Isoquant: Assumptions and Properties
Isoquant means equal quantity. Isoquant is therefore known as the production indifference curve or equal product curve. As the name itself suggests, an isoquant is the locus of all those combinations of inputs (labour and capital) which yield the same output. Hence, all the points on an isoquant represent different combinations of labour and capital, which can be used to produce the same quantity of output.
Now the question is that, how the different combinations of inputs can yield the same output. The answer to this question is that since there are different techniques of production available in the world, thus, the different techniques of production requires different combinations of inputs. Thus it is possible to produce the same level of output using different combinations of inputs and techniques of production.
Assumptions of Isoquant
The assumptions for deriving an isoquant are as follows:
- There are only two inputs/factors (labour and capital), L and K, to produce a commodity X.
- Labour and capital can be substituted for each other up to a certain limit at a diminishing rate of substitution.
The production function is continuous in nature, indicating that both labour and capital are perfectly divisible in nature and can be substituted in any small quantity.
Given these assumptions, isoquant can be derived based on the following way:
Table: Capital–Labour Combinations and Output
Points | Input Combinations K + L | Output | ||
A | OK4 + OL1 | = 100 | ||
B | OK3 + OL2 | = 100 | ||
C | OK2 + OL3 | = 100 | ||
D | OK1 + OL4 | = 100 |
As it is quite clear from the above table that different input combinations, i.e. point A, B, C, and D, yield the same level of output, 100. Thus an isoquant should pass through these points. Moreover, as can be seen from these combinations that both inputs are substitutes for one another. Now based on all these, we can draw the isoquant as shown in Figure 1:
As represented above, IQ1 yields the same level of output, i.e. 100 units of X using different combinations of l and k. But it is important to note here that the movement from point A to D indicates an increase in the employment of labour and a reduction of capital in the production process.
This clearly indicates that labour and capital are perfect substitutes for each other as the same quantity of X can be produced by either more of labour/less of capital or by more of capital/less of labour.
A higher isoquant represents higher output produced using more of both labour and capital combinations, as represented by IQ2 in the above diagram, which yields 200 units of X.
Isoquants vs Indifference Curves:
An isoquant is analogous to an indifference curve in more than one way. In it, two factors (capital and labour) replace two commodities of consumption. An isoquant shows an equal level of the product, while an indifference curve shows an equal level of satisfaction at all points. The properties of isoquants, as we shall study below, are exactly similar to those of indifference curves. However, there are certain differences between isoquants and indifference curves.
● Firstly, an indifference curve represents satisfaction which cannot be measured in physical units. In the case of an isoquant, the product can be measured in physical units.
● Secondly, on an indifference map, one can only say that a higher indifference curve gives more satisfaction than a lower one, but it cannot be said how much more or less satisfaction is being derived from one indifference curve as compared to the other, whereas one can easily tell by how much output is greater on a higher isoquant in comparison with a lower isoquant.
Properties of Isoquant:
● Negative slope of isoquant: The negative slope of the isoquant implies the substitution of one input for another so that output remains the same. It means that if one of the inputs is reduced, the other input has to be increased so that the total output remains unaffected. Moreover, an isoquant is always negative in the economic region, where the substitution between the inputs is technically efficient.
● Convexity: Isoquants are convex to origin because of the diminishing marginal rate of technical substitution.
Here the marginal rate of technical substitution implies the rate at which one input is substituted for the other input at different levels without affecting the total output. Symbolically,
MRTS is always diminishing because of two reasons:
- No factor is a perfect substitute for another and
- Inputs are subject to diminishing marginal returns.
Hence, if we increase the employment of labour by one unit, then it leads to a decrease in the capital, and this decrease in the capital reduces with the employment of more and more labour by one more unit, keeping the output level the same. Thus, MRTS is diminishing in nature.
Moreover, the isoquants never intersect with each other and are never tangent to each other. Else there will be two possibilities:
- The same combination of inputs can produce two different quantities of the same commodity and
- A given quantity of a commodity can be produced with a smaller as well as a larger input combination.
For instance, consider Figure 2; if the isoquants are as follows, then:
Point M represents that the same level of combination of labour and capital can produce two different levels of output, 100 and 200. Moreover, if we look at point k and point J, then both of them represent that the L2 unit of labour with more capital is yielding 200 output, and the L2 unit with less capital is yielding 100 output.
Hence both of these conditions violate the assumptions of isoquant. Hence, we conclude that due to the problem of inconsistency, isoquant neither intersects nor tangents to each other.
Additionally, higher isoquant represents a higher level of output produced. This is because any combination on the higher isoquant comprises larger input combinations, which will, in turn, produce a higher level of output.
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