Expansion path

1. PRESENTAION ON FIRM’S EXPANSION PATH PRESENTED BY: Pawan Kawan Roll No.- 15 MBA-I

2. Concepts: In economics, an expansion path is a line connecting optimal input combinations as the scale of production expands. A producer seeking to produce the most units of a product in the cheapest possible way attempts to increase production along the expansion path.

3. Economists Alfred Stonier and Douglas Hague defined expansion path as,” that line which reflects least cost method of producing different levels of output, when factors prices remains constant”.

4. The Firm’s Expansion Path The expansion path does not have to be a straight line. The expansion path does not have to be upward sloping.

5. Firm’s Expansion Path 9 1 2 3 8 4 8 7 6 11 12 5 13 14 6 4 10 2 10 12 14 Labour (L) Capital (K) E F A B C D I H G M K L J 14Q 12Q 10Q Expansion Path Optimal inputs combination Y X I II III

6. At the points of tangency between isoquants and iso -cost lines, the slope of isoquant (MRTS) is equal to the slope of the iso -cost line. i.e. Slope of iso -cost line = -w/r Slope of isoquant (MRTS) = -MP L /MP K Optimal inputs combination is: MP L MP K we get: MP L MP K w r Where, w = wage rate of labour r = rate of capital w r

7. Conclusion Expansion path gives the least cost input combinations for every level of output. The point on an expansion path occur when iso -cost line and isoquant are tangent. At the points of tangency between isoquants and iso -cost lines, the slope of isoquant (MRTS) is equal to the slope of the iso -cost line.

8. T HANK YO U