PRINCIPLE OF

LEAST
Cost combination
LEAST COST COMBINATION
PRINCIPLE
 A rational firm would combine various factor
of production its production function in such
a way that with minimum input and
maximum output is obtained at the minimum
cost.

Such a combination is referred to as a least

cost combination.
ASSUMPTION OF LEAST COST
COMBINATION
 There are two factor of production- labor & capital.
 All units of labor & capital are homogenous.
 The price of units of labor(w) & capital are given &
constant.
 The firm aims at profit maximization.
THE LEAST COST COMBINATION
MAY BE STATED
 Marginal productivity of labor\price of labor =marginal
pro duct of capital/price Of Capital.

 MPL = Marginal productivity of labor.

 PL =Price of labor.
 MP /P = MP /P
L L C C.

 MP C= Marginal product of labor.

 PC = Price of capital.
 PRINCIPLE OF LEAST COST
COMBINATIONS
1. Marginal rate of subsitution (MRS)=
Number of units of replaced resources(x2)
Number of units of added resoucres (x1)

2. Price ratio (PR)

= Cost per unit of added resources
Cost per unit of replaced resources

= Price of x1
Price of x2
PROPERTIES OF ISOQUANT
A) Isoquant (iso product) curve: is also means equal and quant
means quantity. As isoquant represents the different
combinations of two variable inputs used in the production
of a given amount of output.

Properties of isoquant:
1. The slope down ward to the right: if more of one is used
less of another input will be employed at the given of level
of output.
2. They are convex to the origin : it is because of diminishing
MRS of one input for another. The additional units of of an
input will replace less and less units of another input.
3. Isoquant does not intersect: it is not possible to have
different output from a single combination of inputs.
4. Slope of isoquant represents the MRS.
ISOQUANT (ISOPRODUCT)
CURVE
PEOPERTIES OF ISOQUANT
1. The slope down ward to the right
2.ISOQUANT DOES NOT
INTERSECT
3. THEY ARE CONVEX TO ORIGIN
ISO – COST LINE
 An iso-cost line indicates all possible
combinations of two inputs which can be
purchased with a given amount of investment
fund (outlay).
 Each combination of inputs has same total
cost which includes the cost of two inputs.
(x1 and x2 ) combined.
 Total cost =Px1.x1+Px2.x2
ISO – COST LINE
PROPERTIES OF ISO- COST LINE:
 As total outlay increases, the iso- cost line
moves higher and higher away from the
origin.
 The iso-cost line are straight.
 Slope of iso- cost line represents price ratio.