Isoquants

PPT ON ISOQUANTS AND ISO COST CURVE MBA 1st YEAR

1. ISOQUANTS & ISO-COST CURVE 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 1 Prepared By: Lavika Arora Malvika Awasthi Manish Monika Dangi Maqbool

2. ISOQUANTS Production function with two variable inputs or equal product curves According to Ferguson, “ An isoquant is a curve showing all possible combinations of inputs physically capable of producing a given level of output” 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 2

3. 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 3 An isoquant represents all those combinations of inputs which are capable of producing the same level of output An isoquant is also known as Production-Indifference curve

4. 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 4 Factor Combination Factor X Factor Y A 1 12 B 2 08 C 3 05 D 4 03 E 5 02 Various combination of X and Y to produce a given level of output Each of the factor combinations A,B,C,D and E represents the same level of production Say 100 units.

5. When we plot them, we get a isoquant curve : FACTOR-Y FACTOR-X Y-axis X-axis 4 6 3 4 8 12 1 2 5 ISOQUANT CURVE 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 5

6. Assumptions of Isoquants Only two factors or inputs of production Factors of production are divisible into small units and used in various proportions Technical conditions of production are not possible to change at any point of time Different factors of production are used in a most efficient way 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 6

7. Types of Isoquant Linear Isoquant Right – angle Isoquant Convex Isoquant 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 7

8. Linear Isoquant In Linear Isoquant there is perfect subtituability of Inputs For Example – 100 units can be produced by using only capital or labour or by number of combination of both capital and labour , say 1 unit of labour and 5 units of capital ,or 2 units of labour and 3 units of capital or various amount of electric power can be produced by burning gas only . Oil and gas are prefect substitute here. Hence , the Isoquants are straight lines . 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 8

9. Q1 Q2 Q3 Q4 Gas O il Q5

10. Right – Angle Isoquant There is complete non – substituability between the inputs 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 10

11. Q3= 3 Scooters Chassis Wheels Q2= 2 Scooters Q1= 1 scooter 2 4 6

12. Convex Isoquant Convex Isoquant assumes substituability of inputs but the substiuability is not perfect 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 12

13. L1 L2 L3 C1 C2 C3 Cloths Labour Q2 Q1

14. Properties of I so quants Isoquants are Negatively Sloped : They normally slope from left to right means they are negatively sloped . The reason is when the quantity of one factor is reduced , the same level of output can be achieved only when the quantity of other is increased Higher Isoquants Represents Larger Output : Higher isoquant is one that is further from he point of origin. It represents a larger output hat is obtained by using either same amount of one factor and the greater amount of both the factors 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 14

15. No Two Isoquants Intersect or Touch each other : Isoquant do no intersect or touch each other because they represent different level of output Isoquants are convex to the origin : I n most production processes the factors of production have substituability. Labour can be substituted for capital and ice versa . however the rate at which one factor is substituted for the other in production process i.e marginal rate of technical substitution (MRTS) also tends to fall 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 15

16. SIGHIFICANCE OF ISOQUANT CURVE IN COST ANALYSIS THE ISO-QUANT CURVE HELPS FIRMS ADJUST THEIR INPUT AGAINST THEIR OUTPUT THE IS A METHOD USED IN MICROECONOMICS TP MEASURE THE INFLUENCE OF INPUT ON PRODUCATION LEVELS AND OUTPUT POSSIBILITIES. 2. THE ISO-QUANT CURVE LINE IS AN IMPORTANT COMPONENT FOR ANALYSING PRODUCER BEHAVIOUR. THE ISO-COST LINE ILLUSTRATES ALL THE POSSIBLE COMBIMATION OF TWO FACTOR THAT CAN BE USED AT GIVEN COSTS AND FOR A GIVEN PRODUCER’S BUDGET 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 16

17. 3. A FIRM CAN PRODUCE A GIVEN LEVEL OF OUTPUT USING EFFICIENTLY DIFFERENT COMBINATION OF TWO INPUTS . THE ISO-QUANT CURVE USED FOR CHOOSING EFFICENT COMINATION OF THE INPUTS , THE PRODUCER SELECTS THAT COMBINATION OF FACTOR WHICH HAS THE LOWER COST OF PRODUCATION 4. THE ISO-QUANT PLAYS A SIMILAR ROLE IN THE FIRM’DECISION MAKING ,THE FIRM FACES MANY ISO-COST LINES DEPENDING UPON THE DIFFERENT LEVEL OF EXPENDITURE THE FIRM MIGHT MAKE.A FIRM MAY INCUR LOW COST BY PRODUCING RELATIVELY LESSER OUTPUT OR IT MAY INCUR RELATIVELY HIGH COST BY PRODUCING A RELATIVELY LARGE QUANTITY 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 17

18. ISO-COST / EQUAL-COST LINE :- 25-11-2014 18 ISOQUANT CURVE & ISOCOST CURVE

19. If the price of factor X is Rs.10 and that of Y is Rs.20, the firm can spend its outlay on X and Y or it can spend the entire outlay on Y and buy 50 units of it with zero units of Y or it can spend the entire outlay on Y and buy 50 units of it with zero units of X factor. In between, it can have any combination of X and Y. Suppose a firm has Rs.1000 to spend on the two factors X and Y . 25-11-2014 19 ISOQUANT CURVE & ISOCOST CURVE

20. One can show iso-cost line diagrammatically also. The X-axis shows the units of factor X and Y-axis the units of factor Y. when entire Rs.1000 are spend on factor X we get OB and when entire amount is spent on factor Y we get OA. The straight line AB which joins point A and B will pass through all combinations of factors X and Y which the firms can buy with outlay of Rs.1000. The line AB is called Iso-cost line . 25-11-2014 20 ISOQUANT CURVE & ISOCOST CURVE

21. E C A B D F O Factor-X Factor-Y 25-11-2014 21 ISOQUANT CURVE & ISOCOST CURVE

22. 25-11-2014 ISOQUANT CURVE & ISOCOST CURVE 22 THANK YOU