Page 215 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 10.7 Iso–cost Line

An iso-cost line is the line which represents those various combinations whose total cost is equal.
In other words, this line represents the various combinations of two factors which a firm can get in
equal cost. Iso-cost lines are various like isoquant curves, which represent various levels of production.
iso-cost line may be defined as the line which shows different possible combinations of two factors that the
producer can afford to buy his total expenditure to be incurred on these factors and price of the factors.

Explanation

The assumption of iso-cost line can be described with Table 2 and Fig. 10.7. Suppose that producer has only 100
units to buy labour and capital. The cost per unit of labour is 10 and cost per unit of capital is 20.

Table 2: Alternative Factor Combination
Total Expenditure (in ) Labour L = 10 Capital L = 20
p k
100 10 0
100 0 5
100 4 3
100 2 4

The producer has following options—
(i) To spend all his money in labour he can
By sloping of iso-cost line, factor price 100

average can obtain. But the level of iso-cost establish 10 units ( ____ = 10 ) .
10
curve shows the budget limit of producer.
High iso-cost line shows more cost to (ii) To spend all his money in capital he can
produce a product. 100
____
buy 5 units ( 20 = 5 ) .

(iii) To spend all his money in both labour and capital he can buy all possible combinations of capital
and labour like (4, 3) (2, 4) etc.
In Fig. 10.7, labour is shown on axis OX and capital is on axis OY. The points A, B, C and D represent
various combinations of capital and labour, which can be bought at 100. Point A indicates the five
units of
Fig. 10.7

Y

Iso-cost Line
A
5
B
4
Capital 3 C

2
1
D
0 X
12 34 56 78 910
Labour

208 LOVELY PROFESSIONAL UNIVERSITY