Concept of isocost, Managerial Economics

The concept of isocost

In the use of resources, firms are faced with opportunity cost.  For every addition of say capital, they must forego a unit of say labour.

Exposition:                                               

194_isocost.png

Suppose the firm pays:

W for L (labour)

r for k (capital)

If C is the Total Cost (TC), then

C = rk + WL.  So if C is given as c, then the producer can choose among various combinations e.g.

                        k = C - WL

                              r     r

Thus if he spends all the money on k then he shall be at A and if he spends all the money on L then he shall be at B.  At A he spends C while at B he shall also spend C.  The line joining A and B is called Isocost line and is defined as locus of all different combinations of factors the firm can purchase given a stipulated money outlay and factor prices.

Posted Date: 11/28/2012 4:49:43 AM | Location : United States







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