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Theory Of Production And Cost

Production Optimisation

Suppose you’re a producer of a commodity of your choice. Probably, thoughts about profit might’ve struck your mind upon reading the previous line. Technically, a producer generally reaches profit through production optimisation. Isoquants and iso-cost lines specify the production optimisation point.

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Isoquants

Breaking the word isoquant into its individual components can easily explain its meaning. Iso means equal and quant means quantity. Hence, isoquant is a graphical representation of all the various combinations of inputs which are equal in the eyes of the producer as they produce the same level of output.

Isoquants are called equal-product or iso-product curves. Again, as all the combinations yield the same level of output the producer tends to be indifferent among them. Hence, isoquants are also known as producer indifference curves. Further, isoquants share resemblances with the indifference curves.

Production Optimisation

But note that there is one major difference between an indifference curve and an isoquant. It is not possible to quantify the level of a consumer in an indifference curve however we can easily quantify a producer’s level of production using an isoquant. An isoquant on the right represents a higher level of production whereas an isoquant on the left represents a lower level of production.

Iso-Cost lines

Iso-cost lines represent the prices of factors. An iso-cost line graphically represents all the combinations of the inputs which the firm can achieve with a given budget for production or given outlay.

Suppose the firm has 100 Rs. which it can spend on combinations of factor X and factor Y, the former priced at Rs. 10 per unit and the latter priced at Rs. 20. The firm can spend the entire amount on factor X or factor Y.

Further, there will be various combinations of both factors which amount to the outlay. The iso-cost line represents all these combinations. Q1, Q2 and Q3 are three different isocosts. The isocost on the right represents a higher outlay.

Production Production

Production Optimisation

Isocosts and Isoquants can together help us to determine the optimum production for a firm. We can achieve production optimisation in two ways. Either we can maximize the production for a given outlay or we can minimize the cost of producing a given level of output.

In case a firm has decided to achieve a given level of production, the next step would be to choose the combination of factors to achieve this target. Definitely, a rational firm would choose the least cost combination. This least cost combination is found out by superimposing the iso-quant on the iso-cost line.

Production Optimisation

We define the least-cost combinations for three different iso-quants show above at a point where the isocosts are tangential to the isoquants. Evidently, the least cost combination for a given isoquant is at the point of tangency of the isoquant with the isocost line.

Solved Example For You

Q: How does an iso-quant differ from an indifference curve?

Ans: An iso-quant and an indifference curve share a lot of properties. However, an iso-quant is a graphical representation of all the combinations of factor inputs among which the producer is indifferent. Whereas, an indifference curve is a graphical representation of all the combinations of goods and services among which the consumer is indifferent.

Further, we cannot quantify the level of satisfaction of a consumer on an indifference curve. On the other hand, quantification of a producer’s level of output is pretty much possible on an iso-quant. Evidently, an iso-quant on the right represents a higher level of output. Whereas an iso-quant on the left represents a lower level of output.

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