Isoquant

 What is an Isoquant?
 An isoquant is a graph that represents all the combinations of two inputs (e.g., labor
and capital) that produce a given level of output. It is a curve that shows the various
ways in which two inputs can be combined to produce a specific level of output. The
isoquant curve is also known as an indifference curve of production.
Properties of Isoquants
There are three main properties of isoquants:
 Negatively Sloped: Isoquants are negatively sloped, meaning that as one input (e.g.,
labor) increases, the other input (e.g., capital) must decrease in order to maintain a
constant level of output. This is because the more labor used, the more capital required
to maintain the same level of output.
 Convex to the Origin: Isoquants are convex to the origin, meaning that they bend
outward from the starting point. This means that as one input increases, the other input
required to maintain the same level of output increases at a decreasing rate.
 Do not Intersect: Isoquants do not intersect, meaning that it is impossible to produce a
given level of output with two different combinations of inputs. This means that there is
only one combination of inputs that can produce a specific level of output.
 Here's an example to illustrate these properties:

 Suppose we have a production process that uses labor (L) and capital (K) to produce a
product. We want to produce 100 units of the product.

Labor (L) Capital (K) Output

10 50 100
15 40 100
20 30 100
In this example, the isoquant would be a curve that passes through these three
points. The curve would be negatively sloped because as labor increases (from 10 to
15 to 20), capital must decrease (from 50 to 40 to 30) in order to maintain the same
level of output (100).

The curve would be convex to the origin because as labor increases, capital required
to maintain the same level of output decreases at a decreasing rate. For example,
when labor increases from 10 to 15, capital must decrease by 10 units (from 50 to
40). However, when labor increases from 15 to 20, capital must decrease by only 5
units (from 40 to 30).

Finally, the isoquant does not intersect because it is impossible to produce 100 units
of output with two different combinations of inputs. The three points on the curve
represent the only possible combinations of labor and capital that can produce this
level of output.
Marginal Rate of Technical Substitution (MRTS)

 Definition:
 The marginal rate of technical substitution (MRTS) is the rate at which one input can be
substituted for another while keeping the output constant.
 Formula: MRTS(L, K)=−ΔK/Δl=MPL/MPk
 ​where:
 K=Capital,L=Labor,MP=Marginal products of each input ΔL , ΔK​
=Amount of capital that can be reduced when labor is increased (typically by one unit)​
Interpretation:
 MRTS measures the rate at which one input can be substituted for another while keeping
the output constant.
 A higher MRTS indicates that one input can be easily substituted for another, while a lower
MRTS indicates that substitution is more difficult.
 MRTS is positive, as it measures the rate at which one input is substituted for another.
 Types of MRTS:
 Increasing MRTS: MRTS increases as the proportion of one input increases. This means that
as the proportion of one input increases, it becomes easier to substitute it with another
input.
 Decreasing MRTS: MRTS decreases as the proportion of one input increases. This means
that as the proportion of one input increases, it becomes more difficult to substitute it with
another input.
 Constant MRTS: MRTS remains constant as the proportion of one input changes. This
means that the substitution between two inputs is unaffected by the proportion of each
input.
 Example:
 Suppose a firm produces 100 units of output using labor (L) and capital (K). The
marginal product of labor is 10 units and the marginal product of capital is 5
units.
 Labor (L) Capital (K) Output
 10 20 100
 12 18 100
 14 16 100
 To find the MRTS, we calculate:
 ΔQ = 0 (since output remains constant)
 ΔL = 2 (increase in labor from 10 to 12)
 ΔK = -2 (decrease in capital from 20 to 18)
 MRTS = -ΔQ/ΔX1 = -0/2 = 0
 In this example, the MRTS is zero, indicating that there is no substitution between
labor and capital.
 Practice Questions:
 What is the marginal rate of technical substitution?
 What does a higher MRTS indicate?
 What type of MRTS occurs when one input becomes more essential to
production?
 Calculate the MRTS when output remains constant and labor increases
by 3 units while capital decreases by 2 units.
 Answers:
 The marginal rate of technical substitution is the rate at which one
input can be substituted for another while keeping the output constant.
 A higher MRTS indicates that one input can be easily substituted for
another.
 Decreasing MRTS occurs when one input becomes more essential to
production.
 To calculate the MRTS, we need more information about the production
process and the changes in inputs and output.