Anisoquant is a curve that indicates a combination of certain inputssuch as labor (L) and capital (K) to produce certain output (Q).Isoquants shows the extent to which a firm is capable of producingsame level of output by substituting two different inputs. To thisend isoquants helps firms make adjustment on inputs to maximizeoutputs and profits. Isocosts lines show how a combination of inputscosts leads to total amount. Isocosts are used in cost-minimizationduring production. A firm will use isoquants and isocosts todetermine how well the costs of inputs can be minimized to realizegreater profits (Jeffrey, 2014).
Theisoquant-isocost approach helps in making input substitution toproduce same quantity of products. For instance, the use of barcodereader and computer in a store market can be replaced with a clerkwho records data manually. In this case, change in inputs is meant tominimize cost of service. It is valid to say that the market in whicha firm is operating is competitive when isoquants and isocosts areused. This is because when firms use isoquants and isocosts, the goalis to minimize the cost of production and thus leap more profits(Jeffrey, 2014). For instance, when a firm substitutes barcode at aservice store with manual records, the firm lowers its capital costs.By using the isoquant-isocost approach, firms seek the bestcombination of inputs that produce similar outputs at reduced costs(Stiglitz, 2012).
Lowproduction costs allow firms to maximize on profits in a competitivemarket. For instance, a firm may wish to use capital intensive inputsto produce more services efficiently and fast rates than using laborintensive inputs which is slower and inefficient. The overriding goalis to use inputs whose costs are low but produce optimal product andservices (Hallock, 2007). If the market is not perfectly competitiveisoquants-isocost may not be distorted because a firm will stillmaximize on production and make more profits. Isoquants and isocostshelps in assessing which best combination of inputs a firm may usefor optimal outputs and maximum profits (Stiglitz, 2012). To thisend, even if the market is not competitive, a firm will benefit morefrom low production costs and possibly offer low prices to attractmore customers to the firm.
Hallock,K. (2007). “Review of the book Personneleconomics in imperfect labor markets.”[Electronic version]. Journalof Economic Literature, 45(4),1073-1076.
JeffreyWolcowitz. (2014). Linking the substitution and output effects ofproduction to profit maximization in the intermediate microeconomicscourse. BusinessEducation and Accreditation. Vol. 6. No. 1. Available athttps://www.questia.com/library/journal/1P3-3111354571/linking-the-substitution-and-output-effects-of-production
Stiglitz,Joseph E., (2012). "Rethinking Macroeconomics: What Failed andHow to Repair it," Journalof the European Association,9(4, August): 591-645.