Lecture Notes: Least Cost Factor Combination
I. Introduction
Definition: Least cost factor combination refers to the optimal mix of production inputs
(like labor and capital) that minimizes production costs for a given output level.
Relevance: This concept is critical in economics as it helps firms to operate efficiently,
maximize profits, and achieve cost competitiveness in the market.
Isoquant Curve: Schedule and Explanation
An isoquant represents various combinations of two inputs—typically labor (L) and capital (K)
—that yield the same output level. The concept is similar to an indifference curve in consumer
theory but applies to production, showing the trade-offs between inputs that maintain a constant
level of production.
Example Schedule for an Isoquant Curve
Let’s assume a production function where a firm can use different combinations of labor (L) and
capital (K) to produce 100 units of output. The table (schedule) below shows possible
combinations of L and K that keep output at 100 units.
Combination Labor (L) Capital (K) Output (Q)
A 10 20 100
B 15 13 100
C 20 9 100
D 25 7 100
E 30 5 100
Interpretation of the Schedule
Constant Output Level: Each combination of labor and capital in this table results in an
output level of 100 units, illustrating the isoquant concept. As one input increases, the
other decreases to keep output constant.
Marginal Rate of Technical Substitution (MRTS): Moving from one combination to
another along the isoquant involves substituting labor for capital (or vice versa). The rate
at which this substitution occurs, maintaining the same output level, is the MRTS. This
rate generally declines as we increase labor and decrease capital, reflecting diminishing
marginal returns.
Graphical Representation:
o If plotted, these points (A, B, C, D, E) will lie on a single isoquant curve for 100
units of output.
o The curve typically slopes downward, illustrating that as more labor is used, less
capital is required, and vice versa.
Properties of Isoquant Curves
1. Negative Slope: Isoquants are downward sloping because to maintain the same output
level, an increase in one input requires a decrease in the other.
2. Convex Shape: Isoquants are generally convex to the origin due to the law of
diminishing marginal returns; as more labor is added, the additional output gained by
replacing capital with labor decreases.
3. Non-Intersecting: Isoquants cannot intersect because each represents a different level of
output.
4. Higher Isoquants Represent Higher Output: Isoquants further from the origin
represent higher levels of output.
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