© 2003 McGraw-Hill Ryerson Limited Isocost/Isoquant Isocost/Isoquant Analysis Analysis Chapter 10 Appendix Chapter 10 Appendix 10A - 2 © 2003 McGraw-Hill Ryerson Limited Isocost/Isoquant Isocost/Isoquant Analysis Analysis ◆ In the long run, a firm can vary all of the factors of production. ◆ One important decision in the long run is which combination of factors to use? ◆ Economic efficiency involves choosing the factors so that the cost of production is at the minimum. 10A - 3 © 2003 McGraw-Hill Ryerson Limited Isocost/Isoquant Isocost/Isoquant Analysis Analysis ◆ A graphical tool used in economics to analyze the long run choice of factors of production is the isocost/isoquant analysis. 10A - 4 © 2003 McGraw-Hill Ryerson Limited The Isoquant Curve The Isoquant Curve ◆ An isoquant curve (equal quantity) represents combinations of factors of production that result in equal amounts of output. 10A - 5 © 2003 McGraw-Hill Ryerson Limited The Isoquant Curve for The Isoquant Curve for 60 Earrings, 60 Earrings, Fig. A10-2, p 229 Fig. A10-2, p 229 Units of labour Machines B A G C D F E (Q 60) 10A - 6 © 2003 McGraw-Hill Ryerson Limited The Isoquant Curve The Isoquant Curve ◆ The rate at which one factor must be added to compensate for the loss of another factor is called the marginal rate of substitution. ◆ The slope of the isoquant curve is the marginal rate of substitution. 10A - 7 © 2003 McGraw-Hill Ryerson Limited The Isoquant Curve The Isoquant Curve ◆ The slope of the isoquant curve: Slope = MP labour /MP machines = MRS 10A - 8 © 2003 McGraw-Hill Ryerson Limited The Isocost line The Isocost line ◆ The isocost line (equal cost) represents alternative combinations of factors of production that have the same cost. ◆ The slope of the isocost line equals the ratio of prices of the factors of production. 10A - 9 © 2003 McGraw-Hill Ryerson Limited The Isocost Line The Isocost Line ◆ The slope of the isocost curve: Slope = P labour /P machines 10A - 10 © 2003 McGraw-Hill Ryerson Limited The Isocost Lines, The Isocost Lines, Fig. A10-4, Fig. A10-4, p230 p230 Units of labour Machines Slope = -P labour /P machines =-5/3 6 12 20 18 C D A [...]...10A - 11 Combining Isoquant and Isocost Curves, Fig Machines A10-5, p 231 20 B A MPlabour/Mpmachines =Plabour/Pmachines C 12 Units of labour © 2003 McGraw-Hill Ryerson Limited Isocost/Isoquant Analysis End of Chapter 10 Appendix © 2003 McGraw-Hill Ryerson Limited . Limited Isocost/Isoquant Isocost/Isoquant Analysis Analysis Chapter 10 Appendix Chapter 10 Appendix 10A - 2 © 2003 McGraw-Hill Ryerson Limited Isocost/Isoquant. the minimum. 10A - 3 © 2003 McGraw-Hill Ryerson Limited Isocost/Isoquant Isocost/Isoquant Analysis Analysis ◆ A graphical tool used in economics to analyze