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ISOQUANTS AND RETURNS TO SCALE PRESENTED BY-KARTIKEYA KARTIKEYA SINGH KRISHNAVATAR KSHITIJ
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Content• Production function and Isoquant• Isoquant or Iso-product map• MRTS• Returns to Scale
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Production Function and Isoquant• Letting q represent the output of a particular good during a period, K represent capital use, L represent labor input, and M represent raw materials, the following equation represents a production function. q f ( K , L, M )
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Two-Input Production Function• While the choices of inputs will obviously vary with the type of firm, a simplifying assumption is often made that the firm uses two inputs, labor and capital. q f ( K , L)
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Isoquant• In economics, an isoquant (derived from quantity and the Greek word iso, meaning equal) is a contour line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two or more inputs.
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Features of Isoquants• Isoquant have a negative slope• Isoquant are convex to the origin• Isoquant cannot intersect or be tangent to each other• Upper isoquant represent higher level of outpu
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MRTS• In economic theory, the Marginal Rate of Technical Substitution (MRTS) - or Technical Rate of Substitution (TRS) - is the amount by which the quantity of one input has to be reduced when one extra unit of another input is used, so that output remains constant .
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Returns to scale• Returns to scale is the rate at which output increases in response to proportional increases in all inputs.• In the eighteenth century Adam Smith became aware of this concept when he studied the production of pins.
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Constant Returns to Scale• A production function is said to exhibit constant returns to scale if a doubling of all inputs results in a precise doubling of output.
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Constant Returns to Scale• Isoquants for constant returns to scale Capital per week 4 q = 40 3 q = 30 2 q = 20 1 q = 10 0 1 2 Labor 3 4 per week (a) Constant Returns to Scale
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Decreasing returns to scale• If doubling all inputs yields less than a doubling of output, the production function is said to exhibit decreasing returns to scale.
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Decreasing returns to scale• Isoquants showing decreasing returns to scale. Capital A Capital A per week per week 4 4 q = 40 3 3 q = 30 q = 30 2 2 q = 20 q = 20 1 1 q = 10 q = 10 0 1 2 3 4 per weekLabor 0 1 2 3 4 Labor per week (a) Constant Returns to Scale (b) Decreasing Returns to Scale
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Increasing Returns to Scale• If doubling all inputs results in more than a doubling of output, the production function exhibits increasing returns to scale Capital A per week 4 3 q = 40 2 q = 30 q = 20 1 q = 10 0 1 2 3 4 Labor per week (c) Increasing Returns to Scale