Isocost/Isoquant Analysis Isocost/Isoquant Analysis
Chapter 10 Appendix Chapter 10 Appendix
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10A 2
Isocost/Isoquant Analysis Isocost/Isoquant Analysis
u In the long run, a firm can vary all of the
factors of production.
u One important decision in the long run is which combination of factors to use? u Economic efficiency involves choosing
the factors so that the cost of production is at the minimum.
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10A 3
Isocost/Isoquant Analysis Isocost/Isoquant Analysis
u A graphical tool used in economics to
analyze the long run choice of factors of production is the isocost/isoquant analysis.
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The Isoquant Curve The Isoquant Curve
u An isoquant curve (equal quantity)
represents combinations of factors of production that result in equal amounts of output.
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Fig. A102, p 229
The Isoquant Curve for 60 The Isoquant Curve for 60 Earrings, Fig. A102, p 229 Earrings,
Machines
A
B G
C
D
E
F (Q60)
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Units of labour
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The Isoquant Curve The Isoquant Curve
u The rate at which one factor must be added to compensate for the loss of another factor is called the marginal rate of substitution.
u The slope of the isoquant curve is the
marginal rate of substitution.
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The Isoquant Curve The Isoquant Curve
u The slope of the isoquant curve:
‰ Slope ‰ = MPlabour/MPmachines = MRS
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The Isocost line The Isocost line
u The isocost line (equal cost)
represents alternative combinations of factors of production that have the same cost.
u The slope of the isocost line equals the
ratio of prices of the factors of production.
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10A 9
The Isocost Line The Isocost Line
u The slope of the isocost curve:
‰ Slope ‰ = Plabour/Pmachines
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Fig. A104, p230
The Isocost Lines, Fig. A104, p230 The Isocost Lines,
Machines
20
C
Slope = -Plabour/Pmachines =-5/3
D A
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18 6 12 Units of labour
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Fig. A105, p 231
Combining Isoquant and Combining Isoquant and Isocost Curves, Fig. A105, p 231 Isocost Curves,
Machines
20
AB
MPlabour/Mpmachines =Plabour/Pmachines
C
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12 Units of labour
Isocost/Isoquant Analysis Isocost/Isoquant Analysis
End of Chapter 10 Appendix End of Chapter 10 Appendix
© 2003 McGrawHill Ryerson Limited
