2

Explain Least Cost Combination of the factors.

Ans.hProducer always tries to achieve the largest possible volume of output from a
given cost outlay on factors with given prices such that these are combined in an
optimal manner. Alternatively, producer minimise his cost of production for producing a
given level of output. In this way, the producer maximises his profits and produces a
given level of output with least cost combination of factors. This least cost combination
of factors will be optimum for him.
Given iso-cost line and the series of isoquants (isoquant-map), the producer will choose
the level of output, where the given iso-cost line is tangent to the highest possible
isoquant. In Fig. 7.10 (a), E1 is the point of equilibrium, where isoquant IQ2 is tangent to
iso-cost line AB.
Given budgeted expenditure, all other points are either not in the reach of producer (like
points P, Q etc. on the same isoquant IQ 2 or any point on higher isoquant IQ3) or give
lesser output (like points R, S on isoquant IQ1) than the point of equilibrium E1 with the
same cost and hence are inefficient.

e cost ou
givenMathematically,
Slop of isoquant = Slop of iso-cost line

tlay is

That is, at the point of equilibrium, the marginal physical products of the two factors are
proportional to the factor prices. In other words, the last rupee spent on one factor (say,
labour) is as productive as the last rupee spent on other factor (say, capital) and
producer has no incentive to change the combination of two factors.
If, for instance, the price of factor X is twice as much as that of factor Y then the
producer will purchase and use such quantities of the two factors that the marginal
physical product of factor X is twice the marginal physical product of factor Y The
result can be extended for more number of factors as MP X/PX = MPy/ PY = MPZ/PZ =