Page 209 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 10.2 Assumptions

The main assumptions of Isoquant curve are—
1. Two Factors of Production: To draw these curves, in view of simplicity, it assumes that only two
factors of production are used to produce a product. Both the factors are variable.
2. Constant Technique: It assumes that the production Two Basic Assumptions
technique is constant or given.
of Isoquant Curves
3. Divisible Factor: It assumes that the factor of
production is divisible or it can be used in small (1) Both the factors using in production are
quantity. substitute to each other.
(2) Decreasing Returns to factor theory amplifies
4. Possibility of Technical Substitution: It must
be assumed that there is possibility of technical in production.
substitution between two factors. Means the
production calculation is Variable Proportion Type and not Fixed Proportion Type.
5. Efficient Combination: It also assumes that in given technique, the factor of production is used in
its efficient combination.

10.3 Explanation

The Isoquant curve can be described by following table which represents various combinations of two
factors (labour and capital) for production.

Table 1: Isoquant Schedule
Combination Product (Watch) Capital (K) Labour (L)
A 100 90 10

B 100 60 20
C 100 40 30
D 100 30 40

Above table indicates that 100 watches can be made by following combinations of labour and capital—
(A) 90 units of capital and 10 units of labour
The Isoquant curve represents
(B) 60 units of capital and 20 units of labour various combinations of capital and
(C) 40 units of capital and 30 units of labour labour by which equal amount of
production occurs.
(D) 30 units of capital and 40 units of labour
In the above table, the combination of capital and labour can be represened by figure or graph too. In
figure 10.1 capital is shown on axis OY and labour is shown on axis OX. Point A represents that 100
units of watches can be produced by 90 units of capital and 10 units of labour. While point B indicates
that this same quantity of watches can be produced by 60 units of capital and 20 units of labour. Thus
the point C indicates that the production of 100 watches can occur by 40 units of capital and 30 units
of labour. While point D represents that the same quantity of watches can be produced by 30 units of
capital and 40 units of labour. Thus A, B, C and D represent various combinations of labour and capital
which produce the similar quantity of watches (100). So the IQ curve which comes by adding the point
A, B, C and D is called Equal Product Curve or Isoquant Curve. This Isoquant curve describes that to
produce a fixed quantity of product, there are various combinations of factors.

202 LOVELY PROFESSIONAL UNIVERSITY