Page 101 - DECO405_MANAGERIAL_ECONOMICS
P. 101
Managerial Economics
Notes
Isocost Line
6.4.2 Concept of Producer’s Equilibrium
The theory of production may be viewed from two angles which are dual to each other. A firm
may decide to produce a particular level of output and then attempt to minimise the cost of total
inputs or it may attempt to maximise its output subject to a cost constraint.
A firm spends money on two inputs only, X and Y. It decides its budget and knows the price of
each of the inputs which remains constant. If the firm spends all its budget it can buy either OB
units of input X or OA units of input Y or a combination of X and Y represented by a point lying
on the straight line AB in Figure 6.3. The line AB is the budget line of the firm.
Figure 6.3: Optimum Factor Combination
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OA
The slope of the budget line or the isocost line will be – , where
OB
Cost Cost
OA = and OB =
Price of Y Price of X
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