PRODUCER’S EQUILIBRIUM WITH THE HELP OF ISO QUANT CURVES

•     PRODUCER’S EQUILIBRIUM
WITH THE HELP OF ISO QUANT CURVES

•     BUSINESS ECONOMICS/MANAGERIAL ECONOMICS/MICRO

•     DR SHASHI AGGARWAL

•     ISO COST LINE

•     INDICATES THE DIFFERENT COMBINATIONS OF TWO FACTORS WHICH THE PRODUCER CAN PRODUCE AT A GIVEN FACTOR PRICE  WITH A GIVEN OUTLAY

•     LOCUS OF ALL THE COMBINATIONS OF TWO ( OR MORE INPUTS WHICH THE PRODUCERS CAN BUY USING HIS FIXED OUTLAY AT FIXED INPUT PRICES.

•     ISO COST LINE IS ALSO KNOWN AS FACTOR PRICE LINE OR OUTLAY LINE OR FIRM’S BUDGET CONTROL LINE

•     DEFINITION OF ISO COST LINE

•     PROF BARTH WAL,” IT IS LOCUS OF ALL COMBINATIONS OF TWO OR MORE INPUTS WHICH THE PRODUCER CAN BUY USING HIS FIXED OUTLAY AT FIXED INPUT PRICES

•     LET US ASSUME THAT FIRM HAS FIXED SUM OF RS 500 TO SPEND ON TWO FACTORS LABOUR AND CAPITAL

•     UNIT OF LABOUR COST RS 50

•     UNIT OF CAPITAL COST RS 100

•     ISO COST LINE

•     ISO COST LINE

•     ISO COST LINE

•     GRAPH

•     EXLANATION

•     IT GIVES ALL COMBINATIONS OF LABOUR AND CAPITAL AT EQUAL COST

•     DEPENDS UPON TWO THINGS :-

•               THE PRICES OF TWO FACTORS OF PRODUCTION

•               TOTAL OUTLAY

•     ISO COST LINE

•     GRAPH

•     ISO COST CHANGE IN THE PRICE OF FACTOR

•     GRAPH

•     PRODUCER’S EQUILIBRIUM

•     CHOOSE THAT COMBINATION OF FACTORS WHICH MINIMIZES THE TOTAL COST FOR ANY GIVEN LEVEL OF OUTPUT.

•      A RATIONAL FIRM SEEKS MAXIMISATION OF ITS PROFIT AND MAXIMIZATION OF PROFIT MEANS MINIMIZATION OF COST. EQUILIBRIUM REFERS TO SATE OF REST WHEN NO CHANGE IS REQUIRED.

•     A PRODUCER WHILE IN EQUILIBRIUM WILL CHOOSE THAT COMBINATION OF FACTORS OF PRODUCTION WHICH MINIMIZES THE TOTAL COST FOR ANY GIVEN LEVEL OF OUTPUT OR WHAT AMOUNT TO BE SAME THING FOR A GIVEN OUTLAY OR EXPENDITURE THE PRODUCER WILL TRY TO MAXIMIZE THEIR OUTPUT

•     ASSUMPTIONS

•     ASSUMPTIONS:-

1.       TWO FACTORS

2.       ALL THE UNITS OF BOTH THE FACTORS ARE HOMOGENEOUS

3.       PRICES ARE GIVEN

4.       TOTAL MONEY OUTLAY IS GIVEN

5.       PERFECT COMPETITION IN THE FACTOR MARKET

•     CONDITIONS OF EQUILIBRIUM

•     AT THE POINT OF EQUILIBRIUM THE ISO COST LINE MUST BE TANGENT TO THE ISO QUANT CURVE. SLOPE OF ISO QUANT CURVE=SLOPE OF ISO COST CURVE

•     AT POINT OF TANGENCY ISO QUANT CURVE IS CONVEX THAT IS MARGINAL RATE OF TECHNICAL SUBSTITUTION GOES ON DIMINISHING

•     OPTIMUM COMBINATION IS WHERE

•     MRTS_LK =P_L/P_K

•     MRTS_LK =MP_L/MP_{K  =} P_L/P_K

MP_L/P_L  =MP_K/P_K

_{MARGINAL PRODUCT OF LAST RUPEE SPENT ON EACH INPUT MUST BE EQUAL.}

_{SLOPE OF ISO QUANT=SLOPE} OF ISO COST LINE

•     GRAPH

•     DETERMINATION OF PRODUCER’S EQUILIBRIUM

•     OPTIMUM COMBINATION IS WHERE

•     

 •POINT K AND M ALSO SATISFY THE TANGENCY CONDITIONS AND MOREOVER THEY LIE WITH IN THE REACH OF THE PRODUCER BUT AT THESE POINTS THE FIRM REMAINS AT LOWER POINT WHICH YIELD LESSER OUTPUT

•E IS THE POINT OF EQUILIBRIUM WHERE THE PRODUCER EMPLOY ES THE OL UNIT OF LABOUR AND OK UNITS OF CAPITAL

•THE SLOPE OF ISO QUANT IS THE MARGINAL RATE OF TECHNICAL SUBSTITUTION ( MRTS) AND THE SLOPE OF THE ISO COST LINE INDICATES THE FACTOR RATION

•OPTIMUM COMBINATION IS WHERE

•MRTS_LK =P_L/P_K 

•(( MARGINAL RATE OF TECHNICAL SUBSTITUTION CAN BE WRITTEN AS THE RATIO OF MP OF LABOUR TO MARGINAL PRODUCT OF CAPITAL

•MRTS_LK =MP_L/MP_{K  =} P_L/P_K   ,   MP_L/P_L  =MP_K/P_K

•     EXPANSION PATH

•     GRAPH