isoquantt .economics production function dr.k.baranidharan - sri sairam institute of technology,...

7/23/2019 ISOQUantT .Economics Production function dr.K.Baranidharan - Sri Sairam Institute of Technology, Chennai

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Dr.K.Baranidhara

nPresent by


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EngineeringEconomics &

FinancialAccountingment

Ee&fa2September 8, 2015


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ISOQUANTISOQUANT


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ISOQUANT- ISOCOST ANALYSISISOQUANT- ISOCOST ANALYSIS

Isoquant A line indicating the level of inputs required

to produce a given level of output

Iso- eaning - !"qual#

-#Quant# as in quantit$ Isoquant % a line of equal quantit$


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ISOQUANTSISOQUANTS

An isoquant curve sho&s variousAn isoquant curve sho&s various

co'inations of t&o input factors such asco'inations of t&o input factors such ascapital and la'our ( &hich $ield the saecapital and la'our ( &hich $ield the sae

level of output)level of output)

An isoquant curve represent all suchAn isoquant curve represent all suchco'inations &hich $ield equal quantit$ ofco'inations &hich $ield equal quantit$ of

the output and an$ or ever$ co'ination isthe output and an$ or ever$ co'ination is

a good co'ination of the anufacture)a good co'ination of the anufacture) Since he prefers all these co'inationSince he prefers all these co'ination

equall$( an isoquant curve is also calledequall$( an isoquant curve is also called

*product indifference curve+*product indifference curve+


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Units

of K40

20

10

6

4

Units

of L 5

12

20

30

50

Point on

diagrama

b

c

d

e

a

Units of labour L!

UnitsofcapitalK!

An isoquant $ielding output ,T. of /000 unitsAn isoquant $ielding output ,T. of /000 units

0

5

10

15

20

25

30

35

40

45

0 5 10 15 20 25 30 35 40 45 50


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Units

of K40

20

10

6

4

Units

of L 5

12

20

30

50

Point on

diagrama

b

c

d

e

a

b

Units of labour L!

Unitsofca

pitalK!

0

5

10

15

20

25

30

35

40

45

0 5 10 15 20 25 30 35 40 45 50



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Units

of K40

20

10

6

4

Units

of L 5

12

20

30

50

Point on

diagrama

b

c

d

e

a

b

c

de

Units of labour L!

Unitsofca

pitalK!

0

5

10

15

20

25

30

35

40

45

0 5 10 15 20 25 30 35 40 45 50



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1eatures of ISOQUANTS1eatures of ISOQUANTS

2O3N3A42 SLOIN562O3N3A42 SLOIN56 An isoquant ust slopeAn isoquant ust slope

do&n&oards fro left to rightdo&n&oards fro left to right 3hich iplies that using ore3hich iplies that using ore

of one input to produce theof one input to produce the

sae level of output ust ipl$sae level of output ust ipl$

using less of the other inputsusing less of the other inputs


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CON7"8 TO O4I5IN6CON7"8 TO O4I5IN6

Isoquants are conve9 to the orgine)Isoquants are conve9 to the orgine)

It is 'ecause the input factors are notIt is 'ecause the input factors are not

perfect su'stitutes)perfect su'stitutes) One input factor can 'e su'stituted '$One input factor can 'e su'stituted '$

another input factor in a *another input factor in a *diinishingdiinishing

arginal ratearginal rate++ If the input factors &ere perfectIf the input factors &ere perfect

su'stitutes( the isoquant &ould 'e asu'stitutes( the isoquant &ould 'e a

fallingfalling straight linestraight line))


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0

5

10

15

20

25

30

35

0 10 20 30 40 50

Isoquant &here input factors are perfect su'stitutesIsoquant &here input factors are perfect su'stitutes

Units of labour L!

Unitsofca

pitalK!

"ssumptions

TC# 200 000

TC# 300 000

TC# 400 000

TC# 500 000


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3hen the input are used in a fi9ed3hen the input are used in a fi9edproportion and su'stitution of oneproportion and su'stitution of one

input for other cannot ta:e place( theinput for other cannot ta:e place( the

isoquant &ill 'e L shaped)isoquant &ill 'e L shaped)


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McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., AllRi hs Reser!e".

