Managerial Economics

PRODUCTION THEORY PRODUCTION FUNCTIONS WITH TWO VARIABLE INPUTS Reported by: Nino Reiner F. Badiola PLM MBA 6 Managerial Economics Dr. Carlos Manapat

DISCUSSION • Isoquant Curves • Marginal Rate of Technical Substitution (MRTS) • Isocost Lines • Least Cost Combination •

PRODUCTION ISOQUANTS • The term Isoquant derived from Iso, meaning Equal, and Quant, from Quantity. • Curves showing all possible combination of inputs that yield the same output. • Locus of points showing that different combinations of factor-inputs give the same quantity of output. • Equal Product Curve

INPUT COMBINATION

PRODUCTION ISOQUANT

EFFICIENT COMBINATION

PRODUCTION ISOQUANTS AND THE THREE STAGES OF PRODUCTION

MARGINAL RATE OF TECHNICAL SUBSTITUTION (MRTS) • The rate at which one input may be substituted for another input in the production process, while total output remains constants. • Amount of one input factor that must be substituted for one unit of another input factor to maintain a constant level of output. • Algebraically, 



MRTS = ΔY / ΔX

MRTS

ISOCOST LINES

COST MINIMIZATION SUBJECT TO AN OUTPUT CONSTRAINTS

OUTPUT MAXIMIZATION SUBJECT TO A COST CONSTRAINTS

ISOQUANT CURVES AND ISOCOST LINES