LEAST-COST

COMBINATION
L EAST COST COMBINATIONPRINCIPLE

A rational firm would combine the various

factors of production its production function in
such a way that with the minimum
input and maximum output is obtained at
the minimum cost.

Such a combination is referred to as

the least cost combination.
 A SSUMPTION OF LEASTCOST
COMBINATIONS
• There are two factors of production – labor & capital.
• All units of labor & capital are
homogeneous.
• The prices of units of labor (w) & capital (r) are given &
constant.
• The firm aims at profit maximization.
• Consistency.
• Transitivity.
• Law of diminishing marginal rate of technical
substitution.
• Producer has no more factor of production then his
requirement.
 THE LEAST COST COMBINATION MAYBE
STATED

Marginal productivity of labor Marginal product of capital

=
Price of labor Price of capital

MPL MPC
= =
PL PC

MPL = marginal productivity of labor

PL = Price of labor

MPC = marginal productivity of capital

Pc = price of capital
 PRINCIPLE OF LEAST COST
COMBINATIONS

 1. Marginal Rate of Substitution (MRS)

 Number of unit of replaced resource (x2)
= --
 Number of unit of added resource (x1)

 2 . Price Ratio(PR)

Cost per unit of replaced resource

= Cost per unit of added resource -

Price of x1
= -
Price of x2
I SOQUANT (I SOPRODUCT) CURVE
1. They slope down ward to the right

PROPERTIES OF ISOQUANT
2. T HEY ARE CONVEX TO THE
ORIGIN
3. NON INTERSECTING ISOQUANT CURVE
4. HIGHER THE ISOQUANT CURVE
HIGHER WILL BE THE LEVEL OF
OUTPUT
5. I SOQUANT CURVES NEITHER TOUCHES X
NOR Y AXIS
 ISO-COST LI N E

An Iso-cost line indicates all possible

combinations of two inputs which can be
purchased with a given amount of investment
fund (outlay).
Each combination of inputs has same total
cost which includes the cost of two
inputs. (X1 and X2) combined.

Ex : Total cost = Px1. x1 + Px2.x2

ISO-COST
LINE
 PROPERTIES OF I SO - COST LINE:

1. As total outlay increases, the Iso- cost line

moves higher and higher away from the
origin.

2. The Iso- cost lines are straight

3. Slope of Iso-cost line represents price ratio.

LEAST COST COMBINATION: