Ou SSS S MRSS \ NSS SSRI \ PIES | | 3 he decision of production i The amount of supply depents Bf ane. cost. For this in this tsp made by the production unit or firm, which “een different aspects of production and cost are ; m Production Ter ; m3.1.Mesniig SO ‘output at point B i nomics 108 Microecot ‘A and B are two points on isoquant q, Output at point A = two points on isoquant q,. So Output at point A = output at point C. Output at point B = output at point C. But it is not possible, because the producer employs more of both the inputs point C than at point B. For this output at point C is greater than the output at pojn, B. Therefore, two isoquants cannot intersect each other. ‘4 319.1. Isoquants with Abnormal Shapes or Exceptional Isoquants, Tsoquants are generally downward sloping and convex to the origin. Except this general shape of isoquants if other types of isoquants are derived then these are calle isoquants with abnormal shapes or exceptional isoquants. In which situations exceptional isoquants are created are now discussed. (a) Downward Sloping Straight Line Isoquants : Fixed rate of technica substitution is the cause of downward sloping straight line isoquant. Fixed rate of technical substitution means that the firm always decreases the same amount of other input for the use of any more amount of increase in an input at the same amount. If the two inputs are Perfect substitute then the rate of technical substitution among the two inputs remain fixed or constant. ae es zs “i ncesieigeas of a substitution input. This isoquant is Reet ao ause rate of technical substitution of the two inputs Input x, ia figure ‘Again A and C are Therefore, In Fig. 3.9, qqis the i th * L-shaped because the rat tat! of Perfectly com, Y complementary inputs. 4 I % Tate of technical substitution mee input, This isoquant is Wo inputs is zero.Production and Cost 109 3.1.10. Economic Region s Sieent combinations of two inne a ned end Ridge Line The lous F : ixed level of i is jisequant. Thus os is the such combinations lees ee ehonde called gets fixed level of production inputs from where the Shape of the isoquant may be of two is the economic shape, "Jsoquant which is obtained by joining technically fixed level of output is call shape of isoquant is elliptical which is ‘ypes. One is technical shape and the other Bre sage combination of two inputs for ee chnical shape of isoquant. The technical W explained with the help of Fig. 3.10. re Sead Input x, Fig : 3.10 _ In Fig. 3.10, input x, is plotted on the horizontal axis and input x, is plotted on the vertical axis. Here qq, is an elliptical shape isoquant. A tangent parallel to the Vertical axis is drawn on isoquant qq,. The tangent touches the isoquant qq, at Point A, On the other hand, another tangent parallel to the horizontal axis is drawn on ‘isoquant qq,. The tangent touches the isoquant qq, at point B,. Therefore the portion AB, of the isoquant qq, is downward sloping and the two portions A,q and B,q, are Sen On the upward portion of the isoquant the amount of output remain even though the amount of two inputs are increased. So these two portions isoquant are not desirable from economic point of view. “The portion A,B, of the isoquant qq, is downward sloping and the downward Portion is the economic shape of the isoquant. In this portion if the amount ‘Sfone input is increased then the amount of other input will reduce for the same level ie. on the downward sloping portion of the isoquant two inputs are used itute input. Therefore on the downward sloping portion of the isoquant two are substitutable. the figure the portion A,B, of the isoquant qq, is downward sloping and the : 1 i ined b A.B, of the isoquant qq, is downward sloping. The locus OA is obtai ; ty tangency points A,, A,, A, which are obtained on the left hand ie of E P by drawing the tangents parallel to the vertical axis. Further the locusMicroeconomics I and Statistics 110 ency points B,, B,, B, which are obtained on the is obtained by joining the tangency points By" 2 i i M the rig, is ol 1 to the horizontal. : A di the tangents paralle! ae hand side een line. Further the area eoafine by the two rig Locus OA ane Terence map is called economic-region or area of substitution Unes of incjaded area within the ridge lines OA and OB isthe economic re ig. 3.10, % Me wc Lak or Concept of Isocost Line : The amount of inputs w eR wants to purchase for production gensose ee of ne money the firm wants to spend, price of the inputs etc. ne ea lin is essential to know how much Fae of different inputs the ion with the fixed amount of money. ae ae ci wants to spend for production a fixed amount of eh ee a the prices of the two inputs are fixed, then the locus of the differe ee two inputs the firm can purchase with the fixed amount of money iz eae e Let the fixed amount of money which the firm wants to spend is rest Let x, and x, are the two inputs which the firm uses for production. Letr, fe E ne price of the input x, and r, be-the fixed price of the input x,- The concep oa line is now explained with the help of Fig 3.11. m wants to spend fy Input x, A Cyr, 0 Input x, Chi a Fig : 3.11 In Fig. 3.11, input x, is plotted along the horizontal axis and input x, is plot’ along with the vertical axis. Ifthe firm spends the entire amount of money to purchas input x, only, it can purchase C,/r, amount of x,. In Fig. 3.11, OB = &* the firm spends the entire amount of money to purchase input x, only, it can Purchase Further ifProduction and Cost Ml on, A of OB bh Co On oo OB h ‘Therefore the slope of the isocost line is equal to the ratio of the prices of two Jsocost line an if Position if the amount of money which the firm wants to ped js changed but the price of the two inputs remain constant. Here the slope of jsocost line remain the same as the price of the two i i bi fine shifts parallely.