Isocost Curves – Cost Combinations for Inputs
While isoquants show equal output combinations, isocost lines show equal cost combinations of inputs.
1. Meaning of Isocost Line
Isocost line shows all possible combinations of two inputs (labour and capital) which can be purchased with a given total cost at given factor prices.
Assume:
- Wage rate of labour = w
- Rental price of capital = r
- Total cost = C
Then isocost equation:
C = wL + rK
Where L = units of labour, K = units of capital.
Key Concept – Isocost
Isocost line is like a budget line of the firm – it shows how much labour and capital the firm can hire with a given cost.
2. Shape of Isocost Line
- Straight line sloping downwards from left to right.
- When firm uses more labour (L), it must use less capital (K) to keep total cost constant.
Loading diagram…
3. Shifts in Isocost Line
(a) Change in Total Cost (C)
- If total cost increases, with same input prices → isocost line shifts upwards (right) (parallel shift).
- If total cost decreases, line shifts downwards (left).
(b) Change in Factor Prices (w or r)
- If wage rate (w) falls while r and C constant → firm can hire more labour → isocost line pivots.
- Similarly for change in rental price of capital.
4. Isocost Map
- Set of isocost lines for different total cost levels.
- Higher isocost line → higher total cost.
Loading comparison…
5. Quick Revision Points
- Isocost line: C = wL + rK, combinations of L and K with same cost.
- Downward straight line; shifts with change in total cost or factor prices.
- Used together with isoquants to find producer’s equilibrium.
6. Quiz Time 🎯
Loading quiz…