This document discusses production decisions and key economic concepts related to determining optimal input combinations. It covers indifference curves, isoquants, marginal rate of technical substitution, and iso-cost curves. Isoquants represent combinations of inputs that produce the same output level. The least cost combination is where an isoquant intersects an iso-cost curve, indicating the lowest cost to produce a given output. The maximum output combination occurs at the intersection of a higher isoquant and iso-cost curve, representing the highest output possible with a given budget. Together, these tools help producers analyze optimal input levels and minimize costs of production.

1. Production Decisions
Dr Raju Indukoori

2. Content
 Indifference Curve
 Iso quant
 Marginal rate of technical substitution (MRTS)
 Iso Curve
 Least cost combination
 Maximum output combination
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3. Indifference Curve
 It is the combination of two different substitutes
with different quantity but giving the same result
or output.
 One of the variable should be minimum but not
zero.
 The units of the two variables vary in each
combination to minimize the input cost or related
keeping the result same.
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4. Production Indifference Curve
Indifference curves in production are used to interpret different
combination of input costs and quantities keeping the output
constant. It is similar to indifference curves in theory of consumer
behavior. Following are the popular tools used in business economics.
1) Isoquants
2) Isocosts
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5. Iso Quant (IQ)
 Iso means equal and Quant means quantity.
 The are also known as equal product curves useful in analysing the
theory of production function. This helps to understand the
optimum combination of factors and minimize the cost.
 Iso Quant represents all possible combinations of two inputs
which arecapable of producing the same level of output.
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6. Marginal Rate of Technical Substitution
(MRTS)
 To what extent one factor input can substitute other factor is
known as MRTS
 For example one tractor can substitute ten men to plough an
agricultural field in a day.
 In the above example the ratio between 10 men and 1 tractor can
be represented as a ratio 1:10 which means 10 men are
substituted by 1 tractor
 MRTS in this case is 1:10
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7. Factor Substitution
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Factor
Combination
Units of
Capital (K)
Units of
Labor (L)
Quantity of
Out Put (Q)
MRTS
A 1 26 100
B 2 20 100 6:1
C 3 15 100 5:1
D 4 11 100 4:1
E 5 8 100 3:1
F 6 6 100 2:1
G 7 5 100 1:1

8. IQ Curve
 It is the curve drawn by using different combination of factor input
units keeping the oupt at the same level.
 Any point on the isoquant curve represent equal quantities of
output.
 As the curve represents same output at any point on the curve, it
is known as isoquatnt or equal product curve.
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9. IQ Curve
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 A,B,C and D are different
combinations of factor
inputs i.e. capital (K) and
labor (C).
 In all the combinations,
the output remains the
same i.e. Q1.

10. IQ Curves
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11. Properties of IQ Curves
 Negative or Downward sloping from left to right
 Convex to the origin
 Two isoquant curves cannot intersect each other.
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12. Iso Cost (IC)
 Iso means equal and cost is cost of cost of factor
inputs in production.
 Iso costs is the combinations of inputs which results
in the same total amount or cost.
 The use of the iso cost pertains to cost-minimization
in production.
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13. Iso Cost
For the two production inputs labour and capital, with fixed
unit costs of the inputs, the equation of the isocost line is
rK + wL = C
Where
C = Total cost
r = Cost of capital
K = Capital
w = wage rate
L = units of labor
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14. IC Curves
 Various combination of
factor inputs and their
costs are represented on
the Ics M, M1 and M2
 M, M1 and M2 are different
total cost levels
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15. Iso cost and Iso Quant Curves
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16. Least cost combination
 It is the combination of factor inputs leading to least cost.
 It can be on any of the Iso cost lines (IC1, IC2, and IC3)
and Iso quant lines (IQ1, IQ2 and IQ3) which has to be
determined by the producer.
 It is on the line of intersection of Iso cost and Iso quant
like IQ1 and IC1, IQ2 –IC2 and IQ3 and IC3
 It gives the least cost combination lowering the factor
cost.
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17. Maximum output combination
 Maximum output combination of factor inputs is the
possible combination of the factor input quantites and
costs.
 It happens at the higher level of Iso cost and iso quant
intersection.
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