ISOCOST/ISOQUANT

ANALYSIS
THE ISOCOST/ISOQUANT GRAPH

• The analyst creates a graph showing various combinations

of factors of production that can produce a certain amount
of output.
THE ISOCOST/ISOQUANT GRAPH

More than 3 units of

machinery and more
than 4 units of labor

Less than 3 units of

machinery and less
than 4 units of labor
THE ISOQUANT CURVE

• Isoquant curve – a curve that represents

combinations of factors of production that
results in equal amounts of output.
• A point on the isoquant curve is
technically efficient.
THE ISOQUANT CURVE

Labor Machines Pairs of Earrings

A 3 20 60
B 4 15 60
C 6 10 60
D 10 6 60
E 15 4 60
F 20 3 60
THE ISOQUANT CURVE
THE ISOQUANT CURVE

• The isoquant curve is bowed inward

because of the law of diminishing marginal
productivity.
 THE ISOQUANT CURVE

• Marginal rate of substitution – the rate at

which one factor must be added to compensate
for the loss of another factor, to keep output
constant.

It is the slope of the isoquant curve.

THE ISOQUANT CURVE

• The absolute value of the slope at a point on the

isoquant curve equals the ratio of the marginal
productivity of labor to the marginal productivity of
machines.

MPlabor
Slope =
MPmachine
= Marginal rate of substitution
THE ISOQUANT CURVE

• Isoquant map – a set of isoquant curves

that show technically efficient
combinations of inputs that can produce
different levels of output.
AN ISOQUANT MAP
THE ISOCOST LINE

• Isocost line – a line that represents

alternative combinations of factors of
production that have the same costs.
THE ISOCOST LINE
CHOOSING THE ECONOMICALLY
EFFICIENT POINT OF PRODUCTION

• The least cost combination of inputs for a

given output occurs where the isocost
curve is tangent to the isoquant curve for
that output.
 CHOOSING THE ECONOMICALLY
EFFICIENT POINT OF PRODUCTION

• The slopes of the two curves are equal at that point of

tangency.

– MPlabor – Plabor MPlabor MPmachines

= so that =
MPmachines Pmachines Plabor Pmachines
CHOOSING THE ECONOMICALLY
EFFICIENT POINT OF PRODUCTION

• The firm is operating efficiently when an

additional output per dollar spent on
labor equals the additional output per
dollar spent on machines.
COMBINING ISOQUANT AND
ISOCOST CURVES
ISOCOST/ISOQUANT
ANALYSIS