The isocost and isoquant line are used to determine the cost minimising level of output produced by a competitive firm.
The isoquant is defined as all the feasible combinations of inputs used to produce a given level of output. In the illustration above we have an commodity which is produced using capital and labour. The illustrations depicts an outcome where 10 units of the commodity is being produced. We can see from the illustration that to produce 10 units of output, we can either use:
- 11 Units of capital and 3 units of labour
- 5 units of capital and 5 units of labour
- 3 units of capital and 11 units of labour
The idea that the isoquant captures is that there is diminishing returns to each input.
The isocost line shows all the different combinations of inputs that could be purchased for a given level of costs. The illustration above depicts an isocost curve where the total cost is $10, the wage rate is $1 and the rental rate of capital is $1. In this case, we can see that we can purchase:
- 10 units of capital and 0 units of labor
- 5 units of capital and 5 units of labor
- 0 units of capital and 10 units of labor