* inputs remain constant. So ¢ 341.12. Optimum Factor Combination—Conditions for Optimisation : If the ve of the firm is to maximise profit, then the factor combination from which the firm can obtain maximum profit is called optimum factor combination. Isoquant ‘and isocost line are used to determine optimum factor combination. ‘Optimum factor combination of the firm will be determined at the situation where ‘ihe firm gets the maximum profit. The profit maximising condition of the firm can be explained in two ways = (1) Output maximisation subject to a given cost and given prices of the inputs. ‘@) Cost minimisation subject to a given output. ‘4 3.1.12.1. Output maximisation subject to a given cost and given prices of ‘the inputs or output maximising factor combination : The objective of the firm is fo maximise output at a given fixed expenditure subject to fixed prices of two inputs. nthis case there exist only one isocost line as the expenditure of the firm is fixed. Fig. 3.12, is used to determine the input combination of the firm for the production ‘of maximum level of output subject to a fixed isocost line. Input x, Input x, . 3.12, input x, is plotted on the horizontal axis and input x, is plotted on . 1 First Part : Application of Calculus : Short Notes-7 : See determination of the slope line with the help of calculus.2 Microeconomics 1 and Statistics the vertical axis. AB is the fixed isocost line of the firm at a fixed expenditure 4, : fixed prices of two inputs. q,, q,, and q, are the three isoquants of the firm. The finy can purchase the inputs at every point on AB such as C, D, E, F, G etc. But Outpy, ; at point F is greater than the output at point G, because the firm stays on highe, isoquant q, at point F compare to point G which is on a lower isoquant qy: In the Same manner, output at point E is greater than output at point F, Because the firm Stays oy ‘higher isoquant q, at point E compare to point F which is on a lower isoquant 4, Bu, ‘output at point D is less than the output at point E. Because the point D is on a lowe, isoquant q, compare to E. In the same manner output at point C is elso less than Output at point D. So the point E is the output maximising point i.e., equilibrium Poi of the firm. At this equilibrium point the firm uses OM amount of input X, and Qy amount of input x, ‘Thus itis seen that the output maximising point of the firm is a point where the highest isoquant touches the fixed isocost line ie., at the output maximising slope of the isoquant and the slope of the isocost line are equal to each other. ‘This condition of output maximisation (equilibrium) is called necessary condition or first order conditon. But for output maximisation of the firm, another condition is to be fulfilled. The condition is, at the tangency point isoquant is convex to the origin ‘This condition is called sufficient condition for output maximisation or second orde; condition for output maximisation.* 4 3.1.12.2, Cost minimisation subject to a given output or cost minimising factor combination :; The objective of the firm at a fixed level of output is to ‘minimise cost subject 'o the fixed level of output, In this case there exist only one ‘soquant as the amou: of output is fixed at a particular fevel. Fig, 3.13 is used ts Getermine the input combination of the firm to minimise cost subject to the fixe ‘evel of output, Let x, and x, ate the two inputs which the firm uses for production Input x,» Point 9 B7_Be 1h Input x, Fig 23.13 In Fig. 3.13, input x, is ploued on the hori . ig. 3.13, input x, horizontal axis and i Eon the vertical axis. q, is the fixed isoquant of the firm ars es A,B, and A,B, are the three isocos lines ofthe firm, Frog ne ingram i socn ta th * Appendlx—Rirst Part: Application of Calelus + Show Notex : ‘termine output maximisation subject toa given cost and ives pee SerineProduction and Cost . ie i: D, E, F G ete. on is gees CG hee CS ea see the same level of output. But se the firm stays on the lower isocost line aba DS ERA Pa Betich son higher isocost line A.B. Inthe pea 2 Fees paar -B,. In th anner the cost of i poi E A Bie as. et oe Production at point D. re ED aro int E compare to the point D which i i a ‘AB But os of rodent pin leer eae pectin at fad ae ps pe firm stays on a higher isocost line A,B, at point ’ tothe po hich is on a lower isocost line AB. In the same manner cost of production at point G is also greater than the cost of production at point = spihe point Eis the cost minimising point ie. the equilibrium point of the firm. ‘Avthis equilibrium point the firm uses OM amount of input x, and ON amount of inpat 3 ‘us it is seen that the cost minimising point of the firm i i e i is a point where the isocost line touches the fixed isoquant ie., at the cost minimising point, slope wie isxoquant and the slope of the isocost line are equal to each other. ‘This condition of cost minimisation (equilibrium) i iti ee costing fuflled. The condition is, at the tangency point isoquant is convex to the origin. This condition is called sufficient condition for cost minimisation or second ‘order ‘condition for cost minimisation.