Isoquants here in!utIsoquants here in!ut

are used in a "nedare used in a "ned!ro!ortion!ro!ortion $omplementar% inputs &'(S#0
http://upload.wikimedia.org/wikipedia/commons/3/34/Isoquant_perfect_compliments.pnghttp://upload.wikimedia.org/wikipedia/commons/3/34/Isoquant_perfect_compliments.pnghttp://upload.wikimedia.org/wikipedia/commons/3/34/Isoquant_perfect_compliments.pnghttp://upload.wikimedia.org/wikipedia/commons/3/34/Isoquant_perfect_compliments.pnghttp://upload.wikimedia.org/wikipedia/commons/3/34/Isoquant_perfect_compliments.pnghttp://upload.wikimedia.org/wikipedia/commons/3/34/Isoquant_perfect_compliments.pnghttp://upload.wikimedia.org/wikipedia/commons/3/34/Isoquant_perfect_compliments.png


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McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., AllRi hs Reser!e".

)* +*( +(-'S-$(.

(/o isouants do not intersect t is because eac of tese denote a

particular leel of output

f a manufacturer /ants to operate at a

iger leel of output, e as to s/itc

oer to anoter isouants /it a igerleel of output


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0

10

20

30

0 10 20

Q1

Q2

Q3

Q4

Q5

Unitsof

capitalK!

Units of labour !

An isoquant apAn isoquant ap


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2O"S NOT TOUC; A8"S62O"S NOT TOUC; A8"S6 The Isoquants touches neither 9The Isoquants touches neither 9

nor Y a9is as 'oth input arenor Y a9is as 'oth input are

required to produce a givenrequired to produce a given

productproduct


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INDEX

Isocosts

Least-cost Combination OfInputs

Cobb-Douglas productionfunction

Law of Return to Scale


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ISOCOSTSISOCOSTS

Isocosts refer to the cost curve thatIsocosts refer to the cost curve thatrepresentsrepresents the combination of inputsthe combination of inputsthat will cost a producer the samethat will cost a producer the same

amount of money.amount of money.Isocosts denotesIsocosts denotesIQIQ2a2aparticular level ofparticular level of

total cost for a given level of production.total cost for a given level of production.

The level of production changes, theThe level of production changes, thetotal cost changes and, thus thetotal cost changes and, thus theisocostsisocostscurve moves upwardscurve moves upwards

1

8


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The total cost as represented '$ each costThe total cost as represented '$ each cost

curve( is calculated '$ ultipl$ing the quantit$curve( is calculated '$ ultipl$ing the quantit$

of each input factor &ith its respective price)of each input factor &ith its respective price)

The threeThe three

do&nload slopingdo&nload sloping

straight line coststraight line costcurves ,assuingcurves ,assuing

that the inputthat the input

prices are fi9ed(prices are fi9ed(

no quantit$no quantit$

discount arediscount areavaila'le. eachavaila'le. each

costing 4s)


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Least-Cost Co'inationLeast-Cost Co'ination

A anufacturer has to *A anufacturer has to *produceproduceat a lo&er cost to attain a higherat a lo&er cost to attain a higher

profit+profit+

Isocosts and isoquants can 'eIsocosts and isoquants can 'e

used to deterine theused to deterine the inputinput

usage that inii@es the costusage that inii@es the cost

of productionof production

2

0


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The slope of an isoquant is equal to that ofThe slope of an isoquant is equal to that ofan isocost is the place of the point of costan isocost is the place of the point of cost

of production)of production)

This can o'served '$This can o'served '$ superiposingsuperiposing thethe

isocosts on isoproduct curveisocosts on isoproduct curve

2

1

It i i'l ' th i ' thIt i i'l ' th i ' th


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It is possi'le 'ecause the a9es in 'oth apsIt is possi'le 'ecause the a9es in 'oth apsrepresent the sae input varia'lerepresent the sae input varia'le

The points of tangenc$ A( and C on each of theThe points of tangenc$ A( and C on each of theisoquant curves represent the least cost co'inationisoquant curves represent the least cost co'inationof inputs( $ielding the a9iu level of output)of inputs( $ielding the a9iu level of output)

An$ output lo&er or higher than this &ill result in aAn$ output lo&er or higher than this &ill result in ahigher cost of production)higher cost of production)

Units of$apital !

7

%

Units of labour !

"

$

Scale line

22


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9


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Co''-2ouglas roduction 1unctionCo''-2ouglas roduction 1unction

2

4


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2

5


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Though the Co''-2ouglas productionThough the Co''-2ouglas productionfunction &as 'ased onfunction &as 'ased on acro level stud$acro level stud$))

It hasIt has 'een ver$ useful for interpreting'een ver$ useful for interpreting

econoic result)econoic result)

2

6

D K B idh


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Dr.K.Baranidhara

n #$A%K '(

isoquantt .economics production function dr.k.baranidharan - sri sairam institute of technology,...

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