Isocost lines2
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This document discusses isocost lines, which graphically represent combinations of two inputs (labor and capital) that a firm can afford with a given total budget. An isocost line shows all combinations of labor and capital available at a specific total cost. Higher budgets result in isocost lines further from the origin, allowing purchase of more inputs. The document provides an example where a firm with a Rs100 budget can hire 20 units of labor (at Rs5 per unit) or purchase 10 units of capital (at Rs10 per unit).
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Isocost Line
An isocost line graphically represents combinations of two factors, like labor and capital, that a firm can purchase with a given total budget. It is expressed mathematically as C = wL + rK, where C is the cost, w is the wage, L is labor, r is the interest rate, and K is capital. The slope of the isocost line equals the ratio of input prices. An isocost line can shift if the total budget or input prices change. An increased budget shifts the line parallel to the right, while higher input prices rotate the line clockwise or counterclockwise depending on which input's price increased.
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3) Explaining the economic logic behind the relative version of purchasing power parity theory.
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An isoquant shows the various combinations of two inputs that can be used to produce the same quantity of output. Isoquants are typically drawn on graphs showing the tradeoff between capital and labor. An isoquant map combines multiple isoquants, each representing a different output quantity, and can indicate whether a production function exhibits increasing, decreasing, or constant returns to scale based on the distances between isoquants. Economies of scale exist when increasing all inputs results in a proportionately higher output, while diseconomies of scale occur when output increases by less than the proportional increase in inputs.
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1. Isoquants slope downwards from left to right and never cut, touch, or intersect each other.
2. Isoquants are convex to the origin, meaning that marginal rate of technical substitution of inputs decreases as one moves away from the origin.
3. A profit maximizing producer aims to minimize costs by securing the optimal combination of factors of production based on technical possibilities and input prices.
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Producer equilibrium is achieved where the isocost line is tangent to the isoquant curve. The isoquant curve shows the different combinations of inputs that produce the same output level, while the isocost line connects combinations that can be purchased with the available budget. Profit is maximized using two methods - where the slopes of the isoquant and isocost lines are equal, or where marginal revenue equals marginal cost at the output level where the total revenue curve's slope equals the total cost curve's slope.
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Isocost Line
An isocost line graphically represents combinations of two factors, like labor and capital, that a firm can purchase with a given total budget. It is expressed mathematically as C = wL + rK, where C is the cost, w is the wage, L is labor, r is the interest rate, and K is capital. The slope of the isocost line equals the ratio of input prices. An isocost line can shift if the total budget or input prices change. An increased budget shifts the line parallel to the right, while higher input prices rotate the line clockwise or counterclockwise depending on which input's price increased.
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1. Isoquants slope downwards from left to right and never cut, touch, or intersect each other.
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Outline for Lecture 15Long-Run Production CostsThe Lon.docx
Outline for Lecture 15
Long-Run Production Costs
The Long-Run Cost Curve (five plant sizes)
Suppose that a firm can operate in five alternative plants in the short run, Plants 1 through 5, with respective short-run average total cost curves (ATC1 through ATC5) illustrated by Figure 9.7.
In this illustration, vertical white lines show levels of output at which firm should change its plant to achieve the lowest average total cost.
To see why, suppose that firm produces an output of less than 20 units, say 15 units. In this case, lowest average total cost is achieved in Plant 1 because ATC1 lies below all other ATC curves for 15 units. Provided that plant is a variable resource in the long run, firm chooses Plant 1, indicating that blue section of ATC1 is part of firm’s long-run average total cost curve for output levels below 20 units.
Now, suppose firm raises production to somewhere between 20 and 30 units, say 25 units. In this second case, lowest average total cost is achieved in Plant ____ because ____ lies below all other ATC curves for 25 units. Provided that plant is a variable resource in the long run, firm chooses Plant ____, indicating that blue section of ____ is part of firm’s long-run average total cost curve for output levels between 20 and 30 units.
Similarly, blue section of ____ is part of long-run average total cost curve for output levels between 30 and 50 units, blue section of ____ is part of long-run average total cost curve for output levels between 50 and 60 units, and blue section of ____ is part of long-run average total cost curve for output levels above 60 units.
