Iosquants

Isoquants or equal product curve

Capital

100 unit output

Labour

An isoquants represent all those possible combination of two

inputs (Labour and Capital), which is capable to produce an
equal level of output.
Marginal Rate Technical Substitute(MRTS)

Isoquants or equal product curve

Capital

100 unit output

Labour

The slop of isoquant is known as Marginal Rate of Technical Substitution (MRTS). It is the rate at which one
factors of production is substitute with other factor so that the level of the out put remain the same.
MRTS = Changes in Labour / changes in capital
 45
a
An isoquant
40 Units Units Point on
of K of L diagram
35 40 5 a
20 12 b
10 20 c
Units of capital (K)

30
6 30 d
25 4 50 e
b
20

15
c
10 d

0
0 5 10 15 20 25 fig 30 35 40 45 50
Units of labour (L)
Isoquants and the Production Function

• Isoquant is a curve that shows the various

combinations of two inputs that will produce a
given level of output
• Slope of an isoquant indicates the rate at which
factors K and L can be substituted for each other
while a constant level of production is maintained.
• The slope is called Marginal Rate of Technical
Substitution (MRTS)
 Properties of Iso quants
Isoquants are Negatively Sloped : They normally
slope from left to right means they are negatively
sloped . The reason is when the quantity of one factor
is reduced , the same level of output can be achieved
only when the quantity of other is increased
 Higher Isoquants Represents Larger Output :
Higher isoquant is one that is further from he point
of origin. It represents a larger output hat is obtained by
using either same amount of one factor and the greater
amount of both the factors
 No Two Isoquants Intersect or Touch each other :
Isoquant do no intersect or touch each other because
they represent different level of output

 Isoquants are convex to the origin : In most

production processes the factors of production have
substituability. Labour can be substituted for capital and
ice versa .
however the rate at which one factor is substituted
for the other in production process i.e marginal rate of
technical substitution (MRTS) also tends to fall
 ISOQUANT MAP- A family or a
group of isoquants is called an ISOQUANT
MAP

K4 A
Iq4 = 400
K3 B
Units of K

Iq3 = 300
K2 C
Iq2 = 200
D
K1

Iq1 = 100

0
L1 L2 L3 L4
Units of L
 Marginal rate of technical substitution
(MRTS)
The slope of the isoquant
The rate at which you can trade off inputs and
still produce the same amount of output.
For example, if you can decrease the amount of
capital by 1 unit while increasing the amount of
labor by 3 units, & still produce the same
amount of output, the marginal rate of technical
substitution is 1/3.
Marginal Rate of Technical Substitution
(MRTS)
or slope of an isoquant
•ΔK/ΔL = - MPL/MPK
•the negative of the ratio of the marginal
products of the inputs, with the input on the
horizontal axis in the numerator.
 The Marginal Rate
of Technical Substitution
 Marginal Rate of Technical Substitution
• The absolute value of the slope of the isoquant is the
marginal rate of technical substitution, MRTS, between two
resources

• Thus, the MRTS is the rate at which labor substitutes for

capital without affecting output
• MRTS = MPL / MPC
 Substitutability of Inputs

• Three general types of shapes that an

isoquant might have are:
• The isoquants are right angles, indicating
that inputs a and b must be used in fixed
proportions and therefore are not
substitutable
 Substitutability of Inputs
Imperfect Substitutes – and the rate at which input
b can be given up in return for one more unit of
input a while maintaining the same level of output
(the MRS) diminished as the amount of input a
being used increases
in general capital and labour are imperfect
substitutes.
 Substitutability of Inputs

Perfect Substitutes – in this case input a can be

substituted for input b at a fixed rate as indicated
by the straight line isoquants (which have a
constant slope and MRS)
Ie. Honey and brown sugar are often nearly perfect
substitutes, Natural gas and fuel oil are close
substitutes in energy production
Isoquant Maps for Perfect Substitutes and Perfect
Complements
 Iosquants

Combination Labour Capital Output level

A 20 1 100 unit
B 18 2 100 unit
C 12 3 100 unit
D 9 4 100 unit
E 6 5 100 unit
F 4 6 100 unit

An isoquants represent all those possible combination of two

inputs (labour and capital), which is capable to produce an equal
level of output .
 Economic Region of Production
• There are certain combinations of inputs that the
firm should not use in the long run no matter how
cheap they are (unless the firm is being paid to use
them)
• These input combinations are represented by the
portion of an isoquant curve that has a positive
slope
• A positive sloped isoquant means that merely to
maintain the same level of production, the firm
must use more of both inputs if it increases its use
of one of the inputs
 It is possible for an isoquant to have
positively sloped sections.
Quantity of capital used
In these sections, you’re
per unit of time
increasing the amounts of
both inputs, but output is
not increasing, because the
marginal product of one the
inputs is negative.

