Isoquent Curves
Isoquant analysis has been used by the economists to explain and illustrated returns to scale. We have already discussed the concept of returns to scale in the preceding chapter. We know that return to scale in the preceding to the behavior of output in response to change in the scale of operations of a firm when all factors inputs are changed in same constant proportion given the state of technology there are three aspects of scale (i) increasing Returns to scale (ii) Diminishing returns to scale and (iii) Constant returns to scale.
(i) Increasing returns to scale: If the output production process increases at a faster rate of increase in an output remaining the same then the returns to scale are the production function with increase. It shows production line between a movement 2 units to 4 and output more than doubles from 50 units to 130 units. The length AB which is greater than length AB which is greater than length BC.OA >AB>BC
(ii) Decreasing returns to scale: when an increase in all inputs a production process leads to a less than proportion increase in output there is decreasing returns to scale. It is clear that the producer is unable to double the output. There are diminishing returns to scale are due to diseconomies of scale.
(iii) Constant returns to scale: constant returns to scale refers to situations in which expansion in output happens to just proportionate to the expansion in factor outputs. In other words doubling the inputs doubles the output. This is seen in the input proportion.
A better approach: in the earlier discussion we have shown three different cases of returns to scale which are different. This is not a very realistic description of the situation. Generally the three returns to scale increase phase of a single production functions. Normally in a production unit the increasing returns is in a operation in the initial stages. After a point there is a phrase of constant returns to scale where output increase in the same proportion as inputs. Empirical evidence suggests that the phrase continue to expand then eventually a point of time will occur due to mounting difficulties of varying returns to scale.
The line OR the expansion path of the firms showing the changes in output with a change in the factor proportion remain same. Increasing return section PR with other section RU where the Isoquant are of equal distance apart decreasing isoquants becoming farther apart factor inputs are needed to produce the same increase in output.
Isoquent Curves
Returns to scale can be explained more clearly with the help of Isoquant curves. Before we proceed to study the returns to scale with the help of Isoquant we will do well to observe the distinction between proportion and scale. The term proportion may be defined as the combination of one fixed factor with a number of variable factors. The idea of proportion is implicit in the law of diminishing returns. According to this law land is the fixed factor while labour is the variable factor. Since it remains fixed, while, labour vary, the proportion between the two factors undergoes a change. It is on account of this change in the law of diminishing returns come into operation. The concept of proportion is a short term concept because all the factors cannot be increased in the same proportion in the short period in account of the non availability of adequate time.
The term scale in the contrary is different. It does not involve any change in factor proportions as the term proportion does. The factors proportions remain constant despite the changes in the quantities of factors.
The difference between the changes in factor proportions will become clear from the study of
In this RS line is parallel to OX It indicates the proportion. The firm moves along RS to the right to produce outputs of 100, 150 and 200 units respectively. What it implies is that the firm keeps capital constant at OR while it goes on increasing the variable factor labour. Thus the movement along the line RS represents variation in factor proportions. Likewise, a vertical line MN parallel to the Y axis is drawn which is also indicate changes in factor proportion. But in this case will remain fixed while the quantity of capital will vary.
Now drawn a straight line OB passed through the origin. It will be seen along the line OB the inputs of both the factors labour and capital vary. Moreover because the line through the origin the ratio between the two proportion between capital and labour. The slope of line OB indicates doubt; indicate increased quantities of capital and labour to raise the output from 100 to 250 units, but the proportion between the two factors remains unchanged:
Factor Y (capital)/ FactorX (labour) = EI/ OI = FJ/ OJ = GK/ OK = HL/ OL
If any other straight line OB passed through the origin it will be seen that along line OB is a straight line through the ratio between the two proportions between capital and labour. The points E, F, G, H on the line OB no doubt indicate increased quantities of capital and labour between the two factors remain same:
The distinction between proportion and scale can be expressed as follows : any critical and horizontal line can drawn from any point on the OY axis in an Isoquant map indicates proportion while any line on the OY axis in any line drawn from the point of origin in an Isoquant map shows the scale.
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