ISOQUANTS AND ISOCOSTS PDF

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. K that can be replaced by one factor e.

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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. K that can be replaced by one factor e. If 2 units of capital could be replaced with one-factor labour, the MRS would be 2 Diminishing marginal rate of substitution If the firm employs 2 L and 40 K. Then employing one extra worker can enable it to save 10K.

This is quite an efficient saving. The firm only has to pay one extra worker but can save the cost of However, at a combination of 9 Labour, employing an extra worker enables a saving of only 2 capital. Therefore, the more that workers are employed, there is a diminishing rate at which you can substitute the other factor.

There comes a point, where employing more workers barely saves any capital at all. As one moves down the isoquant, output remains the same. Therefore the output gained from employing more labour must equal the output lost from employing more capital. For example I1 may show the combinations of capital and labour that can produce 4, TPP. I2 may show the combinations of capital and labour that can produce 5, TPP. I5 is a higher output than I4 In the short-term, a firm faces a trade-off along one particular isoquant.

But, in the long-term, a firm can invest in increasing capital stock and produce at a higher output for the same quantity of labour. Isocost An isocost shows all the combination of factors that cost the same to employ.

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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. The decision to supply an extra unit depends on the marginal cost of producing that unit.

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