TAILIEUCHUNG - Isocost/Isoquant Analysis

A graphical tool used in economics to analyze the long run choice of factors of production is the isocost/isoquant analysis. A graphical tool used in economics to analyze the long run choice of factors of production is the isocost/isoquant analysis. | Isocost/Isoquant Analysis Chapter 10 Appendix Isocost/Isoquant Analysis In the long run, a firm can vary all of the factors of production. One important decision in the long run is which combination of factors to use? Economic efficiency involves choosing the factors so that the cost of production is at the minimum. Isocost/Isoquant Analysis A graphical tool used in economics to analyze the long run choice of factors of production is the isocost/isoquant analysis. The Isoquant Curve An isoquant curve (equal quantity) represents combinations of factors of production that result in equal amounts of output. The Isoquant Curve for 60 Earrings, Fig. A10-2, p 229 Units of labour Machines B A G C D F E (Q60) The Isoquant Curve The rate at which one factor must be added to compensate for the loss of another factor is called the marginal rate of substitution. The slope of the isoquant curve is the marginal rate of substitution. The Isoquant Curve The slope of the isoquant curve: Slope = MPlabour/MPmachines = MRS The Isocost line The isocost line (equal cost) represents alternative combinations of factors of production that have the same cost. The slope of the isocost line equals the ratio of prices of the factors of production. The Isocost Line The slope of the isocost curve: Slope = Plabour/Pmachines The Isocost Lines, Fig. A10-4, p230 Units of labour Machines Slope = -Plabour/Pmachines =-5/3 6 12 20 18 C D A Combining Isoquant and Isocost Curves, Fig. A10-5, p 231 Units of labour Machines 20 12 C A B MPlabour/Mpmachines =Plabour/Pmachines Isocost/Isoquant Analysis End of Chapter 10 .

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