Class 3 isocosts & isoquants

ISOQUANTSEqual Quantity of Production

MEANING OF ISOQUANTS• Isoquants are the curves, which represent the

different combinations of inputs producing a particular quantity of output

• Any combination on the isoquant represents the some level of output

• Isoquant is a production function with two variables inputs, which are substitutable for one another within limits

• Thus an isoquant shows all possible combinations of two inputs, which are capable of producing equal or a given level of output

Equation : Q = f (L,K) 2

ASSUMPTIONS OF ISOQUANTS

• There are only two factors of production.

• The two factors can substitute each other up

to certain limit.

• The shape of the isoquants depends upon the

extent of substitutability of the two inputs.

• The technology is given over a period

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AN ISOQUANT MAY BE EXPLAINED WITH THE HELP OF AN ARITHMETICAL EXAMPLES

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Combinations

Labour (units)

Capital (units)

Output (quantity)

A 1 10 50

B 2 7 50

C 3 4 50

D 4 3 50

E 5 1 50

ISOQUANT CURVE :

5

1, 10

2, 7

3, 44, 3

5, 10

2

4

6

8

10

12

0 1 2 3 4 5 6

Capi

tal (

K)

Labour (L)

ISOQUANTS

FEATURES OF ISOQUANTS

It is a downward sloping curveIt is convex to originIt does not intersectIt does not touch axis 6

MARGINAL RATE OF TECHNICAL SUBSTITUTION MARGINAL RATE OF TECHNICAL SUBSTITUTION (MRTS)(MRTS)• MRTS refers to the rate at which one input factor

is substituted with the other to attain a given level of output

• It is measured as

MRTS = changes in one input/changes in another input

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Combinations

Labour (units)

Capital (units)

Output (quantity

)

MRTS

A 1 10 50 ----

B 2 7 50 1:3

C 3 4 50 1:3

D 4 3 50 1:1

E 5 1 50 1:1

ISOCOSTSEqual Cost of Production

DEFINITION OF ISOCOSTS

Isocosts refers to that cost curve that represents the combination of inputs that will cost the producer the same amount of money.

In other words, each isocost denotes a particular level of total cost for a given level of production. If the given level of production changes, the total cost changes and thus the isocost curve moves upwards. And vice versa.

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ISOCOST CURVE

In the following figure three downwards sloping straight line cost curves each costing Rs.1.0 lakh, Rs. 1.5 lakh and Rs. 2.0lakh for the output levels of 20,000, 30,000 and 40,000 units. Isocosts farther from the origin, for given input costs, are associated with higher costs. Any change in input prices changes the slope of isocost lines 10

ISOCOSTS VS. ISOQUANTS

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