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Isoquant Analysis

Isoquant Analysis. Isoquant analysis. Constructing isoquants. 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 ). An isoquant. a. Units of K 40 20 10 6 4. Units

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Isoquant Analysis

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  1. Isoquant Analysis

  2. Isoquant analysis Constructing isoquants

  3. 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)

  4. 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)

  6. 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)

  7. Isoquant analysis Diminishing marginal rate of substitution

  8. Diminishing marginal rate of factor substitution MRS = DK / DL DK = 2 DL = 1 g MRS = 2 h Units of capital (K) isoquant Units of labour (L)

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

  10. Isoquant analysis An isoquant map

  11. An isoquant map I5 I4 I3 I2 I1 Units of capital (K) Units of labour (L)

  12. Isoquant analysis Returns to scale

  13. Constant returns to scale c b a R 600 Units of capital (K) 500 400 300 200 Units of labour (L)

  14. 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)

  15. Decreasing returns to scale (beyond point b) R c 500 b Units of capital (K) 400 a 300 200 Units of labour (L)

  16. Isoquant analysis Isocosts

  17. An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000 Units of capital (K) Units of labour (L)

  18. 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)

  19. Isoquant analysis The least-cost method of production

  20. Finding the least-cost method of production Assumptions PK = £20 000 W = £10 000 TC = £200 000 TC = £300 000 TC = £400 000 TC = £500 000 Units of capital (K) Units of labour (L)

  21. Finding the least-cost method of production s TC = £500 000 TC = £400 000 r t TPP1 Units of capital (K) Units of labour (L)

  22. Isoquant analysis Effect of a rise in the wage rate

  23. 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 24 Units of labour (L)

  24. 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)

  25. Effect of a wage rise on the least-cost method of production(wage rises to £20 000) r 11 9 Assumptions PK = £20 000 W = £10 000 = £20 000 Units of capital (K) TC = £400 000 r 8 TPP1 24 Units of labour (L)

  26. Isoquant analysis The maximum output for a given cost

  27. Finding the maximum output for a given total cost Units of capital (K) TPP5 TPP4 TPP3 TPP2 TPP1 O Units of labour (L)

  28. Finding the maximum output for a given total cost Isocost Units of capital (K) TPP5 TPP4 TPP3 TPP2 TPP1 O Units of labour (L)

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

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

  31. Isoquant analysis Deriving an LRAC curve from an isoquant map

  32. At an output of 200 LRAC = TC2 / 200 200 100 TC1 TC2 Deriving an LRAC curve from an isoquant map Units of capital (K) O Units of labour (L)

  33. Note: increasing returns to scale up to 400 units; decreasing returns to scale above 400 units Deriving an LRAC curve from an isoquant map Units of capital (K) 700 600 500 400 300 200 100 O TC5 TC1 TC4 TC2 TC3 TC7 TC6 Units of labour (L)

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

  35. Isoquant analysis Deriving short-run costs from an isoquant map

  36. 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)

  37. 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)

  38. The short-run situation: capital fixed in supply 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)

  40. L2 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)

  41. L3 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)

  42. K2 L4 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 L3 L2 L1 Units of labour (L)

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