Introduction to the

Law of Variable
Proportions
The law of variable proportions is a fundamental economic principle
that describes how the output of a production process changes as the
quantity of one input is varied, while other inputs are held constant. This
principle has important implications for understanding the optimization
of production decisions.

SK
by Sujan Kc
Isoquant: Assumptions, Marginal Rate of Technical
Substitution, and Properties
Assumptions Marginal Rate of Technical Properties
Substitution
Isoquants are based on the Isoquants are downward-sloping,
assumptions of diminishing marginal The MRTS is the rate at which one convex to the origin, and do not
returns and the ability to substitute input can be substituted for another intersect.
inputs. without changing the level of output.
Graph: Isoquant Curve
1 Capital-intensive
The isoquant curve is relatively flat, indicating a high MRTS and a
greater ability to substitute capital for labor.

2 Labor-intensive
The isoquant curve is relatively steep, indicating a low MRTS and a
lower ability to substitute capital for labor.

3 Optimal Combination
The optimal input combination is found where the isoquant is tangent
to the iso-cost line, minimizing the cost of production.
Iso-cost Curve
Definition
The iso-cost curve represents all
possible combinations of inputs that
can be purchased with a given
budget.
Slope
The slope of the iso-cost curve is
determined by the relative prices of
the inputs.
Tangency
The optimal input combination is
found where the iso-cost curve is
tangent to the isoquant, minimizing
the cost of production.
Table: Optimal Employment of Inputs
Input Quantity Price Total Cost

Labor 5 workers $20/hour $100

Capital 2 machines $50/machine $100

Total Cost $200

The table shows the optimal employment of labor and capital inputs to minimize the total cost of production, given the prices and
quantities of each input.
Laws of Return to Scale
1 Constant Returns to Scale
A proportional increase in all
inputs leads to the same
proportional increase in output.
2 Increasing Returns to
Scale
A proportional increase in all
inputs leads to a more than
proportional increase in output.
3 Decreasing Returns to
Scale
A proportional increase in all
inputs leads to a less than
proportional increase in output.
Graph: Returns to Scale
Small Scale
Increasing returns to scale as the business grows.

Medium Scale
Constant returns to scale as the business reaches maturity.

Large Scale
Decreasing returns to scale as the business becomes too
large.
Conclusion and Key Takeaways

Optimal Input Combination

The optimal input combination is found where the isoquant is tangent to the iso-cost line, minimizing the cost
of production.

Returns to Scale
The laws of returns to scale describe how output changes as all inputs are increased proportionally.

Substitution of Inputs
The marginal rate of technical substitution measures the ability to substitute one input for another without
changing output.