Iso Quant And Iso Cost 4u2d1g

What is ISO? Is it International Standards Organization?

YES Here ISO means ‘Equal’

Objective of Business Firms What ever may be the business objective, at the end of the day business objective is to earn more profits.

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How do we achieve this?

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• Optimum efficiency in production i.e. managing your resources • Managing cost of production i.e. trying to minimize it •

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ISO Quant  Equal

ISO Quant  Short of quantity

Basic Concept Building : 1.

Assumption:

An organization’s production function specifies the relationship between use of resource and output, given technology remains unchanged.

2.

Resource Inputs:

§Labour §Capital

Examples:

Farming a piece of land Car Wash

Units of labour per period

Units of capital per period

DEFINITION: An ISOquant is a line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two inputs.

Examples: - labour and capital - Raw materials and production - Machine and labour

Properties of ISO Quant 

Ø ISOquant’s never through origin. 

Ø X-axis is inversely proportional to Y-axis i.e. the two resource inputs are inversely proportional. 

Ø Two ISOquant’s will never intersect 

Ø An ISOquant may run parallel to X or Y axis but will never meet the axis that axis.

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Types of ISO Quant ’ s There are three types of ISO Quant’s

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• Cobb-Douglas ISO Quant (The one that we just saw) • Linear ISO Quant • Leontief ISO Quant

Linear ISOquant P R O P E R T IE S : Capital and labour are perfect substitutes i.e. Q = aK + bL Linear isoquants are independent of the input levels employed. Eg. Buying a Pepsi/Coke for a party. What ever is available you buy it.

Leontief Isoquants PROPERTIES:

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• Capital and labour are perfect complements. 

• Capital and labour are used in fixedproportions. 

• Q = min {bK, cL}  

Eg. 1 machine and 2 workers

ISO Costs

DEFINITION:

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ISOcost line shows all combinations of inputs which cost the same total amount.

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Properties of ISOCost Lines:

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Ø ISOcost line never through origin. 

Ø Two ISOcost lines will never intersect 

Cost minimization or optimal choice of input combinations • Cost minimization or optimal choice of input combinations.

Long Run Expansion Path