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Isoquant

The document discusses isoquant analysis and its applications. It begins by constructing isoquants and showing different combinations of capital and labor that produce the same output. It then explains the concept of diminishing marginal rate of technical substitution. An isoquant map is presented showing multiple isoquants. The document discusses returns to scale and how isoquants change under conditions of increasing, decreasing, and constant returns. It also covers isocost lines and using isoquants and isocost lines to find the least-cost method of production. Finally, it demonstrates how to find the maximum output possible for a given total cost using isoquants and isocost lines.

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SaTish Kdka
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520 views26 pages

Isoquant

The document discusses isoquant analysis and its applications. It begins by constructing isoquants and showing different combinations of capital and labor that produce the same output. It then explains the concept of diminishing marginal rate of technical substitution. An isoquant map is presented showing multiple isoquants. The document discusses returns to scale and how isoquants change under conditions of increasing, decreasing, and constant returns. It also covers isocost lines and using isoquants and isocost lines to find the least-cost method of production. Finally, it demonstrates how to find the maximum output possible for a given total cost using isoquants and isocost lines.

Uploaded by

SaTish Kdka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Kings College

MBA 2015

MBA 2015

Isoquant analysis
Constructing isoquants

MBA 2015

Units of capital (K)

An isoquant
Units
of K
40
20
10
6
4

MBA 2015

Units of labour (L)

Units
of L
5
12
20
30
50

Point on
diagram
a
b
c
d
e

An isoquant

45

40

Units
of K
40
20
10
6
4

Units of capital (K)

35
30
25

Units
of L
5
12
20
30
50

Point on
diagram
a
b
c
d
e

20
15
10
5
0
0

10

15

20

25
MBA 2015 30

Units of labour (L)

35

40

45

50

An isoquant

45

40

Units
of K
40
20
10
6
4

Units of capital (K)

35
30
25

Units
of L
5
12
20
30
50

Point on
diagram
a
b
c
d
e

20
15
10
5
0
0

10

15

20

25
MBA 2015 30

Units of labour (L)

35

40

45

50

An isoquant

45

40

Units
of K
40
20
10
6
4

Units of capital (K)

35
30
25

Units
of L
5
12
20
30
50

Point on
diagram
a
b
c
d
e

20
15

10

5
0
0

10

15

20

25
MBA 2015 30

Units of labour (L)

35

40

45

50

Isoquant analysis
Diminishing marginal
rate of Technical substitution

MBA 2015

Diminishing marginal rate of


Technical substitution
Units of capital (K)

g
K = 2

MRTS = 2

MRTS = -K / L

h
L = -1

isoquant

MBA 2015

Units of labour (L)

Units of capital (K)

g
K = 2

Diminishing marginal rate of


Technical substitution
MRTS = 2

MRTS = -K / L

h
L = -1

j
K = 1

MRTS = 1
k

L = -1

isoquant

MBA 2015

Units of labour (L)

Isoquant analysis
An isoquant map

MBA 2015

10

Units of capital (K)

An isoquant map

I5
I1
MBA 2015

Units of labour (L)

I2

I3

I4

11

Isoquant analysis
Returns to scale

MBA 2015

12

Constant returns to scale


R
Units of capital (K)

600

500

400

300
200
MBA 2015

Units of labour (L)

13

Increasing returns to scale


R
Units of capital (K)

c
700
b
600
500
a

400
300
200
MBA 2015

Units of labour (L)

14

Decreasing returns to scale


R
Units of capital (K)

600

400
a
300
200
MBA 2015

Units of labour (L)

15

Isoquant analysis
Isocost line

MBA 2015

16

An isocost line
Assumptions

Units of capital (K)

PK = Rs20 000
W = Rs10 000
TC = Rs300 000

MBA 2015

Units of labour (L)

17

An isocost line

30

Assumptions

Units of capital (K)

25

PK = Rs20 000
W = Rs10 000
TC = Rs300 000

20

15

10

TC = Rs300 000
d

0
0

10

15

20

MBA 2015

25

Units of labour (L)

30

35

40

18

Isoquant analysis
The least-cost
method of production

MBA 2015

19

Finding the least-cost method of


Assumptions
production
Units of capital (K)

PK = Rs20 000
W = Rs10 000

TC=Rs 200 000

TC = Rs 300 000
TC = Rs 400 000
TC = Rs 500 000

MBA 2015

Units of labour (L)

20

Units of capital (K)

Finding the least-cost method


of production
s

TC = Rs 500 000

TC = Rs 400 000

MBA 2015

Units of labour (L)

Isoquant

21

Isoquant analysis
The maximum output
for a given cost

MBA 2015

22

Units of capital (K)

Finding the
maximum output for
a given total cost

I5
I4

I1
MBA 2015

Units of labour (L)

I2

I3

23

Units of capital (K)

Finding the
maximum output
for a given total
cost
Isocost

I5
I4

I1
MBA 2015

Units of labour (L)

I2

I3

24

r
Units of capital (K)

Finding the
maximum output
for a given total
cost

I5
I4

v
O

I1
MBA 2015

Units of labour (L)

I2

I3

25

Finding the
maximum output
for a given total
cost

r
Units of capital (K)

K1

I5
I4

v
O

I1
L1

MBA 2015

Units of labour (L)

I2

I3

26

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