ISOQUANT AND ISOCOST ANALYSIS PDF

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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Isoquant is also called as equal product curve or production indifference curve or constant product curve. A line joining tangency points of isoquants and isocosts with input prices held constant is called the expansion path. Thus, E is the point of equilibrium from where there is no tendency on the part of the producer to move away. This website uses cookies As a user in the EEA, your approval is needed on a few things.

This is used to provide traffic data and reports to the authors of articles on the HubPages Service. Outlay is not sufficient to move to IQ 3.

In the words of Prof. Cost minimisation occurs when an isoquant is just tangent to but does not cross an isocost line. It is also known as the desired rate of factor substitution, i.

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. If labour were relatively more expensive, the isocost lines would be steeper in Fig. Google provides ad serving technology and runs an ad network. If, in the short run, its total output remains fixed due to capacity constraint and if it is a price-taker i.

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Isocost-isoquant analysis | economics |

The chapter examines the theory of production or how firms organize production i. For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: When the amount of money spent by the firm changes, the isocost line may shift but its slope remains the same. Therefore, the only way to maximise profit is to minimise cost. With the change in the factor prices the slope of iso cost lien will change.

Capital and labor are the two factors involved in production.

The capacity of the producer is shown by his monetary resources, 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 cost factor combination. The absolute value of the slope of the isocost line, with capital plotted vertically and isocos plotted horizontally, equals the ratio of unit costs of labour and capital.

With right angled or L shaped, isoquantinputs can only be combined in fixed proportion in production.

Isocost-isoquant analysis

A higher isoquant represent lower isoquajt of output. In both cases the factors will have to be employed in optimal combination at which the cost of iocost will be minimum. By using this nad, you agree to the Terms of Use and Privacy Policy.

Table 1 illustrates, by using hypothetical numbers, seven alternative methods of producing six units of output. No data is shared unless you engage with this feature.

Please choose which areas of our service you consent to our doing so. The marginal physical product per rupee of one factor must be equal to tht of the other factor. Least cost input is a combination where the slope of isoquant is equal to the slope of isocost. Sign in or sign up and post using a HubPages Network account.

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This page was last modified on 16 Aprilat We know that the MRTS is equal to the ratio of the marginal products of the two inputs.

It follows that while in equilibrium. Maximization of profit implies minimization of cost. HubPages Tutorials and Community.

It is also known as the equal product curve. If the firm is to isqouant the same level of output while reducing capital by one unit, it needs to replace one unit of capital by one unit of labour. Iso quant map shows all the possible combinations of labour and capital that can produce different levels of output.

The isocost line will shift when the prices of factors change, the outlay remaining the same. While going through this analysis students may feel it is isoquajt revision of the indifference curve and the budget line.

Isoquants, abbreviated as IQs, possess the same properties as those of the indifference curves. Points A and B also satisfy the tangency condition and they lie within the reach of the producer.