Input output isoquant. What Is an Isoquant Curve and How Does It Work? 2022-11-01
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An isoquant is a graphical representation of all the possible combinations of inputs that can be used to produce a given level of output. In other words, an isoquant represents the technical efficiency of a production process. Isoquants are important tools in the field of economics because they help to understand how firms make production decisions and how they can be more efficient.
Input-output analysis is a way of studying the relationship between the inputs used in a production process and the output that is produced. This analysis helps to identify the most cost-effective combination of inputs that can be used to produce a given level of output. It also helps to identify the returns to scale, which is the relationship between the increase in output and the increase in inputs used.
Isoquants are usually plotted on a graph with inputs on the x-axis and outputs on the y-axis. The slope of the isoquant represents the marginal rate of technical substitution (MRTS), which is the rate at which one input can be substituted for another while maintaining the same level of output. The MRTS is important because it determines the cost of production and the cost-minimizing input combination.
The shape of an isoquant is also important. If an isoquant is concave, it means that the MRTS is decreasing as more of one input is used. This indicates that it becomes more costly to substitute one input for another as the quantity of the input increases. On the other hand, if an isoquant is convex, it means that the MRTS is increasing as more of one input is used. This indicates that it becomes less costly to substitute one input for another as the quantity of the input increases.
In summary, input-output analysis and isoquants are important tools in the field of economics because they help to understand how firms make production decisions and how they can be more efficient. Isoquants represent the technical efficiency of a production process and the MRTS helps to determine the cost-minimizing input combination. The shape of the isoquant also provides valuable information about the cost of production.
Types of Isoquants in Production
What are the different shapes of isoquants? It implies that the production function is of variable proportion type. Isoquants: An isoquant is a locus of points showing all the technically efficient ways of combining factors of production to produce a fixed level of output. The producer must be rational, i. Hence, it can be concluded that isoquants will never intersect with each other. Properties of Isoquant Curve The isoquant curve has almost the same properties as are possessed by the indifference curve of the theory of consumer behavior. Marginal Rate of Substitution MRS is defined as the units of one input factor that can be substituted for a single unit of the other input factor. These factors of production are essential to produce any good or service.
Isoquants are convex to the origin This is because of the operation of the principle of diminishing marginal rate of technical substitution. An isocost line is a locus of points showing the alternative combinations of factors that can be purchased with a fixed amount of money. Assume that total outlay available increases keeping factor prices constant. In the same manner, slop of iso-cost line will change when interest rate changes and it may become steeper or flatter. The mathematical form of how Labor L can be substituted for Capital K in production is given by: Isoquant Curve example A firm could choose many different combinations of capital and labor that could produce a given quantity. Behavior of the producer in long-run production can analyze by using the isoquant approach. Why marginal rate of technical substitution diminishes? As shown in the tabular example of MRTS, the ratio by which the input units of capital is substituted by labor units diminishes with more and more substitution of labor for capital.
Linear Isoquant This type assumes perfect substitutability of factors of production. The law of production would fail to be applicable. What is difference between isocost and isoquant? In the figure, we can see that there are two isoquant curves Iq 1 and Iq 2. MRTS is also equal to the ratio of marginal product of one input to the marginal product of another input. Similarly, MRTS of labour for capital would imply the amount of capital that the firm would be willing to give up for an additional unit of labour. Figure 2: Convex Isoquant Curve The convexity represents that the MRTS diminishes if we move from point A to B and from B to C along the isoquant. A Higher Isoquant Denotes a Higher Level of Output: Another basic characteristic of an isoquant is that greater its distance from the point of origin, higher output level it will represent.
Figure 3 shows the concave isoquant curve: As shown in Figure 3, if we move from point A to B and from B to C along the isoquant, the MRTS increases. How do you show isoquants are convex? So, like the consumer the producer has also to operate under a budget resource constraint. The isoquant curve is the main tool to explain the behavior of producers. An isoquant map is a set of isoquants, each of which shows the maximum output that can be achieved for any set of inputs. Increasing input units of either of the factors without deducing the input of the other factor will result in increased production and it is beyond the principle of isoquant curve.
Marginal rate of technical substitution diminishes in production process. Figure 1: graphical representation of isoquant schedule isoquant curve Assumptions of Isoquant Curve The concept of isoquant is based on the following assumptions. Assumptions of Isoquant Curve It implies that the production function is of variable proportion type. This means that as output rises, it becomes more difficult for firms to substitute resources or inputs at will because there are not enough available resources. An isoquant map is a set of isoquants, each of which shows the maximum output that can be achieved for any set of inputs. Then employing one extra worker can enable it to save 10K. One important thing to consider here is that, not every input combinations are economically feasible to use in production.
There is one serious defect in marginal rate of technical substitution as a measure of factor substitutability. In the figure, when OK 1 units of capital were employed, OL 1 units of labor were employed too. Isoquant is convex to the origin The isoquant is convex to the origin because the marginal rate of technical substitution MRTS between the inputs is diminishing. It means that at the point of intersection the factor combination, OK + OL can produce 100 units as well as 200 units of output. Two isoquants can not intersect each other.
If it produced at say 13 K and 48 Labour, it would only be able to produce a TPP of 3,500. What are the characteristics of isoquant? Isoquant of a rational producer is convex towards the origin. These unfeasible input combinations are represented by positively sloped portion of isoquant. Thus, an isoquant will be, in general, convex to the point of origin. Isocost An isocost shows all the combination of factors that cost the same to employ.
Production techniques are efficient only within the ridge lines. The graphical representation of fixed factor proportion isoquant is L in shape, shown in Figure 5: Figure 5: L-Shaped Isoquant As shown in Figure 5, the L-shaped isoquant represents that there is no substitution between labour and capital and they are assumed to be complementary goods. It could combine capital and labor in any of the combinations on the schedule below. Isoquants have certain properties that resemble that of indifference curves — convex to the origin, downward sloping, and nonintersecting curves. An isoquant must always be convex to the origin. History of Political Economy 2012 44 4 : 643—661.
It is also known as the desired rate of factor substitution, i. An iso-product curve is the graphic representation of an iso-product schedule. In opposite case, when factor inputs are not substitutes, then MRTS L,K remains infinity or zero, and isoquants become kinked and parallel to K and L axes. Hence, to increase output, both factors are to be increased holding the proportion constant. Linear Iso-quant Curve: This curve shows the perfect substitutability between the factors of production.
