Isoquants and Isocosts

Appendix to Chapter 7

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Isoquants

An isoquant is a graph that shows all the

combinations of capital and labour that can be
used to produce a given amount of output.

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Properties of Isoquant Maps

 There are an infinite number of combinations of labour

and capital that can produce each level of output.
 Every point lies on some isoquant.
 The slope of an isoquant is equal to:
- MPlabour / MPcapital = - MPL / MPK = ΔK / ΔL
 The slope of the isoquant is called the marginal rate of
technical substitution which can be defined as the rate at
which a firm can substitute capital for labour and hold
output constant.

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Isoquants Showing All Combinations of Capital and
Labour That Can Be Used to Produce 50, 100, and
150 Units of Output (Figure 7A.1)

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The Slope of an Isoquant Is Equal to
the Ratio of MPL to MPK (Figure 7A.2)

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Isocosts

An isocost is a graph that shows all the

combinations of capital and labour available for
a given cost.

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Isocost Lines Showing the Combinations of
Capital and Labour Available for $5, $6, and $7
(Figure 7A.3)

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Isocost Line Showing All Combinations of
Capital and Labour Available for $25 (Figure 7A.4)

 The slope of an
isocost line is
equal to - PL / PK.

 The simple way to

draw an isocost is
to calculate the
endpoints on the
line and connect
them.

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The Cost Minimizing Equilibrium
Condition

Slope of isoquant = - MPL / MPK

Slope of isocost = - PL / PK

For cost minimization we set these equal and

rearrange to obtain:

MPL / PL = MPK / PK

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Finding the Least-Cost Combination of Capital
and Labour to Produce 50 Units of Output
(Figure 7A.5)

 Profit-maximizing firms
will minimize costs by
producing their chosen
level of output with the
technology represented
by the point at which
the isoquant is tangent
to an isocost line.
 Point A on this diagram

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Minimizing Cost of Production for qx
= 50, qx = 100, and qx = 150 (Figure 7A.6)

 Plotting a series of
cost- minimizing
combinations of
inputs - shown
here as A, B and C
- enables us to
derive a cost
curve.

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A Cost Curve Showing the Minimum
Cost of Producing Each Level of Output
(Figure 7A.7)

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Review Terms & Concepts

 isocost line
 isoquant
 marginal rate of technical
substitution

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