Producers Equi-

librium and Cost

Curves
Copyright@ Ashis Kumar Pradhan
Producers Equilibrium
A firm is interested to know the optimum combination of factors of produc-
tion which would minimize its cost of production. This can be known with
the help of Isoquants and Isocost lines.

Isoquant- An isoquant curve represents all those combinations of inputs

which are capable of producing the same level of output. Isoquants are also
called as equal-product curves or iso-product curves or product-indifference
curve. Therefore, the producer is indifferent throughout various combina-
tion throughout the curve.
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The basic difference between Isoquant curve and indifference curve is that
whereas it is not possible to quantify using the indifference curve but the
level of production acquired by the producer can be easily quantifiable.
Iso-cost or Equal-cost Lines- Iso-cost line represents the prices of factors. It
shows the various combinations of two factors which the firm can buy with
given outlay.
Producers Equilibrium
Suppose the firm has already decided about the level of output to be pro-
duced. The question is with which factor combination the firm should try to
produce the pre-decided level of output. The firm will try to use the least-
cost combination of factors. This can be found by super-imposing the iso-
quant and iso-cost lines.
Suppose the firm has decided to produce 1,000 units (represented by iso-quant P).
The units can be produced by various combinations of factor inputs such as A, B, C, D,
and E lying on P. The cost of producing 1,000 units would be minimum at the factor
combination represented by point C where the iso-cost line MM1 is tangent to the
given isoquant P. Producing at other points such as A, B, D and E will cost more as
these points lie on higher iso-cost lines than MM1. Thus the optimum combination of
factor inputs produced by the producer is reached at point C.
Cost Curves
Cost Function- It refers to the mathematical relation between the cost of a
product and various determinants of costs such as price of factor, the size of
output, technology, level of capacity utilization, efficiency etc.

Short-run Total Costs-

Total costs (TC)= Total fixed costs (TFC) + Total variable costs (TVC)
Total Fixed Costs- The costs which is incurred by the producer by spending
on fixed factors. In short-run the quantities of fixed factors does not vary.
Total variable costs- The costs incurred by the producer by spending on vari-
able factors. In short-run the producer can produce more by spending on
these factors. Such costs vary with a change in the level of output.
Cost Curves
Short-run Average cost curves
Average Fixed cost- AFC is obtained by dividing the total fixed cost by the number
of units of output produced. i.e. AFC=TFC/Q where Q is the number of out produced.
Average fixed costs steadily falls with the increase in output since total fixed cost is
held constant.
Average Variable costs- AVC is calculated by dividing the total variable cost by the
number of units of output produced. AVC=TVC/Q where Q is the number of out pro-
duced. AVC normally falls as output increases from zero to normal capacity output due
to occurrence of increasing returns. But, beyond the normal capacity output, AVC will
rise steeply because of the operation of diminishing returns.
Average total cost- AFC + AVC
Marginal Cost- Marginal cost is the addition made to the total cost by the produc-
tion of an additional unit of output. MC= ΔTC/ΔQ
Cost Curves
Long-run cost curves
A long-run cost curve depicts the functional relationship between
output and long-run costs of production.
The long-run costs curve is also called as Planning curve or else
envelope curve.