Various capital and labor combinations

to produce 5000 units of output

a b c d e

Units of capital (K) 40 20 10 6 4

Units of labor (L) 5 12 20 30 50

Units of capital (K) An isoquant

40 a

c
d
e
4 TPP = 5000
O 5 Units of labor (L) 50
 An isoquant map
K

I5
I4
I3
I2
I1
L
O
 MRTS
(marginal rate of technical substitution)

• MRTS is the amount of one factor (e.g. K) that can be

replaced by a one unit increase in the other factor
(e.g. L), if output is to be held constant . Therefore, if
2 units of capital could be replaced by one unit of
labor:

MRTS = ∆ K = 2 = 2
∆L 1
 Slope of an isoquant

K ∆ K.MPPK = ∆ L.MPPL

12 g
∆K=2 rearranging
MRTS = ∆ K = 2 ∆ K = MPPL
10 h ∆L ∆ L MPPK
∆ L =1
Also MRTS = ∆ K = MRTS
∆L

MRTS = MPPL
MPPK
O L
2 3
 Returns to scale

Constant Increasing Decreasing

 Constant returns to scale

K
R
c
3

600
b
2 500

a 400
1
300

200

O L
1 2 3
 Increasing returns to scale

R
K

c
3
700

b 600
2
500

400
a
1 300

200

O L
1 2 3
 Decreasing returns to scale

K
R
c
3

500
b
2

a 400
1
300

200

O L
1 2 3
Increase in output when K is Constant
K

I7
K I6
I5
I4
I3
I2
I1
O L1 L2 L3 L4 L5 L6 L
When the isoquants are straight lines
K

I1 I2 I3

O L1 L2 L3 L
K Non diminishing returns to factor

K
I4
I3
I2
I1
O L1 L2 L3 L4 L
 Assume
1. Factor prices are fixed i.e. PK and PL
remain unchanged.
2. Firm’s budget is also fixed
e.g. Rs. 300,000.

Table
Units of capital( Rs. 20,000 per unit) 0 5 10 15
Units of labor ( Rs. 10,000 per unit) 30 20 10 0
 Isocost line
K

What will happen to the isocost if the prices

of both L and K rise by the same
percentage
15
Iso
10 co
st
lin
e

O L
20 30
 Isocost line
K

What will happen to the isocost if the wage

rate rises to Rs. 15,000?

15
Iso
co
st
lin
e

O L
20 30
 The least cost combination of factors
for producing a given level of output
Output = 5,000 units
K

20
s TC = Rs. 400,000

10
r

t
TPP = 5000

O L
20 30 40 50
 Highest output for a given cost of
production
K

L TPP5
TPP4
TPP3
TPP2
TPP1
O L