Quantity of labor used per unit of time

 The lines connecting the points where the isoquants
begin to slope upward are called ridge lines.

Quantity of capital used

per unit of time

ridge lines

Quantity of labor used per unit of time

 No profit-maximizing firm will operate at a point outside the
ridge lines, since it can produce the same output with less
of both outputs.

Notice, for example, that

Quantity of capital since points A & B are on
used per unit of the same isoquant, they
time
produce the same amount
K2 B of output.
A
K1 However, point B is a more
expensive way to produce
since it uses more capital &
more labor.

L1 L2 Quantity of labor used per

unit of time
 Economic Region of Production
• Ridge Lines – are lines connecting the points
where the marginal product of an input is equal to
zero in the isoquant map and forming the
boundary for the economic region of production
• Economic Region of Production – is the range in an
isoquant diagram where both inputs have a
positive marginal product. It lies inside the ridge
lines
 Isocost Lines
• Isocost lines show different combinations of inputs which
give the same cost.
Isocost Line - is a line that shows the various combinations
of two inputs that can be bought for a given dollar cost.
The equation for an isocost line is:
C =L. PL +K. PK

• The slope of the isocost line is given by

– Slope of isocost line = PL/PK
 The Isocost Line
Cost = Rs50
Capital, K (machines rented)

A a Per unit price of

10 labor input =
Rs10/hour
b
8 Per unit price of
capital input =
c Rs5/machine
6

d
4

e
2

0 1 2 3 4 B5 6 7 8 9 10
Labor, L (worker-hours employed) 25
 Slope of isocost line
M=PL.QL+PK.QK
Where, M=total outlay
PL= price per unit of labor
PK= price per unit of capital
QL= units of labor
QK= units of capital

Slope of isocost line= OA/OF

price per unit of labour input

price per unit of capital input

Slope of isocost line can be changed in two ways:

1) Change in the factor price, and
2) Change in total outlay or total cost
 Changes in One factor Price
Decrease in the factor price causes rightward shift and
increase in factor price causes leftward shift in iso-cost line.
Capital, K (machines rented)

a Cost = 500; labor,R = 16.5 or 10or 1/ hour

10 The money wage, W = Rs5/machine

6 A Change
in unit price of labor
4

2 …Rs10
Rs16.5 h f …Rs1

0 1 2 3 4 5 6 7 8 9
10 Labor, L (worker-hours employed) 27
 K
Change in total outlay or total cost
Direction of increase
in total cost
capital (r)

Slope = -w/r

TC= Rs. 100

of

TC= Rs. 75
Units

TC=Rs. 50

L
Units of labour(w)
28
 PRODUCER EQUILIBRIUM/LEAST
COST
• The ultimate aim of any firm is to earn the
maximum profit possible.
• Producer equilibrium is the situation of
PROFIT – MAXIMISATION .
• At equilibrium, the firm has the maximum
level of output being produced and earning the
maximum profit out the same.
• It is the equilibrium level of output which the
producer will produce at MINIMUM COST
and sell to earn MAXIMUM PROFIT.
 Optimal Choice of Input Combinations

• PRODUCTION OF GIVEN OUTPUT AT MINIMUM COST

• PRODUCTION OF MAXIMUM OUTPUT WITH A GIVEN
LEVEL OF COST
• Producer equlibrium can be explained
graphically with the use of both the isoquant
curve and isocost line.
• It is attained at the point where the isocost line
is tangent to the isoqaunt curve in the graph.
Maximizing Output for a given cost

MPL w
MRTS LK  
MPK r
Maximizing Output for a given cost

MPL w
MRTS LK  
MPK r
• As shown in Figure-11, the producer can
produce 60 units of output by using any
combinations that is R, Q, and S, on curve IP’.
He/she would select the combination that
would obtain the lowest cost. It can be seen
from Figure-11 that Q lies on the lowest iso-
cost line and would yield same profit as on R
and S points, at the lowest cost. In such a case,
Q is the point of equilibrium; therefore, it
would be selected by the producer.
 Expansion Path
• In case, after attaining equilibrium, if a
producer is willing to increase its production,
then he/she needs to determine the
combination that is required to reach a new
equilibrium state. Let us consider Figure -12 in
which the producer is willing to produce 60
units of output. Now, if the producer wants to
produce 80 units of output instead of 60 units,
then equilibrium point will change.