+ What is an lsoquant? - An isoquant is a curve showing all possible (efficient) input bundles capable of producing a given output level. - The term "isoquant,’ broken down in Latin, means “equal quantity,’ with “iso” meaning equal and “quant” meaning quantity. Essentially, the curve represents a consistent amount of output. - A firm's counterpart of the consumer's indifference curve. - The isoquant curve is also known as an “Equal Product Curve” or “Production Indifference Curve” or lso-Product Curve.” lsoquant Curve Picture An isoquant curve is a concave-shaped line on a graph, used in the study of microeconomics, that charts all the factors, or inputs, that produce a specified level of output. This graph is used as a metric for the influence that the inputs—most commonly, capital and labor—have on the obtainable level of output or production. The isoquant curve assists companies and businesses in making adjustments to inputs to maximize production, and thus profits. lsoquant Map Picture An isoquant map is a set of isoquants that shows the maximum attainable output from any given combinationinputs. PROPERTIES OF ISOQUANT Property 1: An isoquant curve slopes downward, or is negatively sloped. This means that the same level of production only occurs when increasing units of input are offset with lesser units of another input factor. This means that the same level of production only occurs when increasing units of input are offset with lesser units of another input factor. This property falls in line with the principle of the Marginal Rate of Technical Substitution (MRTS). As an example, the same level of output could be achieved by a company when capital inputs increase, but labor inputs decrease. Property 2: An isoquant curve, because of the MRTS effect, is convex to its origin. This indicates that factors of production may be substituted with one another. The increase in one factor, however, must still be used in conjunction with the decrease of another input factor. Property 3: Isoquant curves cannot be tangent or intersect one another.Curves that intersect are incorrect and produce results that are invalid, as a common factor combination on each of the curves will reveal the same level of output, which is not possible. Property 4: Isoquant curves in the upper portions of the chart yield higher outputs. This is because, at a higher curve, factors of production are more heavily employed. Either more capital or more labor input factors result in a greater level of production. Property 5: An isoquant curve should not touch the X or Y axis on the graph. If it does, the rate of technical substitution is void, as it will indicate that one factor is responsible for producing the given level of output without the involvement of any other input factors. Property 6: Isoquant curves do not have to be parallel to one another. The rate of technical substitution between factors may have variations. Property 7: lsoquant curves are oval-[Link] curves are oval-shaped. This allows firms to determine the most efficient factors of production. Isoquant Curve vs. Indifference Curve The isoquant curve is in a sense the flip side of another microeconomic measure, the indifference curve. The mapping of the isoquant curve addresses cost-minimization problems for producers—the best way to manufacture goods. The indifference curve, on the other hand, measures the optimal ways consumers use goods. It attempts to analyze consumer behavior, and map out consumer demand. When plotted on a graph, an indifference curve shows a combination of two goods (one on the Y-axis, the other on the X-axis) that give a consumer equal satisfaction and equal utility, or use. This makes the consumer "indifferent’—not in the sense of being bored by them, but in the sense of not having a preference between them. The indifference curve attempts to identify at what point an individual stops being indifferent to the combination of goods.lsocost What is Isocost? - An isocost line is a graphical representation of various combinations of two factors (labor and capital) which the firm can afford or purchase with a given amount of money or total outlay. It is an important tool for determining what combination of factor-inputs the firm will choose for production [Link] important tool for determining what combination of factor-inputs the firm will choose for production process. - An isocost line is also known as price line or outlay [Link] isocost line is also known as price line or outlay [Link] this example, we have one isocost and three isoquants. With the isocost of £400,000 the maximum output a firm can manage would be a TPP of 4,000. If it produced at say 13 K and 48 Labour, it would only be able to produce a TPP of 3,500. A total TPP of 4,500 is currently not possible without increasing costs beyond £400,000 — the least cost method of production It is a counterpart of budget line of indifference curve analysis. Mathematically, an isocost line can be expressed asC=wLtrKk Where, C = cost of production w = price of labor or wages L = units of labor r = price of capital or interest rate K =units of capital Slope of an Isocost Line The slope of the isocost line is equal to the ratio of price of factor-inputs. Mathematically, slope of an isocost line is expressed as And this slope remains the same throughout the isocost line. Shift in Isocost Line An isocost line may shift due to two reasons. They are + Change in total outlay to be made by the firm + Change in price of a factor-input Change in total outlay to be made by the firmWhen the firm decides to increase the total money to be spent on purchase of inputs while prices of the inputs remain the same, the producer becomes able to afford such combinations of inputs which were initially unattainable to him. This causes isocost line to shift to a new position higher to the initial line. Picture Whether the isocost line shifts toward the left or toward the right, it will always remain parallel to the original line. It is because the slope of an isocost line is calculated as Since we assume that no changes are made in the prices of either of the inputs, the slope remain the same for all budget line at any given outlay. And, any lines with same slope are parallel to each other. Change in price of a factor-input When price of factor-input changes, the isocost line swings or rotates. The direction in which the isocost line will swing depends upon the factor whose price has changed. Case |: Change in price of laborFigure: shift in isocost line due to change in price of labor Capital decrease in price of labor = rightward shift increase in price of labor =leftward shift Isocosttine ‘Labor Let us suppose that a firm has total outlay of Rs. 200 and AB is initial isocost line. Let us also suppose that the price of labor was decreased by certain amount, as a result of which the producer became able to purchase more units of labor at the same outlay. However, the producer can't increase purchasing units of capital as price of capital is constant. Therefore, the position of price line is changed in the x-axis but unchanged in y-axis. Simply, decrease in price of labor causes anti-clockwise rotation and increase in price of labor causes clockwise rotation. Case II: Change in price of capital Figure: shift in isocost line due to change in price of capitalOnce again, let us assume that a firm has total outlay of Rs. 200 but this time let us suppose that the price of capital has changed and not of labor. In this case, the producer will be able to buy more units of capital at same outlay but won't be able to increase the purchasing units of labor. As a result, the isocost line shifts its position in y-axis and not in x-axis. In other words, decrease in price of capital causes clockwise shift in isocost line and increase in price of capital causes anti-clockwise shift.