapter 5 The Firm And the Isoquant Map Chapter 5 The Firm And the Isoquant Map.
Isocost Curve & Isoquant
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Transcript of Isocost Curve & Isoquant
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
afirm can purchase or hire at a given cost. By the use of isocosts
and isoquants, a firm can determinethe 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 ofcost- minimizing combinations of inputs - shown
here as A, B and C -enables us to darwa 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 Thank you