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PRESENTAION ON FIRM’S EXPANSION PATHPRESENTED BY: Pawan Kawan Roll No.- 15 MBA-I
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Concepts: In economics, an expansion path is a line connecting optimal input combinations as the scale of production expands. A producer seeking to produce the most units of a product in the cheapest possible way attempts to increase production along the expansion path.
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Economists Alfred Stonier and Douglas Hague defined expansion path as,” that line which reflects least cost method of producing different levels of output, when factors prices remains constant”.
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The Firm’s Expansion Path The expansion path does not have to be a straight line. The expansion path does not have to be upward sloping.
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Y E Firm’s Expansion Path 14 13 12 11 L Expansion Path A 10 9 CCapital (K) 8 J 7 I Optimal inputs combination 6 5 H 14Q III 4 G M 3 K 12Q 2 II 10Q 1 I D B F X 0 2 4 6 8 10 12 14 Labour (L)
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At the points of tangency between isoquants and iso-cost lines, the slope of isoquant (MRTS) is equal to the slope of the iso-cost line. Where, w = wage rate of labour i.e. Slope of iso-cost line = -w/r r = rate of capital Slope of isoquant (MRTS) = -MPL/MPK Optimal inputs combination is: MPL w MPK r we get: MPL MPK w r
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Conclusion Expansion path gives the least cost input combinations for every level of output. The point on an expansion path occur when iso-cost line and isoquant are tangent. At the points of tangency between isoquants and iso-cost lines, the slope of isoquant (MRTS) is equal to the slope of the iso-cost line.
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