If, in the short run, its total output remains fixed due to capacity constraint and if it is a price-taker i. Therefore, the only way to maximise profit is to minimise cost. Thus, profit maximisation and cost minimisation are the two sides of the same coin. Moreover, supply depends on cost of production.
|Published (Last):||15 April 2014|
|PDF File Size:||11.66 Mb|
|ePub File Size:||18.97 Mb|
|Price:||Free* [*Free Regsitration Required]|
For the convenience of the students, we can state them as follows. Two isoquants do not intersect each other: No isoquant can touch either axis Isoquant is oval in shape A higher IQ implies a higher level of output IQs are never parallel to each other. Interspacing between them is least at the ends and maximum in the middle. IQs are convex to the origin: convex isoquants possess continuous substitutability of K and L over a stretch. Beyond this stretch, K and L are not substitutable foe each other.
IQs may be linear when labour and capital are perfect substitute. A linear isoquant implies that either factor can be used in proportion.
If isoquant has several linear segments separated by kinks, the isoquant is called kinked isoquant or activity analysis isoquant or linear programming isoquant. Such isoquants are used in linear programming. Such isoquant is known a input-output isoquant or Leontief isoquant. There is only one combination of L and K available for production. It is the corner point of L-shaped isoquant.
If marginal product of one of the two factors is zero, IQ is parallel to the axis on which the factor with zero marginal products is represented. If one of the two factors has negative marginal product the IQ slopes upwards from left to right. If both the factors have negative marginal products, the IQ is concave to the origin. If the producer has a preference for a factor of production, the IQ is quasi linear.
If the factors to be employed in whole numbers units only. The IQ is discontinuous. Iso cost line shows various combinations of labour and capital that the firm can buy for a given factor prices. In this equation , PL is the price of labour and Pk is the price of capital. The slope of iso cost line indicates the ratio of the factor prices. A set of isocost lines can be drawn for different levels of factor prices, or different sums of money.
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. Slope of iso cost line With the change in the factor prices the slope of iso cost lien will change. If the price of labour falls the firm could buy more of labour and the line will shift away from the origin. The slope depends on the prices of factors of production and the amount of money which the firm spends on the factors.
When the amount of money spent by the firm changes, the isocost line may shift but its slope remains the same. A change in factor price makes changes in the slope of isocost lines as shown in the figure. The choice is based on the prices of factors of production at a particular time. 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.
In both cases the factors will have to be employed in optimal combination at which the cost of production will be minimum. The least cost factor combination can be determined by imposing the isoquant map on isocost line.
The essential condition is that the slope of the isocost line must equal the slope of the isoquant. Thus at a point of equilibrium marginal physical productivities of the two factors must be equal the ratio of their prices. The marginal physical product per rupee of one factor must be equal to tht of the other factor. And isoquant must be convex to the origin. The marginal rate of technical substitution of labour for capital must be diminishing at the point of equilibrium. The Economic region of production The firm would not operate on the positively sloped portion of an isoquant because it could produce the same level of quantity with less capital and labour.
Economic region of Production: Ridge lines: separate the relevant i. Ridge lines joins points on the various isoquants where the isoquants have zero slope and thus zero MRTSlk.
Isoquant and isocosts
An isoquant shows all combination of factors that produce a certain output An isocost show all combinations of factors that cost the same amount. Isocosts and isoquants can show the optimal combination of factors of production to produce the maximum output at minimum cost. Definition isoquant An isoquant shows all the combination of two factors that produce a given output In this diagram, the isoquant shows all the combinations of labour and capital that can produce a total output Total Physical Product TPP of 4, In the above isoquant, this could be 20 capital and 18 labour or more capital intensive 9 capital and 35 labour. With fixed capital employing extra workers gives a declining increase in the marginal product MP Marginal rate of factor substitution The marginal rate of substitution is the amount of one factor e.
Isoquant and Isocost Lines (With Diagram) | Economics