ISOQUANT MAP

UNIT-3

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 ISOQUANT MAP- A family or a
group of isoquants is called an ISOQUANT
MAP

K4 A
Iq4 = 400
K3 B
Units of K

Iq3 = 300
K2 C
Iq2 = 200
D
K1

Iq1 = 100
0
L1 L2 L3 L4
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 The Isocost Line
Cost = Rs50
Capital, K (machines rented)

A a Per unit price of

10 labor input =
Rs10/hour
b
8 Per unit price of
capital input =
c Rs5/machine
6

d
4

e
2

0 1 2 3 4 B 5 6 7 8 9 10
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employed)
 Slope of isocost line
 M=PL.QL+PK.QK
Where, M=total outlay
PL= price per unit of labor
PK= price per unit of capital
QL= units of labor
QK= units of capital

 Slope of isocost line= OA/OF

price per unit of labour input


price per unit of capital input
 Slope of isocost line can be changed in two ways:
1) Change in the factor price, and
2) Change in total outlay or total cost

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 Changes in One factor Price
Decrease in the factor price causes rightward shift and
increase in factor price causes leftward shift in iso-cost line.
Capital, K (machines rented)

a Cost = 500; labor,R = 16.5 or 10or 1/ hour

10 The money wage, W = Rs5/machine

6 A Change
in unit price of labor
4

2 …Rs10
Rs16.5 h f …Rs1

0 1 2 3 4 5 6 7 8 9
6/2/2017 10 Labor, L (worker-hours employed)
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 Change in total outlay or total cost
K

Direction of increase
in total cost
capital (r)

Slope = -w/r

TC= Rs. 100

of

TC= Rs. 75
Units

TC=Rs. 50

L
Units of labour(w)
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 Isoquants and Cost Minimization
K
IQ 3
IQ 2
10

• M
IQ 1

•
8

N P”
•
Units of Cap[ital

• P
6

TC=Rs10
0 Q=300
4

TC=Rs=75
Q=200
• P’
2

TC=Rs50

Q=100
0

L
0 2 4 6 8 10 12 14 16 18 20
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 Optimization & Cost
• Expansion path gives the efficient (least-
cost) input combinations of labor and capital
needed for every level of output.
Derived for a specific set of input prices
Along expansion path, input-price ratio is constant
& equal to the marginal rate of technical
substitution
• It is defined as the locus of tangency points
between iso-cost lines and isoquants.

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 EXPANSION PATH
•Itimplies to Long run because:
 No input is fixed.
Path starts from origin
indicating that if output is

Capital input
zero costs are zero.
•Expansion path gives us the
level of output & one least
combination that can
produce this level of output.
•Movement along the line gives
Labor input
the costs at which output can
be expanded
•So called Expansion Path.
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 Estimation of production function – Cobb
Douglas Production Function
The function used to model production is of the form:
Q(L,K) = ALaKb
where:
Q = total production
L = labor input
K = capital input
A = total factor productivity
a and b are the output elasticities of labor and capital,
respectively. These values are constants determined by
available technology.

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Output elasticity measures the responsiveness of output to a
change in levels of either labor or capital used in production,
ceteris paribus. E.g. if a= 0.15, a 1% increase in labor would lead
to approximately a 0.15% increase in output.

Total Factor productivity :TFP tries to assess the efficiency with

which both capital and labour are used. Once a country's labour
force stops growing and an increasing capital stock causes the
return on new investment to decline, TFP becomes the main
source of future economic growth. It is calculated as the
percentage increase in output that is not accounted for by
changes in the volume of inputs of capital and labour. So if the
capital stock and the workforce both rise by 2% and output rises
by 3%, TFP goes up by 1%.

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 Returns to scale based on Cobb
Douglas function
• If a+b = 1,the production function has constant
returns to scale (CRTS). That is, if L and K are
each increased by 20%, then Q increases by
20%.
• If output increases by less than that
proportional change, there are decreasing
returns to scale (DRS). i.e. a+b<1

• If output increases by more than that

proportion, there are increasing returns to scale
(IRS) ). i.e. a+b>1
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 Leontief Production function
• Capital and labor are perfect complements.
• Capital and labor are used in fixed-
proportions.
• Q = min {BK,CL}
• Since capital and labor are consumed in fixed
proportions there is no input substitution
along isoquants (hence, no MRTSKL).

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 Difference between return to
factor & return to scale
• The difference between returns to a variable factor and returns to scale flow from the
Law of Diminishing Returns and must be understood in the parameters of the concepts
of short-run and long-run.

• Short run (return to factor) is a period when production can be increased only with
increase in variable factors because fixed factors are constant; the firms cannot change
their sizes and scales in the short run. When output is increased by more quantities of
variable factors with the fixed factor held constant, the the proportion between the
fixed and variable factors changes and the change in output follows the Law of Variable
Proportions in terms of which initially the total rises at a higher rate, then it become
constant because marginal product reaches zero and eventually it falls. This locus of the
marginal product (MP) i.e. incremental output is called the Law of Variable Proportions.

• Long run (return to scale) is defined as a period which allows the firm to change their
sizes and scales to increase output i.e. in the long run all factors are variable but even in
this case initially there are increasing returns to scale i.e. the total output rises with fast
speed, then it becomes constant and eventually the total output falls because marginal
product (MP) becomes negative. This situation is subservient to the Law of Diminishing
Returns to Scale.

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 Difference between the laws of
returns to a variable factor and the
laws of returns to scale
• The basic difference between the laws of returns to a variable factor and
the laws of returns to scale lies in the assumptions on which these laws
are based.

• In case of the laws of returns to a variable factor, only one input is

variable—all other inputs remaining constant—whereas in case of the
laws of returns to scale, all the inputs are variable.

• The law of returns to a variable factor is a short run phenomenon

because supply of capital in the short run is inelastic. On the contrary, the
laws of returns to scale are a long run phenomenon because supply of all
the inputs in the long run is elastic and more and more of all the inputs
can be employed. In the analysis of the input–output relationship,
therefore, in case of the law of returns to a variable factor a single-
variable production function is used whereas in case of the laws of
returns to scale a two-variable production function is used.

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