LECTURE NOTES

Avijit Mallik
Assistant Professor
IBA,DU
PRODUCTION
THEORY
Salvatore#7
Production
Production Function

■ Total Product
■ Average Product
•Fixed Inputs ■ Marginal Product

•Variable Inputs ■ Law of Diminishing Return

•Short Run

•Long Run
 Isoquant
An isoquant is a curve that shows all the
combinations of inputs that yield the same level of
output. 

• Negatively sloped

• Convex to the origin

• Never intersect

• The marginal rate of technical

substitution (MRTS) is an economic theory
that illustrates the rate at which one factor
must decrease so that the same level of
productivity can be maintained when another
factor is increased.
Economic
Region of
Production
• Firms will never produce on the
positively sloped portion of the Isoquant

• Ridge lines will separate the relevant

from the irrelevant portion of the
Isoquant
*Cobb Douglas Production Function

*Return to Scale Concept

 COSTS OF
PRODUCTION
Salvatore#8
Short run Costs
Cost Concepts

■ Explicit Cost
■ Implicit Cost/Opportunity Cost
■ Fixed Cost
■ Variable Cost
Per-unit Costs
Isocost
Least Cost Input Combination (LCIC)
In Class Activity

■ Suppose the total cost of production is

$120. The cost of capital is $4 per unit and
wage rate is $2. Draw the isocost line and
isoquant curve. What is the MRTS and
optimal combination of Labor-Capital to
minimize the cost?