PRODUCTION THEORYPRODUCTION FUNCTIONS WITH TWO VARIABLE

INPUTS

Reported by: Nino Reiner F. Badiola

PLM MBA 6

Managerial EconomicsDr. 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

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

Thank you!