2. Isocost Lines/Outlay Line/Price
Line/Factor Cost Line
INTRODUCTION
A firm can produce a given level of output using
efficiently different combinations of two inputs. For
choosing efficient combination of the inputs, the
producer selects that combination of factors which
has the lower cost of production. The information
about the cost can be obtained from the isocost lines.
3. Isocost Lines/Outlay Line/Price
Line/Factor Cost Line
DEFINATION
An isocost line is a graphical representation of various
combinations of two factors (labour and capital) which
the firm can afford or purchase with a given amount of
money or total outlay.
It is an important tool for determining what combination
of factor-inputs, the firm will choose for production
process.
4. EXPLANATION
An isocost line is also called outlay line or price
line or factor cost line. An isocost line shows all
the combinations of labor and capital that are
available for a given total cost to-the producer.
Just as there is infinite number of isoquant, there
is infinite number of isocost lines, one for every
possible level of a given total cost. The greater
the total cost, the further from origin is the isocost
line.
Isocost Lines/Outlay Line/Price
Line/Factor Cost Line
5. DIAGRAM/FIGURE
In the fig. the point A shows 10 units of capital used
whereas point T shows 20 units of labor are hired at the
given price. If we join points A and T, we get a line AT.
This AT line is called isocost line or outlay line. The
isocost line is obtained with an outlay of Rs100.
6. EXAMPLE
Let us examine a firm which wishes to spend Rs
100 on a combination of two factors labor and
capital for producing a given level of output.
We suppose further that the price of one unit of
labor is Rs 5 per day. This means that the firm can
hire 20 units of labor.
On the other hand if the price of capital is Rs10 per
unit, the firm will purchase 10 units of capital.
7. Let us assume now that there is no change in the
market prices of the two factors labor and capital but
the firm increases the total outlay to Rs150.
The new price line BK shows that with an outlay of
Rs150, now the producer can purchase 15 units of
capital or 30 units of labor.
The new price line BK Shifts upward to the right. In
case the firm reduces the outlay to Rs 50 only, the
isocost line CD shifts downward to the left of original
isocost line and remains parallel to the original price
line.
8. CONCLUSION OR IMPORTANCE
OF ISOCOST LINE
The isocost line plays a similar role in the firm's
decision making as the budget line does in
consumer's decision making.
The only difference between the two is that the
consumer has a single budget line which is
determined by the income of the consumer. Whereas
the firm faces many isocost lines depending upon the
different level of expenditure the firm might make.
A firm may incur low cost by producing relatively
lesser output or it may incur relatively high cost by
producing a relatively large quantity.
