What is an Isoquant in economics?
The term “isoquant,” broken down in Latin, means “equal quantity,” with “iso” meaning equal and “quant” meaning quantity. The isoquant curve is a company’s counterpart to the consumer’s indifference curve. Essentially, the curve represents a consistent amount of output.
What is Isoquant Isocost?
An isoquant shows all combination of factors that produce a certain output. An isocost show all combinations of factors that cost the same amount. Isocosts and isoquants can show the optimal combination of factors of production to produce the maximum output at minimum cost.
Can an Isoquant be a straight line?
Isoquants are curves that represent efficient blend of different inputs such as labor and capital which yield the same (iso) level of output (quantity). When both inputs are perfect substitutes, isoquants are straight line and have a constant slope because one input can be replaced with the other at the same rate.
What is the slope of Isoquant?
The slope of an isoquant at any point is the slope of a tangent line at that point. The slope is called the marginal rate of technical substitution (MRTS). It tells the firm how much capital is needed to replace a unit of labor to maintain the output.
What are the types of Isoquant?
Marginal Rate of Technical Substitution (MRTS) Marginal Rate of Technical Substitution is the proportion at which the one production factor partially replaces the other, to produce consistent output. Linear Isoquant. Smooth Convex Isoquant. Leontief or Right Angled Isoquant. Kinked Isoquant.
What is MRTS equal to?
Marginal rate of technical substitution (MRTS) is the rate at which a firm can substitute capital with labor. It equals the change in capital to change in labor which in turn equals the ratio of marginal product of labor to marginal product of capital. MRTS equals the slope of an isoquant.
Why can’t Isoquants cross?
Therefore, isoquants cannot intersect. An isoquant must always be convex to the origin. This is because of the operation of the principle of diminishing marginal rate of technical substitution. The MRTS diminishes because the two factors are not perfect substitutes.
Why is MRTS negative?
1. If both marginal products are positive, the slope of the isoquant is negative. If the MRTS also diminishes as the quantity of labor increases along an isoquant, the isoquants are convex to the origin.
What does a straight line Isoquant mean?
When the production isoquants are straight lines, the MRTS is constant. This means that the rate at which capital and labour can be substituted for each other is the same whatever level of inputs is being used, as Fig. 6.7.
What is an Isocost curve?
A curve showing the combinations of factor inputs that have constant market cost. If firms are acting as price-takers in factor markets, the isocost curve is a straight line, whose slope represents the relative prices of different factors’ services.
What is LAC curve?
The LAC curve is a planning curve because it is the curve which helps a firm to decide which plant is to be established in order to produce an output level consistent with the optimal cost. The firm selects that short run plant which yields the minimum cost of producing the anticipated output level.
What is Isoquant line?
An isoquant (derived from quantity and the Greek word iso, meaning equal), in microeconomics, is a contour line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two or more inputs.