Question

explain the concept of isocosts and isoquants

Answer 1

ISOQUANT-

An isoquant is a locus of points showing all the technically efficient ways of combining factors of production to produce a fixed level of output.

Isoquant is also known as the equal product curve.

In case of two variable factors, labour and capital, an isoquant appears as a curve on a graph the axes of which measure quantities of the two factors. The curve shows the efficient alter­native techniques of production or alternative combinations of two factors that can produce a fixed level of output. An isoquant shows all the combination of two factors that produce a given output.

An isoquant is usually shaped concave because of the law of diminishing returns.

It is a graphical representation of various combinations of inputs say Labour(L) and capital (K) which give an equal level of output per unit of time. Output produced by different combinations of L and K is say, Q, then Q=f (L, K).

Marginal Rate of Factor Substitution:-  Q=f(L,K)

Properties and Charecteristics of ISOQUANTS:-

1. Isoquant is oval in shape
2. No isoquant can touch either axis
3. Two isoquants do not intersect each other
4. A higher IQ implies a higher level of output
5. IQs are never parallel to each other
6. IQs are convex to the origin
7. If Land K are prefect complements to each other, the IQ is L-shaped

ISOCOST -

An isocost line is a locus of points showing the alternative combinations of factors that can be purchased with a fixed amount of money. In fact, every point on a given isocost line represents the same total cost. To construct isocost lines we need information about the market prices of the two factors.

An isocost shows all the combination of factors that cost the same to employ.

Iso cost line shows various combinations of labour and capital that the firm can buy for a given factor prices.

The slope of iso cost line = PL/Pk. In this equation , PL is the price of labour and Pk is the price of capital.

The slope of iso cost line indicates the ratio of the factor prices. A set of isocost lines can be drawn for different levels of factor prices, or different sums of money.

The iso cost line will shift to the right when money spent on factors increases or firm could buy more as the factor prices are given.

Slope of ISOCOST-

With the change in the factor prices the slope of iso cost lien will change. If the price of labour falls the firm could buy more of labour and the line will shift away from the origin. The slope depends on the prices of factors of production and the amount of money which the firm spends on the factors. When the amount of money spent by the firm changes, the isocost line may shift but its slope remains the same.

Profit maximisation

To maximise profits, a firm will wish to produce at the point of the highest possible isoquant and minimum possible isocost.