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The concepts of Law of Variable Proportions, MRTS, and Isoquants in Economics. It describes how to calculate MRTS and what it tells us. It also discusses the properties of isoquants and their importance in identifying the efficient range of production. Additionally, it explains the concept of diseconomies of scale and the factors that contribute to it. diagrams and examples to illustrate the concepts.
Typology: Exercises
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What Is the Marginal Rate of Technical Substitution – MRTS?
Properties of Isoquants
1. An isoquant lying above and to the right of another isoquant represents a higher level of output. This is because of the fact that on the higher isoquant, we have either more units of one factor of production or more units of both the factors. This has been illustrated in figure 3. In figure 3, points A and B lie on the isoquant IQ 1 and IQ 2 respectively. At point A we have = OX 1 units of Labor and OY 1 units of capital. At point B we have = OX 2 units of Labor and OY 1 units of capital. Though the amount of capital (OY 1 ) is the same at both the points, point B is having X 1 X 2 units of labor more. Therefore, it will yield a higher output.Hence, it is proved that a higher isoquant shows a higher level of output. 2. Two isoquants cannot cut each other Just as two indifference curves cannot cut each other, two isoquants also cannot cur each other. If they intersect each other, there would be a contradiction and we will get inconsistent results. This can be illustrated with the help of a diagram as in figure 4.
4. No isoquant can touch either axis If an isoquant touches the X-axis it would mean that the commodity can be produced with OL units of labor and without any unit of capital. Point K on the Y-axis implies that the commodity can be produced with OK units of capital and without any unit of labor. However, this is wrong because the firm cannot produce a commodity with one factor alone. 5. Isoquants are negatively sloped An isoquant slopes downwards from left to right. The logic behind this is the principle of diminishing marginal rate of technical substitution. In order to maintain a given output, a reduction in the use of one input must be offset by an increase in the use of another input.
Figure 8 shows that when the producer moves from point A to B, the amount of labor increases from OL to OL 1 , but the units of capital decreases from OK to OK 1 , to maintain the same level of output. The impossibility of horizontal, vertical or upward sloping isoquants can be shown with the help of the following diagrams. Consider figure 9(A) At point A, we have OL units of labor and OK units of capital and at B, we have OL 1 units of labor and OK units of capital. OL 1 + OK > OL + OK, and so combination B will yield a higher output than A. Therefore, points A and B on the IQ curve cannot represent an equal level of the product. Hence, the isoquant cannot be a horizontal straight line like AB. Consider figure 9(B) At point A, we have OL units of labor and OK units of capital. At point B, we have OL units of labor and OK 1 units of capital.
An important feature of an isoquant is that it enables the firm to identify the efficient range of production consider figure 11. Both the combinations Q and P produce the same level of total output. But the combination Q represents more of capital and labor than P. combinations Q must therefore be expensive and would not be chosen. The same argument can be made to rule out combination T or any other combination lying on a portion of the isoquant where the slope is positive. Positively sloped isoquants imply that an increase in the use of labor would require an increase in the use of capital to keep production constant. In general, for any input combination on the positively sloped portion of an isoquant, it is possible to find another input combination with less of both the inputs on the negatively convex portion that will produce the same level of output. Therefore, only the negatively sloped segment of isoquant is economically feasible.
In figure 12, the segment P 1 S 1 is the economically feasible portion of the isoquant for IQ. If we consider such feasible portions for all the isoquants, then the region comprising of these portions is called the economic region of production. A producer will operate in this region. It is shown in figure 12. The lines OP 1 P 2 and OS 1 S 2 are called ridge lines. Ridge lines may be defined as lines separating the downward sloping portions of a series of isoquants from the upward sloping portions. They give the boundary of the economic region of production.
Economies of scale: Savings that arise from increasing scale
Diseconomies of scale: Additional costs that arise from increasing scale
The relation between economies of scale and diseconomies of scale