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Isocost v. Isoquant Graph. In the simplest mathematical formulation of this problem, two inputs are used (often labor and capital), and the optimization problem seeks to minimize the total cost (amount spent on factors of production, say labor and physical capital) subject to achieving a given level of output, as illustrated in the graph.
Wire-grid Cobb–Douglas production surface with isoquants A two-input Cobb–Douglas production function with isoquants. In economics and econometrics, the Cobb–Douglas production function is a particular functional form of the production function, widely used to represent the technological relationship between the amounts of two or more inputs (particularly physical capital and labor) and ...
In managerial economics, isoquants are typically drawn along with isocost curves in capital-labor graphs, showing the technological tradeoff between capital and labor in the production function, and the decreasing marginal returns of both inputs. In managerial economics, the unit of isoquant is commonly the net of capital cost.
The slope is -w/r which represents the relative price. Any point within the isocost line indicates that there are surplus after purchasing the combination of labor and capital at that point. Any point outside the isocost line indicates that the combination of labor and capital is not enough to be purchased at the given cost.
Since capitalists purchase labour and capital out of the same common pool of available yet scarce labor and capital, it is essential that their plans fit together in at least a semi-coherent fashion. Hayek (1937) defined an efficient planning process as one where all decision makers form plans that contain relevant data from the plans from others.
The average product of labor (APL) is the total product of labor divided by the number of units of labor employed, or Q/L. [2] The average product of labor is a common measure of labor productivity. [4] [5] The AP L curve is shaped like an inverted “u”. At low production levels the AP L tends to increase as additional labor is added.
So, the employer also buys unproductive labour because the employer's costs in this respect are lower than the loss of value that would occur, if he did not employ unproductive labour to maintain capital value, and to prevent loss of capital value. For example, cleaning work might seem a very menial and low-value activity, but if business ...
For example, when inputs (labor and capital) increase by 100%, the increase in output is less than 100%. The main reason for the decreasing returns to scale is the increased management difficulties associated with the increased scale of production, the lack of coordination in all stages of production, and the resulting decrease in production ...