Page 98 - DECO405_MANAGERIAL_ECONOMICS

Unit 6: Production Theory

Notes
3. One reason why the just-in-time system decreases overhead labour considerably is
that the time required for planning and management is reduced because changeovers
are faster.
4. The firm's isoquants shifted inward to the origin.

6.4 Producer’s Equilibrium

Before discussing the concept of producer’s equilibrium, we must discuss the concepts of
Isoquants, marginal rate of technical substitution and isocost line. After learning these concepts,
you will be able to understand the concept of producer’s equilibrium better.

6.4.1 Isoquants

Isoquants are a geometric representation of the production function. The same level of output
can be produced by various combinations of factor inputs. Imagining continuous variation in
the possible combination of labour and capital, we can draw a curve by plotting all these
alternative combinations for a given level of output. This curve which is the locus of all possible
combination is called the ‘isoquant’.
Any quantity of a good can be produced by using many different combinations of labour and
capital (assuming both can be substituted for each other). An isoquant or an iso-product curve is
the line which joins together different combinations of the factors of production (L, K) that are
physically able to produce a given amount of output.
Suppose isoquant refers to 100 Kg. of output. This output can be produced by a large number of
different combinations of labour and capital. All the different combinations for the same amount
of output would lie on the same isoquant.

Example: 10 units of capital and 5 units of labour (A) provide the same output as 3 units
of capital and 20 units of labour input (B). The firm can choose any one of these combinations
(A or B) or any other combination which lies on the same isoquant to get 100 Kg. of output. The
isoquant does not tell us the combination of factor inputs the firm actually uses; (that combination
is based on process of the factors) but shows the technically possible combinations of factor
inputs that are required to produce a given level of output. Isoquant I has been drawn by joining
these combinations of labour and capital inputs which give out the same amount of total produce
i.e., 100 Kg. Points like A which require more capital but less labour represent capital intensive
methods of production. Points like B, which require less capital and more labour represent
labour intensive methods of production.

Units of Capital

Units of Labour

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