Howdoes a firm use isoquants and isocosts to choose the optimalcombination of inputs? Is it valid to assume that the market in whichthe firm is operating is perfectly competitive? Why or why not? Ifthe market is not perfectly competitive, will the isoquant/isocostanalysis be distorted? Why or why not?
Alsoreferred as equal-product or quantity curve, Isoquantindicates different combinations of two production factors (such aslabor and capital), which results in the same level of output, withreference to time unit. It does can also be summarized as a graphicalrepresentation of different input combinations i.e. labor andcapital. Isoquant graphs are mostly used in the study ofmicroeconomics to estimate the influence of inputs to the level ofoutput that can be achieved (Feller,1972).
Onthe other hand, an Isocost (equal cost line) is the total cost ofproduction, which acknowledges the combinations of any two resourcesthat can be deployed by a firm while given the total cost. Isocostcurves or lines display all possible combinations of inputs that havethe same total cost. An isocost line is used together with isoquantmap which in turn helps to determine the optimum production point(Hirschey,2009).The point at which the isoquant and the isocost line meets, denotesthe lowest-cost combinations of inputs that can in turn lead to theyielding the level of output that is related with the isoquant used.
Isoquantsand Isocosts are used hand in hand, as the two helps in estimation ofthe various and most efficient combinations of resources (Lloyd,2012).The key point with reference to the aspects of isoquant and isocostis that, the most efficient combinations of resources that can bedeployed introduction are experienced where the isoquantis tangent to the budget line.
Itwould be wrong or invalid to assume that, the market at which thefirm is operating is a perfect competition. This due to the factthat, other factors influence the market competition, while thefactors may differ from one firm to the other. However, theimperfectness of the competitive market will not change or impact theisoquant/isocostanalysis. This is due to the fact that, different firms havedifferent and varying resources that affect the isoquant/Isocostanalysis, which may not be impacted by the outside environment suchas the case of factors affecting competitiveness (Lloyd,2012).
Feller,I. (1972). Production Isoquants And The Analysis Of Technological AndTechnical Change. QuarterlyJournal Of Economics, 86(1),154-161.
Hirschey,M. (2009). Fundamentalsof managerial economics.Mason, OH: South-Western/Cengage Learning.
Lloyd,P. (2012). The Discovery of the Isoquant. HistoryOf Political Economy, 44(4),643-661.