Isoquant Analysis

Isoquant analysis

Constructing isoquants

An isoquant
45 40
Units of capital (K)
Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e

35 30 25 20 15 10 5

Units of labour (L)

An isoquant
45
a

40
Units of capital (K)

35 30 25 20 15 10 5

Units of K 40 20 10 6 4

Units of L 5 12 20 30 50

Point on diagram a b c d e

Units of labour (L)

An isoquant 45 a 40 Units of capital (K) 35 30 25 20 15 10 5 b Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e Units of labour (L) .

An isoquant 45 a 40 Units of capital (K) 35 30 25 20 15 10 5 b Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e c d e Units of labour (L) .

Isoquant analysis Diminishing marginal rate of substitution .

Diminishing marginal rate of factor substitution 14 g Units of capital (K) 12 ∆ K = 2 10 8 6 4 2 ∆ L=1 MRS = 2 h MRS = ∆ K / ∆ L isoquant Units of labour (L) .

Diminishing marginal rate of factor substitution 14 g Units of capital (K) 12 ∆ K = 2 10 8 6 4 2 ∆ L=1 MRS = 2 h MRS = ∆ K / ∆ L j ∆ K=1 ∆ L=1 MRS = 1 k isoquant Units of labour (L) .

Isoquant analysis An isoquant map .

An isoquant map 30 Units of capital (K) 20 10 I1 Units of labour (L) I2 I3 I5 I4 .

Isoquant analysis Returns to scale .

Constant returns to scale 4 R c Units of capital (K) 3 b 600 500 2 a 400 300 1 Units of labour (L) 200 .

Increasing returns to scale (beyond point b) 4 R c Units of capital (K) 700 600 3 b 500 2 a 400 300 1 Units of labour (L) 200 .

Decreasing returns to scale (beyond point b) 4 R c Units of capital (K) 500 3 b 2 a 400 300 1 Units of labour (L) 200 .

Isoquant analysis Isocosts .

An isocost 30 Assumptions 25 Units of capital (K) 20 PK = £20 000 W = £10 000 TC = £300 000 15 10 5 Units of labour (L) .

An isocost 30 Assumptions 25 Units of capital (K) 20 PK = £20 000 W = £10 000 TC = £300 000 a b c TC = £300 000 d 15 10 5 Units of labour (L) .

Isoquant analysis The least-cost method of production .

Finding the least-cost method of production 35 Assumptions 30 Units of capital (K) PK = £20 000 W = £10 000 TC = £200 000 TC = £300 000 TC = £400 000 25 20 15 10 5 TC = £500 000 Units of labour (L) .

Finding the least-cost method of production 35 30 Units of capital (K) 25 20 s TC = £500 000 r TC = £400 000 15 t 10 5 TPP1 Units of labour (L) .

Isoquant analysis Effect of a rise in the wage rate .

Effect of a wage rise on the least-cost method of production 35 30 Units of capital (K) Assumptions PK = £20 000 W = £10 000 25 20 TC = £400 000 15 8 r 10 5 24 Units of labour (L) TPP1 .

Effect of a wage rise on the least-cost method of production (wage rises to £20 000) 35 30 Units of capital (K) Assumptions PK = £20 000 W = £10 000 = £20 000 25 20 TC = £400 000 15 8 r 10 5 24 Units of labour (L) TPP1 .

Effect of a wage rise on the least-cost method of production (wage rises to £20 000) 35 30 Units of capital (K) Assumptions PK = £20 000 W = £10 000 = £20 000 25 20 1 15 1 8 r r TC = £400 000 10 5 9 24 Units of labour (L) TPP1 .

Isoquant analysis The maximum output for a given cost .

Finding the maximum output for a given total cost Units of capital (K) O Units of labour (L) TPP1 TPP5 TPP4 TPP3 TPP2 .

Finding the maximum output for a given total cost Units of capital (K) Isocost O Units of labour (L) TPP1 TPP5 TPP4 TPP3 TPP2 .

Finding the maximum output for a given total cost r s Units of capital (K) u v O Units of labour (L) TPP1 TPP5 TPP4 TPP3 TPP2 .

Finding the maximum output for a given total cost r s Units of capital (K) K1 t u v O L1 Units of labour (L) TPP1 TPP5 TPP4 TPP3 TPP2 .

Isoquant analysis Deriving an LRAC curve from an isoquant map .

Deriving an LRAC curve from an isoquant map Units of capital (K) At an output of 200 LRAC = TC2 / 200 O TC 1 TC 100 200 2 Units of labour (L) .

decreasing returns to scale above 400 units Units of capital (K) 700 600 500 400 300 O TC 1 TC 2 TC TC TC 3 4 100 200 5 TC 6 TC 7 Units of labour (L) .Deriving an LRAC curve from an isoquant map Note: increasing returns to scale up to 400 units.

Deriving an LRAC curve from an isoquant map Units of capital (K) Expansion path 700 600 500 400 300 O TC 1 TC 2 TC TC TC 3 4 100 200 5 TC 6 TC 7 Units of labour (L) .

Isoquant analysis Deriving short-run costs from an isoquant map .

Deriving short-run costs from an isoquant map The long-run situation: both factors variable Units of capital (K) 300 TC = £60 000 TC = £20 000 TC = £40 000 100 200 O Units of labour (L) .

Deriving short-run costs from an isoquant map The long-run situation: both factors variable Units of capital (K) Expansion path 300 TC = £60 000 TC = £20 000 TC = £40 000 100 200 O Units of labour (L) .

Deriving short-run costs from an isoquant map The short-run situation: capital fixed in supply Units of capital (K) Expansion path K1 300 TC = £60 000 TC = £20 000 TC = £40 000 100 200 O Units of labour (L) .

Deriving short-run costs from an isoquant map Units of capital (K) Expansion path K1 300 TC = £60 000 TC = £20 000 TC = £40 000 100 200 O L1 Units of labour (L) .

Deriving short-run costs from an isoquant map Units of capital (K) Expansion path K1 300 TC = £22 000 TC = £20 000 TC = £40 000 TC = £60 000 200 100 O L2 L1 Units of labour (L) .

Deriving short-run costs from an isoquant map Units of capital (K) Expansion path K1 300 TC = £22 000 TC = £20 000 TC = £40 000 TC = £60 000 TC = £65 000 200 100 O L2 L1 L3 Units of labour (L) .

Deriving short-run costs from an isoquant map Units of capital (K) Expansion path K2 K1 a bL bS 300 TC = £22 000 TC = £20 000 TC = £40 000 TC = £60 000 TC = £65 000 200 100 O L2 L1 L4 L3 Units of labour (L) .