Promoting active learning

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Isoquant Analysis
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Isoquant analysis

• Constructing isoquants

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An isoquant
Units of K 40 20 10 6 4
Units of L 5 12 20 30 50
Point on diagram a b c d e
Units of capital (K)
Units of labour (L)
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An isoquant
a
Units of K 40 20 10 6 4
Units of L 5 12 20 30 50
Point on diagram a b c d e
Units of capital (K)
Units of labour (L)
5
An isoquant
a
Units of K 40 20 10 6 4
Units of L 5 12 20 30 50
Point on diagram a b c d e
Units of capital (K)
b
Units of labour (L)
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An isoquant
a
Units of K 40 20 10 6 4
Units of L 5 12 20 30 50
Point on diagram a b c d e
Units of capital (K)
b
c
d
e
Units of labour (L)
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Isoquant analysis

• Diminishing marginal
• rate of substitution

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Diminishing marginal rate of factor substitution
g
MRS 2
h
Units of capital (K)
isoquant
Units of labour (L)
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Diminishing marginal rate of factor substitution
g
MRS 2
MRS DK / DL
DK 2
h
DL 1
Units of capital (K)
j
MRS 1
k
isoquant
Units of labour (L)
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Isoquant analysis

• An isoquant map

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An isoquant map
Units of capital (K)
Units of labour (L)
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Isoquant analysis

• Returns to scale

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Constant returns to scale
R
600
Units of capital (K)
500
400
300
200
Units of labour (L)
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Increasing returns to scale (beyond point b)
R
c
700
600
b
Units of capital (K)
500
400
a
300
200
Units of labour (L)
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Decreasing returns to scale (beyond point b)
R
c
500
b
Units of capital (K)
400
a
300
200
Units of labour (L)
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Isoquant analysis

• Isocosts

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An isocost
Assumptions PK 20 000 W 10 000 TC 300
000
Units of capital (K)
Units of labour (L)
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An isocost
Assumptions PK 20 000 W 10 000 TC 300
000
a
Units of capital (K)
b
c
TC 300 000
d
Units of labour (L)
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Isoquant analysis

• The least-cost
• method of production

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Finding the least-cost method of production
Units of capital (K)
Units of labour (L)
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Finding the least-cost method of production
Units of capital (K)
Units of labour (L)
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Isoquant analysis

• Effect of a rise in
• the wage rate

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Effect of a wage rise on the least-cost method of
production
Assumptions
PK 20 000 W 10 000
Units of capital (K)
TC 400 000
r
8
TPP1
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Units of labour (L)
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Effect of a wage rise on the least-cost method of
production(wage rises to 20 000)
Assumptions
PK 20 000 W 10 000 20 000
Units of capital (K)
TC 400 000
r
8
TPP1
24
Units of labour (L)
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Effect of a wage rise on the least-cost method of
production(wage rises to 20 000)
Assumptions
PK 20 000 W 10 000 20 000
Units of capital (K)
TC 400 000
r
8
TPP1
24
Units of labour (L)
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Isoquant analysis

• The maximum output
• for a given cost

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Finding the maximum output for a given total cost
Units of capital (K)
TPP5
TPP4
TPP3
TPP2
TPP1
O
Units of labour (L)
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Finding the maximum output for a given total cost
Units of capital (K)
TPP5
TPP4
TPP3
TPP2
TPP1
O
Units of labour (L)
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Finding the maximum output for a given total cost
Units of capital (K)
TPP5
TPP4
TPP3
TPP2
TPP1
O
Units of labour (L)
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Finding the maximum output for a given total cost
r
s
Units of capital (K)
K1
TPP5
u
TPP4
v
TPP3
TPP2
TPP1
O
L1
Units of labour (L)
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Isoquant analysis

• Deriving an LRAC curve from an isoquant map

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Deriving an LRAC curve from an isoquant map
Units of capital (K)
O
Units of labour (L)
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Deriving an LRAC curve from an isoquant map
Units of capital (K)
700
600
500
400
300
200
100
O
TC1
TC5
TC2
TC3
TC4
TC7
TC6
Units of labour (L)
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Deriving an LRAC curve from an isoquant map
Expansion path
Units of capital (K)
700
600
500
400
300
200
100
O
TC1
TC5
TC2
TC3
TC4
TC7
TC6
Units of labour (L)
35
Isoquant analysis

• Deriving short-run costs from an isoquant map

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Deriving short-run costs from an isoquant map
The long-run situation both factors variable
Units of capital (K)
300
TC 60 000
TC 40 000
200
TC 20 000
100
O
Units of labour (L)
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Deriving short-run costs from an isoquant map
The long-run situation both factors variable
Expansion path
Units of capital (K)
300
TC 60 000
TC 40 000
200
TC 20 000
100
O
Units of labour (L)
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Deriving short-run costs from an isoquant map
Expansion path
Units of capital (K)
K1
300
TC 60 000
TC 40 000
200
TC 20 000
100
O
Units of labour (L)
39
Deriving short-run costs from an isoquant map
Expansion path
Units of capital (K)
K1
300
TC 60 000
TC 40 000
200
TC 20 000
100
O
L1
Units of labour (L)
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Deriving short-run costs from an isoquant map
Expansion path
Units of capital (K)
K1
300
TC 22 000
TC 60 000
TC 40 000
200
TC 20 000
100
O
L1
Units of labour (L)
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Deriving short-run costs from an isoquant map
Expansion path
Units of capital (K)
K1
300
TC 22 000
TC 60 000
TC 65 000
TC 40 000
200
TC 20 000
100
O
L2
L1
Units of labour (L)
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Deriving short-run costs from an isoquant map
Expansion path
bL
Units of capital (K)
bS
a
K1
300
TC 22 000
TC 60 000
TC 65 000
TC 40 000
200
TC 20 000
100
O
L2
L3
L1
Units of labour (L)