Isoquant Curve: Meaning, Assumptions & Properties

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. The isoquant curve aids corporations and enterprises in making modifications to inputs in order to optimize output and, therefore, profit. As we move down along an isoquant the absolute value of its slope or Marginal Rate of Technical Substitution declines and the isoquant is convex. Ridge lines separate the relevant (i.e. the negatively sloped) from the irrelevant portion of the isoquant. Iso-quant curves cannot intersect or be tangent to each other.

The iso-cost line shifts in a parallel fashion from AB to CD when total outlay increases and from AB to EF if it declines. Hence, it can be concluded that isoquants will never intersect with each other. Thus, an isoquant will be, in general, convex to the point of origin. Similarly, other iso-cost lines can be plotted by taking cost more than 120, in case the producer is willing to spend more amount of money on the production factors.

• Property 3 − Isoquant curves are incapable of being tangent or overlapping with one other.
• The various units of output such as 100, 200, 300, etc., shown in an isoquant map are arbitrary.
• It attempts to analyze consumer behavior, and map out consumer demand.
• Such behaviour of an isoquant is based on the principle of diminishing MRTS.

The above table is based on the assumption that only two factors of production, namely, Labor and Capital are used for producing 100 meters of cloth. If isoquants were concave to the origin, the MRTS between two inputs would be increasing one, rather than a diminishing one. The rate at which one input is substituted for another is called the MRTS.

Used by producers and manufacturers, they display the best interplay of two factors that will result in the maximum output at minimum cost. An isoquant the slope of iso-quant explains shows all combinations of factors that produce a certain output. An isocost show all combinations of factors that cost the same amount.

Uses of Income Elasticity of Demand in Business Decision Making

For example, in the graph of an isoquant where capital (represented with K on its Y-axis and labor on its X-axis, the slope of the isoquant, or the MRTS at any one point, is calculated as dL/dK. The rate of technical substitution between factors may have variations. The arrow in the figure shows an increase in the output with a right and upward shift of an Iso-quant curve.

In other words, the level of total output of a firm increases with increase in its financial resources. Like the price-income line in the indifference curve analysis, a relative cheapening of one of the factors to that of another will extend the iso-cost line to the right. If one of the factors becomes relatively dearer, the iso-cost line will contract inward to the left.

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What is meant by elasticity of technical substitution between factors?

Isocosts and isoquants can show the optimal combination of factors of production to produce the maximum output at minimum cost. Any point on the isoquants outside the upper ridge line OR and the lower ridge line OL constitute uneconomic region of production. Production must take place inside the ridge lines. Note that the ridge lines separate the relevant (i.e., negatively sloped) from the irrelevant portions (i.e., positively or zero sloped) of the isoquants. So, like the consumer the producer has also to operate under a budget constraint.

Firstly, in the indifference curve technique, utility cannot be measured. In the case of an isoquant, the product can be precisely measured in physical units. Secondly, in the case of indifference curves, we can talk only about higher or lower levels of utility.

No iso-quant curve touches either of the axis, X or Y. The same can be explained with the help of a numerical example. Suppose the firm decides to produce 10 units of output. The price of labour per hour is Rs. 10 and the price of machine use per hour is Rs. 10. The following table shows the various combinations of labour and machine capital hours required to produce 10 units of output. Alternatively, if both factors are doubled to OC2+ OL2 they lead to the lower output level isoquant 175 at point R than the isoquant 200 which shows diminishing returns to scale.

Any units of output such as 5, 10, 15, 20 or 1000, 2000, 3000, or any other units can he taken. Isoquants need not be parallel because the rate of substitution between two factors is not necessarily the same in all the isoquant schedules. The first, second, third and the fourth combinations are shown as A, S, С and D respectively. In case of perfect complement factors, vertical portion of isoquant shows zero marginal product of capital while horizontal portion shows zero marginal product of labor.

What is Short Run Cost? Types: Total, Average, Marginal

Expansion path means locus of all such points that shows least cost combination of factors corresponding to different levels of output. In Figure 15, P1L1 iso-cost line has become tangent to iso-product curve at point E. At this point, the slope of the iso-cost line is equal to the iso-product curve. The slope of the iso- product curve represents MRTS of labour for capital. The slope of the iso-cost line represents the price ratio of the two factors.

And this would be against the assumption that the isoquant curve is based on. 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. Since B is having KK1 more units of capital it is wrong to assume that both A and B will yield the same level of output.

An isocost line is a locus of points showing the alternative combinations of factors that can be purchased with a fixed amount of money. In fact, every point on a given isocost line represents the same total cost. To construct isocost lines we need information about the market prices of the two factors. 1 per unit and the price of capital is Rs. 4 per unit.

Principle of Marginal Rate of Technical Substitution

In the Figure 8.8 , the iso-cost line becomes flatter when interest rate increases and becomes steeper when the interest rate falls. Elasticity of factor substitution (σ) refers to the ratio of percentage change in capital-labour ratio to the percentage change in MRTS. However, it does not reveal the degree of substitutability of one factor to another.

Thus, an isoquant, in general, should slope downward from left to right. In the words of Cohen and Cyert, an iso-product curve is a curve along which the maximum achievable production is constant. An isoquant, therefore, depicts all the technological possibilities graphically and show a substitution between two factors while keeping the output same. The iso-cost line gives information regarding factor prices and financial resources of the firm.

The table 1 shows that the five combinations of labour units and units of capital yield the same level of output, i.e., 200 metres of cloth. Thus, 200 metre cloth can be produced by combining. Let us suppose that there are two factor inputs—labour and capital. An Iso-product schedule shows the different combination of these two inputs that yield the same level of output as shown in table 1. Isoquant curve can be an indicator of efficiently utilizing the two input factors for improving productivity.

The isoquant curve assists companies and businesses in making adjustments to inputs to maximize production, and thus profits. While going through the isoquant curves, we come across the numerous possibilities which may or may not be practically applicable. Further, as the firm expands, it enjoys internal economies of production. It may be able to install better machines, sell its products more easily, borrow money cheaply, procure the services of more efficient manager and workers, etc. All these economies help in increasing the returns to scale more than proportionately.