ISOQUANTS AND RETURNS TO SCALE

PRESENTED BY-KARTIKEYA
KARTIKEYA SINGH
KRISHNAVATAR
KSHITIJ
 Content

• Production function and Isoquant

• Isoquant or Iso-product map
• MRTS
• Returns to Scale
 Production Function and Isoquant

• Letting q represent the output of a particular good

during a period, K represent capital use, L represent
labor input, and M represent raw materials, the
following equation represents a production function.

q f ( K , L, M )
 Two-Input Production Function

• While the choices of inputs will obviously vary with

the type of firm, a simplifying assumption is often
made that the firm uses two inputs, labor and
capital.

q f ( K , L)
 Isoquant
• In economics, an isoquant (derived from quantity
and the Greek word iso, meaning equal) is a contour
line drawn through the set of points at which the
same quantity of output is produced while changing
the quantities of two or more inputs.
 Features of Isoquants

• Isoquant have a negative slope

• Isoquant are convex to the origin
• Isoquant cannot intersect or be tangent to each
other
• Upper isoquant represent higher level of outpu
 MRTS

• In economic theory, the Marginal Rate of Technical

Substitution (MRTS) - or Technical Rate of Substitution
(TRS) - is the amount by which the quantity of one
input has to be reduced when one extra unit of
another input is used, so that output remains
constant .
 Returns to scale

• Returns to scale is the rate at which output

increases in response to proportional increases in all
inputs.
• In the eighteenth century Adam Smith became
aware of this concept when he studied the
production of pins.
 Constant Returns to Scale

• A production function is said to exhibit constant

returns to scale if a doubling of all inputs results in a
precise doubling of output.
 Constant Returns to Scale
• Isoquants for constant returns to scale

Capital
per week

4
q = 40
3
q = 30
2
q = 20
1
q = 10
0 1 2 3 4 per Labor
week
(a) Constant Returns to Scale
 Decreasing returns to scale

• If doubling all inputs yields less than a doubling of

output, the production function is said to exhibit
decreasing returns to scale.
 Decreasing returns to scale
• Isoquants showing decreasing returns to scale.

Capital A Capital A
per week per week

4 4
q = 40
3 3 q = 30
q = 30
2 2
q = 20 q = 20
1 1
q = 10 q = 10
0 1 2 3 4 per Labor 0 1 2 3 4 Labor
week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
 Increasing Returns to Scale

• If doubling all inputs results in more than a doubling

of output, the production function exhibits
increasing returns to scale

Capital A
per week
4
3
q = 40
2 q = 30
q = 20
1
q = 10
0 1 2 3 4 Labor
per week
(c) Increasing Returns to Scale
Thank you