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Laws Of Returns The Isoquant Isocost Approach

 Laws of Returns The Isoquant Isocost Approach


            An Isoquant is a curve on which the diverse mixtures of labour and capital prove the same productivity. As per Cohne and Cyret “An isoproduct curve is a curve along which the maximum achievable rate of production is constant.” It is also identified as a production indifference curve or a constant product curve. Just as an indifference curve representing the various mixtures of any two products that offer the consumer the same amount of satisfaction – iso utility, likewise an Isoquant designates the an assortment of mixtures of two aspects of production which offer the manufacturer the equal intensity of productivity per unit of time.

Isoquants Vs. Indifference Curve

            An Isoquant is equivalent to an indifference curve in a quantity of ways. In it, two factors (labour and capital) reinstate two articles of consumption. An Isoquant presents same amount of goods while in indifference curve gives same amount of contentment at all points. The properties of Isoquants as we are going to discuss are unerringly to those of indifference curves. Nevertheless there are definite differences amidst the two.

  1. An indifference curve embodies contentment which cannot be calculated in physical units.
  1. On an indifference sketch, one can only say that a higher indifference curve gives many contentment than a lower one, however it cannot be said how much more or less contentment is being derived from one indifference curve corresponding to the other whilst one can easily judge by how much productivity is greater on a higher Isoquant relating to a lower Isoquant.

Properties of Isoquant

  1. Isoquants are negatively inclined – If they do not posses such a slope definite logical irrationality occurs. If the Isoquants inclines rising to the right, it entails that both capital and labour augment except they produce the same productivity.
  1. An Isoquant lying above and to the right of one more stands for a advanced productivity level.
  1. No Isoquants can intersect each other. In the illogical sense if they tend to intersect each other, those combinations cannot be both less and more productive at the same time. Therefore, two Isoquants cannot intersect each other at any point.
  1. Isoquants need not be corresponding since the rate of substitution amidst two factors is not essentially the same in all Isoquant programmes.
  1. Amidst two Isoquants there can be a number of Isoquants presenting diverse levels of productivity which the mixture of the two aspects can capitulate.
  1. Units of productivity presented on Isoquants are random or any other variables can be presented.
  1. No Isoquants can touch either axis – If it touches X axis, it would indicate that the product is being produced with the help of labour only devoid usage of capital. Hence this fact is logically incorrect and the actuality is they can touch the axis.
  1. Each Isoquant is convex to the origin – As further units of labour are engaged, lesser and lesser units of capital are used. Thus the Isoquants are convex to the origin due to diminishing marginal rate of substitution.
  1. Ridge Lines are the locus of the points of Isoquants where the marginal products of factors are nil. The top ridge line entails nil MP of capital while the lower, nought MP of labour. Manufacture methods are merely competent within the ridge lines. The marginal products of factors are negative and techniques of production are incompetent external the ridge lines. Thus ridge lines show the fiscal area of manufacture.

Isocost curves and Expansion Path

            After learning the nature of Isoquants that represents the possible productivity of a firm from a given combination of two contributions, we surpass the next aspect, prices of contributions that are represented on the Isoquant sketch by the Isocost curves. These curves are also acknowledged as cost lines, price lines, input price lines, factor cost lines, constant outlay lines etc. Each Isoquant curve corresponds to the diverse combinations of two inputs that a firm can purchase for a given sum of money at the given price of each input.

The principle of Marginal Rate of Technical Substitution

            The principle of marginal rate of technical substitution is based on the production function where two factors can be substituted in diverse magnitude in such a way as to manufacture a stable intensity of productivity. Salvatore defines as “The marginal rate of technical substitution is the amount of an output that a firm can give up by increasing the amount of the other input by one unit and still remain on the same Isoquant.”

The Law of Variable Proportions

            The performance of the law of variable proportions are of short run production function when one factor is invariable and the other variable, can also be explained in the terms of Isoquant analysis. For instance, capital is a fixed factor and labour is a variable factor. The portion of the Isoquant that lies outside the ridge lines, the marginal product of that factor is negative.

The Laws of Returns to Scale: Production Function with two variable inputs

The laws of returns to scale can also be elucidated in stipulations of the Isoquant approach. “The laws of returns to scale refer to the effects of a change in the scale of factors upon output in the long run when the combinations of factors are changed in some proportion.” If by increasing two factors say labour and capital in the same proportion, productivity augments in exactly the same proportion there are invariable returns to the scale.

Increasing Returns to Scale

  1. There may be indivisibilities in machines, management, labour, finance etc. A little item of equipment or some activities have a minimum size and cannot be divided into smaller units.
  1. Increasing returns to scale also result from specialisation and division of labour, when the scale of firm enlarges, there is a broader exposure for specialisation and division of labour.
  1. As the firm enlarges, it enjoys internal economies of production. It may be able to install better machines, sell its products more easily, borrow money cheaply, procure the services of more efficient manager and workers etc.

Decreasing Returns to Scale

  1. Indivisible factors may become incompetent and less productive.
  1. The firm experiences internal diseconomies. Business may become unwieldy and produce problems of supervision and coordination. Large management creates complexities of control and rigidities.
  1. To these internal diseconomies are additional external diseconomies of scale. These occur from higher factor price or from diminishing productivity of the factors.

Constant Returns to Scale

  1. The returns to scale are invariable when internal economies enjoyed by a firm are neutralised by internal diseconomies so that productivity amplifies in the same ration.
  1. One more reason is the balancing of external economies and external diseconomies.
  1. Invariable returns to scale also result when factors of production are perfectly divisible, substitutable, standardised and their supplies are perfectly elastic at given prices.

That’s why in the case of invariable returns to scale, the production function is ‘homogeneous of degree one’.

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