Thus, the convexity of equal product curves is due to the diminishing marginal rate of technical substitution of one factor for the other. Therefore, less and less of capital is required to be substituted by an additional unit of labour so as to maintain the same level of output. Thus, the marginal rate of technical substitution is now 3. The capacity of the producer is shown by his monetary resources, i. No two isoquants can intersect each other: If the two isoquants, one corresponding to 20 units of output and the other to 30 units of output intersect each other, there will then be a common factor combination corresponding to the point of intersection. Identify the truthfulness of the following statements.
However, if there are strong increasing returns to scale, the marginal returns of the variable factor increase instead of diminishing. The absolute value of the slope of Isoquant is called the Marginal Rate of Technical Substitution. Therefore, the convexity of isoquants implies the diminishing returns to a variable factor. The isocost curve illustrates all possible combinations of two inputs that result in the same level of total cost. When the marginal product of labor is falling, the average product of labor is falling.
Homogeneous production function of the first degree, which, as said above, implies constant returns to scale, has been actually found in agriculture as well as in many manufacturing industries. This proves that the marginal returns or physical productivity of the variable factor, labour, have diminished. Thus it is clear that an isoquant must slope downward to the right as shown in Figure 24. Empirical evidence suggests that the phase of constant returns to scale is quite long. This is known as the principle of diminishing marginal rate of technical substitution.
They assume a perfect complementary nature between factors implying zero substitutability. This is explained in terms of Figure 24. The Economic region of production The firm would not operate on the positively sloped portion of an isoquant because it could produce the same level of quantity with less capital and labour. So, higher the isoquant curve, greater will be the production level. Linear homogeneous production function is extensively used in empirical studies by economists.
The isoquant appears as a smooth curve convex to the origin. However, when the returns to scale are slightly increasing, then the marginal returns of the variable factor will diminish. Both of which are logically incorrect because no producer will be willing to sacrifice a larger or same quantities, respectively, of a factor for successively more of other if the marginal factor productivities are diminishing. We have seen that there are diminishing returns to a factor because of the fact that different factors are imperfect substitutes of each other in the production of a good. This shape is a consequence Labour of fact that if a producer uses more of capital or more of labour or more Fig. I am considering only raw material and labor as inputs, ignoring the machine. The different combinations of these factors are used to have the same level of output as shown in the schedule below: Combination Labor unit Capital Unit Output Number A 1 10 100 B 2 9 100 C 3 8 100 D 4 7 100 Iso-quant Map: An iso-quant map shows the different iso-quant curves representing the different combinations of factors of production, yielding the different levels of output.
Cobb-Douglas production has the following useful properties: 1. The concept of marginal rate of technical substitution can be easily understood from Table 17. Consider a small movement down the equal product curve from G to H in Fig. This set is shown in the following figure, together with the for the output 2. Higher isoquant represents higher production The isoquant which is in higher stage has higher units of labor and capital combinations. Moving down from combination A to combination B, 4 units of capital are substituted by 1 unit of labour in the production process without any change in the level of output. If, in the short run, its total output remains fixed due to capacity constraint and if it is a price-taker i.
Labour is thus being overworked and its marginal product is negative. The conditions for the equilibrium of the firm are the same, as discussed above. The concept of Iso-quant can be further comprehended through an illustration below: Suppose there are two input factors Viz. In the above figure, Iq 1 and Iq 2 are two isoquant curves and R is the point where both the curves intersect. The increasing returns to scale are attributed to the existence of indivisibilities in machines, management, labour, finance, etc. More precisely, marginal rate of technical substitution of labour for capital may be defined as the number of units of capital which can be replaced by one unit of labour, the level of output remaining unchanged. The absurd conclusion that follows when two isoquants cut each other is explained with the aid of Figure 24.
P L is the unit price of labor w in the text and P K is the unit price of physical capital r in the text. This indicates that one factor can be used a little more and other factor a little less, without changing the level of output. Both the situations are impossibilities because nothing can be produced either with only labour or only capital. Finally, any combination of inputs above or to the right of an isoquant results in more output than any point on the isoquant. The level of production or output of a production process is same throughout the curve.
Convex to the Point of Origin: This characteristic of isoquant means that the producer is willing to sacrifice fewer and fewer units of capital for every additional unit of labour and vice versa. Similarly, when returns to scale are decreasing, marginal physical product of a variable factor always diminish, and when returns to scale are increasing marginal physical product of a factor will still diminish unless the returns to scale are increasing sufficiently strongly. These curves are also known as outlay lines, price lines, input-price lines, factor-cost lines, constant-outlay lines, etc. When the two factors are perfect substitutes of each other, then each of them can be used equally well in place of the other. If they run fast, then a relatively small amount of labor is used together with a relatively large amount of raw material since some is wasted. The long-run production function of a firm involving the usage of two factors, say, capital and labour is represented by equal-product curve or isoquant.