IsoCost Line CHAPTER 4

An Isocost line is defined as the locus of factor combinations that can

be purchased for a given total cost. It is also called the Price line or
Outlay line. The iso cost line plays an important part in determining
what combination of factors the firm will choose for production. An Iso
cost line in Figure 2 shows various combinations of two factors that the
firm can buy with a given outlay. Iso cost line depends upon two things,
viz., prices of the factors of production and the total outlay which the
firm has to make on the factors. (p.132)
Let us assume that the firm has $ 400 to spend on
two factors K and L. The price of factor K is $ 8 per
unit and the price of factor L is $ 10 per unit. With
the outlay of $ 400, he can buy 50 units of K or 40
units of L. Let OB in Figure 2 represent 50 units of
K and OA represent 40 units of L. The straight line
AB which joins points A and B will pass through all
combinations of factors K and L which the firm can
buy with the outlay of LE. 400, if it spends the
entire money on them at the given prices.
The line AB is called Iso cost line for which every
combination lying on it the firm buys it, has to incur the
same outlay at the given prices. In fact, any number of
parallel iso cost line can be drawn which represent
various combinations of two factors that can be
purchased for a particular outlay. The higher the outlay,
the higher the corresponding iso cost line.
The slope of the isocost line is equal to the ratio of the prices of two
factors. Hence, slope of the iso cost line is:
AB =



If the producer desires to minimize his cost of production or to
maximize his output level for a given cost or outlay, now the
question arises which factor combination produces a given level of
output. He will choose the combination of factors which minimizes
the cost of production. Hence, the producer will produce the given
level of output with least cost combination of factors.(p.134)

While arriving to the least cost combination of input, a
firm is guided by the principle of equi-marginal returns.
According to this principle, the producer achieves the
least cost combination when he combines various inputs
in such a way that the marginal productivities yielded
by the last pound spent on each input are equal. Table 2
shows the least cost combination of two inputs
producing 200 units of output.

Table 2: Least Cost Combinations of Two Inputs
X
1
X
2
P
X1
.X
1
P
X2
.X
2
Cost
10 45 30 180 210
20 28 60 112 172
30 16 90 64 154
40 12 120 48 168
50 8 150 32 182
Note: P
X1
= $ 3, P
X2
= $ 4
Equal Product Curves
The equal product curves are contour lines which trace the loci
of equal outputs. An equal product curve represents all those
input combinations which are capable of producing the same
level of output. It is otherwise known as Isoquants (equal
quantities) or production indifference curves. (p.136)
The term isoquant is derived from the words Iso and quant, Iso
means equal and quant means quantity. Hence, isoquants means
equal quantity. For a given level of output, the firms production
becomes the function of two inputs viz., capital and labour. Hence,
an Isoquant shows all possible combinations of the two inputs
which are capable of producing equal level of output. The producer
becomes indifferent towards these combinations.
Assumptions
1. There are two factors of production viz, labour and
capital
2. These two factors can be substituted each other up
to a certain limit.
3. Shape of the isoquant depends upon the extent of
substitutability of the two inputs.

Table 3: Equal Product Combination
Combinations
Labour
(units)
Capital
(units)
Output
(units)
A 1 10 50
B 2 7 50
C 3 4 50
D 4 2 50
Labour is measured on X axis and capital on the Y axis. EP is
the Iso product curve which shows all the alternative
combinations, A,B,C and D which can produce 50 units of a
product. An iso product map is been drawn with the help of
iso product curves, as shown in the figure 4.

Properties of Iso quants
1. Isoquants slope downwards from left to right. It means increasing
the employment of one factor of production results in the decreasing
employment of the other factor of production to maintain the same
level of output.
2. Isoquants cannot be horizontal or vertical and they cannot slope
upwards.
3. Isoquants are convex to the origin.
4. The shape of the isoquants indicates the rate of substitution
between the two factor inputs.
5. Two Isoquant curves cannot interest each other.
6. Higher Isoquants show higher level of output and vice versa
(p.138)