* 3.1.13. Expansion Path of the Firm or Output Expansion Path : Isoquant and isocost line are tangent to each other at the equilibrium situation or at the cpimam input combination of the firm. The firm moves from lower isoquant to the higherisoquant if the firm wants to increase the level of output. As a result the size ee increased. The path which the firm follows for this expansion is called expansion path. . The locus of the different equilibrium points or optimum factor combinations of the firm due to increase in expenditure of the firm, prices of the two inputs remain constant is called expansion path or output expansion path of the firm. Fig. 3.14 is used to explain the expansion path of the firm. In Fig. 3.14, AB is the isocost line of the firm at fixed expenditure of the firm and fted prices of the two inputs. This isocost line touches the isoquant q, at point E,. Therefore E, is the equilibrium point of the firm. Isocost line AB shifts parallely in the upward direction from AB to A,B, due to increase in expenditure of the firm, leeping prices of the two inputs remain constant. Ths isocost line touches the isoquant {it point E,. Therefore E, is the new equilibrium point of the firm. Further the ioetst line A,B, shifts parallely in the upward direction from AB, to AB, due to in expenditure of the firm, keeping prices of the two inputs remain Constant. This isocost line touches the isoquant q, at point E. Therefore E, is the new point of the firm, By joining the points E,, E,, F, the locus EK is Part: Application of Calculus : Short Notes-9 : See application of calculus to ‘minimisation subject to a given output.[and Statistics th or output expansion path of the, haped. Expansion path will be a cup if the inputs are used inf, ie Microeconomics i is the expansion pat tained. The locus EK is s Sena path of the firm can be different au a if the two inputs are used in different propo! ane proporuon, then the expansion path will be Input x, Input x, ° ay Fig : 3.14 Further if none of the inputs are inferior, demand for both the inputs are increas along with the increase in expenditure of the firm. As a result of this, expansion pai will be upward rising. But among the two inputs if one of the input become a inferior input after a certain level, then the demand for the inferior input wi Gecrease after that level along with increase in expenditure of the firm. As a res Of this, expansion path will be backward bending after a certain level. same direction then it is called chan; to change in scale is called returns | scale, a Retums | to scale can be. of three types : (a) Constant Returns to Scal (b) Increasing Returns to Scale, (c) Decreasing Re ‘ctums to Scale. If the rate of change in output is equal to the Tate of change in which all the facto Of production are changed then it is called const: ‘ant returns to scale, For example, if total, output is doubled when all the factors of production 3 doubled then it is said that constant returns to scale operates, Further, if the rate of change in output is &reater than the rate of Change in whic! all the factors of production are changed then it is called increasing returns to scaltProduction and Cost WS # aaa arenes with the help of an example, It is assumed that Perl ete u i *; 10 produce a commodity q. It is assumed that the employs pee and 2 units of x, to produce 10 units of the commodity jnthis ee : # Saeed A the inputs are doubled i.e., 6 units of x, and ‘ of X, l. As a result o} the chi i t os aan ange in total output may be of three bee Table 3.4 : Returns to Scale eee | Te (unit) (unit)? 2 10 ,, " ha Constant 3 2 10 5; . so) omens 3 2 10 ; " ia Decreasing A of Table 3.4, it is seen that total output become doubled (form 10 units nits) as a result of doubling the two factors of production. So in Tier A, ant returns to scale operates. B of Table 3.4, total output become more than doubled (from 10 uhits to 4 a result of doubling the two factors of production. So in Tier B, increasing to scale operates. ‘Tn Tier C of Table 3.4, total output become less than doubled (from 10. units to 15 is) a8 a result of doubling the two factors of production. So in Tier C, decreasing to scale operates. the initial stage of increased. production increasing returns to scale operates. But Particular level of production decreasing returns to scale operates. This is the ns to scale. A 3.1.14.1, Output Expansion path or Expansion path of the Firm and Homo- Production Function : Isoquent and isocost line are tangent to each other ilibrium situation or at the optimum input combination of the firm. The firm m lower isoquant to the higher isoquant if the firm wants to increase the put. The path which the firm follows for this expansion is called output Path or expansion path. The locus of the different equilibrium points or factor combinations of the firm due to increase in expenditure of the firm, ‘two inputs remain constant is called output expansion path or expansion inputs of the firm are always used in fixed proportion then the output ‘of the firm is straight line and the production, function is homoge- = iy, XD Dkg =f (xy, Ax) then the function is said to be homogeneous of