Isoquant: Production Factors and Output

• Isoquant
  • Indicates various combinations of two factors of production which give the same level of output per unit of time.
  • Also called equal product curve, production indifference curve, or constant product curve.
  • Any two factors are substitutable; labour is substitutable for capital and vice versa.
  • It is a graphical representation of various combinations of input like Labour (L) and capital (K) which give an equal level of output per unit of time.
  • Demonstrates the Marginal Rate of Technical Substitution of factor L for K (MRTS L,K)

Assumptions

• There are two factor inputs: labour and capital
• The proportions of factors are variable
• Physical production conditions are given
• The scale of operation is variable
• The state of technology remains constant

Shape of Isoquant

• The shape of isoquant plays a role in the production theory like the shape of indifference curve in the consumption theory.
• An isoquant map shows all possible combinations of labor and capital that can produce different levels of output.
• Isoquants closer to the origin indicate a lower level of output.
• Slope of iso quant is K/L = MRSLK= MPL/MPk

Properties/characteristics of isoquants

• Isoquants (IQs) possess the same properties as those of the indifference curves

• Two isoquants do not intersect each other

• An isoquant cannot touch either axis

• Isoquants are 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

• IQs may be linear when labour and capital are perfect substitutes

• If an isoquant has segments separated by kinks, the isoquant is called kinked isoquant or activity analysis isoquant or linear programming isoquant.

• If L and K are perfect complements to each other, the IQ is L-shaped and is known as an input-output isoquant or Leontief isoquant.

• If the marginal product of one of the two factors is zero, IQ is parallel to the axis on which the factor with zero marginal product is represented

• If one of the two factors has a negative marginal product, the IQ slopes upwards from left to right

• If both 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

• Isocost

  • Refers to that cost curve that represents the combination of inputs that will cost the producer the same amount of money.
  • In economics an isocost line shows all combinations of inputs which cost the same total amount
  • Isocost line pertains to cost-minimization in production, as opposed to utility-maximization.
  • Each isocost denotes particular level of 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.

Isocost Curves

• An isocost curve is the locus traced out by various combinations of L and K, each which costs the producer the same amount of money.
• Differentiating equation with respect to L, that gives the slope of the producer's budget line (isocost curve)
• Slope of iso cost line = PL/Pk where 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
• If the price of labour falls the firm could buy more labour and the line will shift away from the origin.

Least cost factor combination

• The firm can achieve maximum profits by choosing the combination of factors which cost it the least.
• 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.
• The least cost factor combination can be determined by imposing the isoquant map on isocost line.
• The point of tangency between the isocost and an isoquant is an important but not a necessary condition for producer's equilibrium.

The Economic Region of Production

• A 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 labor
• Ridge lines separate the relevant (negatively sloped) from the irrelevant (or the positively sloped) portion of the isoquant.
• Ridge lines join points on the isoquants where the isoquants have zero slope (and thus zero MRTSlk)