Isocosts Summarize Prices of Inputs

Each isocost represents a given total cost – further out for higher costs.
Slope of isocost reflects relative cost of inputs – it’s MCL/MCK
Graph by Harcourt, Inc.
 Isoquants Summarize Technology

Each isoquant represents a quantity of output – further out for more.

Slope of isoquant is the marginal rate of technical substitution.
Graph by Harcourt, Inc. MRTS = MPL/MPK
 Perfect Technological Complements

No substitution is possible, so isoquants are right angles. Note

that perfect substitutes would be straight lines - look like isocosts.

Graph by Harcourt, Inc.

 Profit Maximizing Choice of Inputs

For the desired quantity of output, set MCL/MCK = MPL/MPK so the

last dollar spent on each input is equally productive.
Graph by Harcourt, Inc.
 Long Run Effect of an Increase in the Wage

A wage increase implies higher MC and thus lower optimal output.

With the lower output (scale effect) reduce labor (Y) but steeper
isoquant (substitution effect) so increase capital (Z).

Graph by Harcourt, Inc.

 Categories of Demand Elasticities

Vertical ED is perfectly inelastic. At their intersection, both

Horizontal ED is perfectly elastic.
Curved ED is unit elastic.
Graph by Harcourt, Inc.
demand curves are unit elastic,
but the steeper one is relatively
less elastic overall.
 Elasticities Along a Straight-line Demand Curve
Unit elastic at
midpoint.
Elastic over
top half.
Inelastic over
bottom half.
Note that total
wage bill is
maximized at
point of unit
elasticity.

Graph by Harcourt, Inc.

 Firm-Specific Training  MRP > W
Without training
MRP0. With
training is MRP1
first then MRP2.
To share cost,
firm can pay W3
and not lose
worker, who is
only worth W0 to
other firms.

If product demand, and thus MRP drops, W3 will likely still be

below the new MRP and thus the worker will not be laid off.
Graph by Harcourt, Inc.
Path of Employment with Adjustment Costs

Costs of hiring (H) and firing (F) make it optimal to have less
employment during a boom and more employment during a
bust. Only hire if MRP-W>H, only fire if W-MRP>F.