Given these five cases illustrated by Figure 9.7, how do we obtain long-run average total cost curve? Is it smooth or bumpy? Explain.
The Long-Run Cost Curve (unlimited plant sizes)
The blue long-run average total cost curve in Figure 9.7 is drawn under the assumption that firm can operate in five alternative plants in the short run. However, in modern manufacturing industries (i.e. automobiles, pharmaceuticals, etc.) the number of possible plant sizes is many more than five.
In line with this reasoning, each red average total cost curve in Figure 9.8 represents a possible plant size in the short run.
Given all these red curves illustrated by Figure 9.8, how do we obtain long-run average total cost curve? Is it smooth or bumpy? Explain.
Economies and Diseconomies of Scale
Shape of long-run average total cost curve (Figures 9.8 and 9.9) is explained via economies and diseconomies of scale.
Economies of Scale
In the upper panel of Figure 9.9, economies of scale corresponds to ____ part of the curve; in the output range between zero and q1, average total cost ____ as production rises in the long run.
Explain economies of scale: why is average total cost decreasing with rising output?
Diseconomies of Scale
In the upper panel of Figure 9.9, diseconomies of scale explains ____ part of the curve; in the output range above than q2, avera.
Al 12 - chapter 3
This document discusses production and costs at the firm level. It begins by defining firms and their objectives to maximize profits. It then explores the production process, explaining that firms use inputs like labor and capital to produce outputs. It discusses the economists' view of costs, distinguishing between explicit costs and implicit opportunity costs. It also explains the differences between accounting profits, economic profits, and normal profits. The document then examines production functions and the laws of diminishing and increasing returns to scale in both the short-run and long-run. It provides graphs and examples to illustrate these concepts.
Economies of scale
1) Economies of scale refers to cost advantages that firms obtain due to increased production. There are two types: internal economies for an individual firm and external economies for an entire industry.
2) Isoquants show different input combinations that produce the same output level. They are convex and slope downward, never intersecting. The marginal rate of technical substitution is the rate at which one input can replace another without affecting output.
3) Producer equilibrium is reached where the isoquant, representing a certain output level, is tangent to the isocline, representing total factor cost. This maximizes output for a given cost.
Jo3516521658
International Journal of Engineering Research and Applications (IJERA) is an open access online peer reviewed international journal that publishes research and review articles in the fields of Computer Science, Neural Networks, Electrical Engineering, Software Engineering, Information Technology, Mechanical Engineering, Chemical Engineering, Plastic Engineering, Food Technology, Textile Engineering, Nano Technology & science, Power Electronics, Electronics & Communication Engineering, Computational mathematics, Image processing, Civil Engineering, Structural Engineering, Environmental Engineering, VLSI Testing & Low Power VLSI Design etc.
7 Production function
1. The production function expresses the relationship between inputs like labor, capital, land, etc. and the quantity of output produced. It defines output as a function of various inputs.
2. Cobb-Douglas production functions take the form Y=(AK^x L^(1-x)) and model output (Y) as a function of capital (K) and labor (L). They assume constant returns to scale and that factors are substitutable up to a limit.
3. Isoquants represent combinations of two variable inputs, like capital and labor, that produce the same level of output. They are used to analyze least-cost input combinations that maximize producer profit or minimize costs.
Unit 4 Production Function
The document discusses production functions and costs. It defines a production function as the relationship between inputs like labor, capital, land, and entrepreneurship and the volume of output. It describes how productivity curves show different combinations of inputs that can produce different levels of output. It also discusses concepts like economies of scale, total costs, average costs, marginal costs, and how these costs change in the short run and long run based on changes in fixed and variable inputs and output levels.
Unit 4 me production function
The document discusses production functions and costs. It defines a production function as the relationship between inputs like labor, capital, land, and entrepreneurship and the volume of output. It describes how productivity curves show different combinations of inputs that can produce certain outputs. It also discusses concepts like economies of scale, fixed vs variable costs, and how average and marginal costs change with different levels of output in the short run and long run.
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Isocost lines2
- 1. ISOCOST LINES PRESENTED BY – PRABHANSHU TIWARI
- 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.
- 9. THANK YOU