Some of the properties of the isoquant curve are as follows: Implies that the slope of isoquant curve is negative. In the short run, there is assumed to be at least one fixed factor input. This generates the law of variable proportion. It means that in a two factor model a firm can vary both labour and capital to increase produc­tion in long run. As the outlay increases, the equilibrium level of output will also increase. Producer’s equilibrium is subject to satisfaction of following two condi­tions: 1. But, if the ʋ is not equal to 1 then the production function will be non-homogenous representing increasing (ʋ > 1) or diminishing (ʋ < 1) return to scale. However, there are two dissimilarities between isoquant curve and indifference curve. The long-run cost curve is a cost function that models this minimum cost over time, meaning inputs are not fixed. Disclaimer 8. Table-5 shows the marginal rate of technical substitution: Table-5 shows that how much labor is required to replace one unit of capital while keeping the output same for all combinations of capital and labor, which is 150. The various assumptions of production function are: It is related to a particular unit of time. It will be the production function for the short run. where TC is either the firm's short run cost function or its long run cost function, depending on whether we are interested in short run or long run supply. More the distance of a line from the point of origin higher will be the total outlay. This shows that capital is substituted by labor, while keeping the output unaffected. A commonly discussed form of long run production function is the Cobb-Douglas production function which is an example of linear homogenous production functions. Long Run Production Function The Laws of Increasing, Decreasing and Constant Returns to The isoquant analysis will enable us to find out not only the producer’s equilibrium in the long run but will also help us to study returns to scale graphically. The long run is the period of time during which all factors are variable. Hence, the function can be written as —, If λ can be taken out as a common factor, than the increased new level of output will be initial output multiplied by λ powered by ʋ (Greek letter Upsilon). Terms of Service 7. This has been presented in Figure-8.10 and has been discussed below: i. It is indicated that capital contribution in production in US industries was around 75% while rest (25%) by labour. Share Your PPT File. The A, α and β are positive co-efficient. an output constraint), there will only be one isoquant (Q) representing the desired level of output. Here, all factors are varied in the same proportion. It is conceptually similar to the indifference curve of the consumer theory. For example, to produce 100 units of product X, an organization has used four different techniques of production with fixed-factor proportion. Long-run production function - Returns to Scale . Anything longer than that is considered the long run. 10 In terms of the industry, “long run” provides free access to the entrance and exit of companies. At the point of equilibrium, the isoquant should be convex to the origin. Following are the assumptions of isoquant curve: i. This relationship between capital and labor can be expressed as follows: Where, min = Q equals to lower of the two terms, aK and bL. Implies that upper curve of the isoquant curve produces more output than the curve beneath. On isoquant curve Q1, the output produced at A and C is 200 while on Q2 curve the output priced at A and B is 300. Isoquant curve is almost similar to indifference curve. On the basis of these assumptions, isoquant curve can be drawn with the help of different combinations of capital and labor. Consider a secretarial firm that does typing for hire using typists for labor and personal computers for capital. Before publishing your Articles on this site, please read the following pages: 1. However, in economics, there are other forms of isoquants, which are as follows: Refers to a straight line isoquant. In the long run, all factors (including capital) are variable, so our production function is $Q=f\left[L\text{,}K\right]$. As shown in Table-4, when the quantity of labor is increased from one unit to two units, the quantity of capital is decreased from four to three, to keep the level of output constant, which is 200. Report a Violation 11. This is shown in Figure-8.11 and discussed below: i. In the long run, all factors can be changed. The point B on isoquant having Q2 = 300 and point C on isoquant curve having Q1 = 200 with the same amount of labor that is OL2. Further, we do this with the help of the law of variable proportions. The long run total cost function for this production function is given by TC(y,w 1,w 2) = 2y(w 1 w 2) 1/2. 1. "The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. To point out, these variable factors are the ones which we can change over a small period of time, as the number of labour, raw material, fuel, power, etc. However, in real life, there can be several ways to perform production with different combinations of capital and labor. For example, in Table-4, it can be seen when more and more units of capital are used to produce 200 units of output, less or less units of labor are used. The long-run production function is different in concept from the short run production function. Producer employs only two factors of production. SHORT PERIOD PRODUCTION FUNCTIONS: The time period in which some factors of production are fixed while some factors of production are variable, is known as short period.It explains the technical relationship between outputs and inputs in the short run. Higher the value of A, more advanced will be technology. In simple words, a producer will produce any level of output on the expansion path in such a way that both the conditions of equilibrium are satisfied. ii. Now, according to isoquant definition, the output produced at A is the same as produced on B and C points. This will happen when the iso-cost line forms a tangent on a point on the isoquant. This video is, in continuation of Production Function series, describing Long-run Production Function and Law of Return to Scale. Before uploading and sharing your knowledge on this site, please read the following pages: 1. 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