ISOQUANTS

 Isoquants are geometric representation of

the production function.The same level of
output can be produced by various
combinations of factor inputs. An isoquant
or iso-product curve is the line which joins
together different combinations of the
factors of production labour and capital
that are physically able to produce a given
amount of output.
 TYPES OF ISOQUANTS
 LINEAR ISOQUANT: ASSUMES PERFECT
SUBSTITUTABILITY BETWEEN FACTORS OF
PRODUCTION.
 INPUT OUTPUT ISOQUANT: ASSUMES STRICT
COMPLEMENTARITY OR ZERO SUBSTITUTABILITY OF
FACTORS OF PRODUCTION.TAKES THE SHAPE OF A
RIGHT ANGLE.ALSO KNOWN AS LEONTIEF ISOQUANT.
 KINKED ISOQUANT:ASSUMES LIMITED
SUBSTITUTABILITY OF K&L.THERE ARE ONLY FEW
PROCESSES FOR PRODUCING ANY ONE
COMMODITY.ALSO KNOWN AS LINEAR PROGRAMMING
ISOQUANT.
 SMOOTH, CONVEX ISOQUANT: ASSUMES CONTINUOUS
SUBSTITUTABILITY OF K&L ONLY OVER A CERTAIN
RANGE,BEYOND WHICH FACTORS CANNOT SUBSTITUTE
DIAGRAMMATIC ILLUSTRATION
Linear isoquant
Input-output isoquant

Kinked Convex
 CHARACTERISTICS OF
ISOQUANTS
 They slope downwards to the right
 Convex to the origin
 Smooth and continuous
 Two isoquants do not intersect
MARGINAL RATE OF TECHNICAL
SUBSTITUTION
 Marginal rate of technical substitution of L for K is
defined as the number of units of K that a producer is
willing to sacrifice for an additional unit of L so as to
maintain the same level of output.
 It is numerically equal to the negative of the slope of the
isoquant at any one point and is geometrically given by
the slope of the tangent to the isoquant at that point.
 MRTS is also equal to the ratio of the marginal product
of capital to labour ie.-dk/dl=MRTSlk=MPL/MPK.As we
move down the isoquant the MRTS of L for K diminishes
 EQUALITY OF MRTS AND RATIO OF MARGINAL
PRODUCT OF CAPITAL AND LABOUR
 MRTSLK= -dK /dL= (∂X/∂L) /(∂X/∂K) =MPL/MPK
 Proof ; The slope of the curve is the slope of the
tangent at any point on the curve.The slope of the
tangent is defined by the total differential. For the
isoquant the total differential is the change in X
resulting from small changes in both factors K & L If
we change K by dK, the output X will change by the
product dK times the marginal product of capital. Ie
dK (∂X/∂K). Similarly, if we change labour by an
infinitesmally small amount dL, the resulting change
in X is dl (∂X/∂L)
(contd)
 PROOF CONTD.
 Along any isoquant the quantity of X is
constant,so the total change in X must be equal
to zero.ie.dX=dk(∂X/∂K) + dL(∂X/∂L)=0
 Solving for dk/dL, we get
dK/dL = (∂X/∂L)/ (∂X/∂K)=MPL/MPK
 Along the ridge line MRTSK,L=0
 Along the upper ridge
MRTSKL=(∂X/∂K)/(∂X/∂L)=0/(∂X/∂L)= 0
 Along the lower ridge
MRTSL,K=(∂X/∂L) /(∂X/∂K)= 0/(∂x/∂K) = 0
 ELASTICITY OF SUBSTITUTION
 DEFINITION: Percentage change in the
capital labour ratio divided by the
percentage change in the rate of technical
substitution.
σ
=percentage change in K/L / percentage
change in MRTS ie.
σ =[d(K/L) /K/L]/[d(MRTS)/MRTS]
 FACTOR INTENSITY
 Factor intensity is measured by the slope of the line through the origin
representing the particular process. Process P1 is more capital intensive
than P2 ie K1/L1>K2/L2

P1
K1
P2 X
K2

L
L1 L2
L
 ISOCOST LINES
 ISOCOST LINES give the relationship between
the total expenditure on capital and labour and
their unit costs.
 Given the per unit price of capital (r) and labour
(w),the total expenditure on capital and labour is
C=rK+wL.Solving for the value of K gives
K=C0/r-w/r L,where C0/r is the vertical intercept
and –w/r is the slope. The ratio –w/r is the rate at
which labour can be exchanged for capital in the
market.
 ISOCOST LINES FOR Budgets of
30,40 & 50
K

16.7

13.3

10 C=50
C=30 C=40

L
15 20 25
 OPTIMAL EMPLOYMENT OF
TWO INPUTS

K a

100 d
20
b
c 10
150
L
 EQUILIBRIUM OF THE
PRODUCER
 The producer reaches equilibrium at the point at
which the slopes of the two curves-the isoquant
and the isocost lines are equal .ie. the marginal
rate of technical substitution equals the ratio of
the price of labour to capital .MRTS = w/r
 Since MRTS=the ratio of the marginal products
of labour to capital, efficiency condition implies
that
MPL/MPK= w/r ie. MPL /w =MPK/r
 For an input combination to be efficient, the
marginal product per rupee of input cost must be
the same for both inputs.
 PROFIT MAXIMISATION
 Efficiency condition discussed previosly is a
necessary but not a sufficient condition for profit
maximisation.
 To maximise profit, both inputs must be hired
until the marginal revenue product equals the
price of input for both capital and labour.Thus
the conditions for profit maximisation requires
that MRPK=r and MRPL=w
 MR=ΔTR/ΔQ, MPL=ΔQ / ΔL, therefore MRPL
= (Δ TR /ΔQ) . (ΔQ /ΔL) =ΔTR/ ΔL