Unit 3: Production With Two Variables Inputs and Isoquants: Dr. Ruma Kundu

Unit 3: Production with
Two Variables Inputs

and Isoquants
By
Dr. Ruma Kundu
Production with two variables inputs and
Isoquants
Suppose x1 and x2 are the two factors of production which

are variable and perfectly divisible. q be the level of out
put then the production function states that q=f(x1,x2). The
two factors of production are substitutable and we can
employ more of one factor and less of another factor to get
the same amount of output.
Now if the output level is constant at q0 then we can get
the equation of the isoquant which is given by q0= f(x1,x2).
What is Isoquant / Equal Product Curve?
It is the locus of different combinations of x1 and x2 that can
produce a given level of output (q0). The equation of the
isoquant is given by q0= f(x1,x2). For one possible level of
output we shall get one isoquant. A higher output level is
represented by a higher isoquant and a lower output level is
represented by a lower isoquant
Characteristics / Properties of Isoquant
1. Downward sloping
2. Convex to the origin
3. No two isoquants can cut or touch each other
4. Higher the isoquant, higher the level of output
What is Marginal Rate of Technical Substitution or Rate of
Technical Substitution (MRTS or RTS)?
The –ve of the slope of the isoquant (- dx2 / dx1) is called MRTS or RTS
between the two factors. It is the rate at which the input x1 can be
substituted for the input x2 in order to obtained the same level of output.
Thus MRTS12=- dx2 / dx1=f1/f2=MP1/ MP2.
Laws of Returns to Scale
It is a long run concept where both the inputs can be changed
simultaneously. A change in scale means proportionate change in all
inputs. Thus if all the inputs are doubled, the scale of the production
process is said to be doubled. Returns to Scale refer to the relation
between the change in the output level and change in the scale of the
production process.
There are 3 types of Returns to Scale:
1. Constant Return to Scale (CRS)-When total output
1.
changes in the same proportion in which the
scale changes.
2. Increasing Return to Scale (IRS)- When total
2.
output changes at a greater proportion in which
the scale changes.
3. Decreasing Return to Scale (DRS)- When total
3.
output changes at a lower proportion in which the
scale changes.
Isocost Curves / Lines
In the neo-classical theory of production it is assume that
input prices are given and the firm wants to spend a given
amount of money (say C0). If r1 and r2 be the prices of x1
and x2 then the equation of the Isocost line is: C0=r1x1+r2x2
i.e., x2=-r1/r2*x1+ C0/r2
This is an equation of a straight line with –ve slope (-r1/r2)
and the +ve vertical intercept (C0/r2). This line gives us
different combination of x1 and x2 foe which cost is the
same. The firm can produce on any point of the Isocost
line represented by AB in figure for a given cost. However
if the cost increases the Isocost line will shift parallely
upward.
Choice of best-input combination
Suppose the firm has decided to produce a given level of output. An Isoquant
represents this given level of output. All points on this Isoquant will yield that
given level of output. The question is, at which point will the profit of the firm be
maximum? Similarly, let us suppose the firm has decided to spend a given
amount of money. For this cost level, we shall get an Isocost line. At all points on
this Isocost line, the level of cost is the same. But different points on this Isocost
line represent different input combinations. The question is which one of them is
the best?
Let us see how the best or optimum input combination on an Isoquant or on an
Isocost line can be determinant. We assume that the firm wants to maximize
profit. The input combination, which yields maximum profit to the firm, will be
called the best or optimum input combination represented by the equilibrium
point. Now profit can be maximized in one of the following three ways:
a. Maximization of output subject to a given cost
b. Minimization of cost subject to a given output
c. Maximization of the difference between total revenue
and total costs.
What is Expansion Path (EP)?
It is the locus of all input combinations for which MRTS=factor price
ratio. In other words it is the locus of tangency points between Isoquant
and parallel Isocost lines. The points on the Expansion path are the
most efficient combinations of the two factors. On the Expansion Path,
slope of isoquant= slope of isocost line
i.e., f1 / f2=r1 / r2 -this is the equation of the EP
Along any EP, the cost production increases, input prices remaining the
same. There will be an output effect along the EP. If both the factors are
non-inferior, EP will be upward rising. But it may be backward bending
or downward sloping after some point if one of the factors becomes
inferior.

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Unit 3: Production with

Two Variables Inputs

Suppose x1 and x2 are the two factors of production which

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