Understanding Iso-cost in Economics
Discover how iso-costs in economics represent combinations of factors that cost the same to employ, along with the significance of iso-cost lines in production budget management and factor pricing.
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Presentation Transcript
An iso-cost shows all the combinations of factors that cost the same to employ. A curve showing the combinations of factor inputs that have constant market cost. If firms are acting as price-takers in factor markets, the iso- cost curve is a straight line, whose slope represents the relative prices of different factors' services.
Iso-cost lines Iso-cost lines represent the prices of factors. An iso-cost line graphically represents all the combinations of the inputs which the firm can achieve with a given budget for production or given outlay. Suppose the firm has 100 Rs. which it can spend on combinations of factor X and factor Y, the former priced at Rs. 10 per unit and the latter priced at Rs. 20. The firm can spend the entire amount on factor X or factor Y. Further, there will be various combinations of both factors which amount to the outlay. The iso-cost combinations. Q1, Q2 and Q3 are three different isocosts. The isocost on the right represents a higher outlay. line represents all these
