Learn Economics by Dr. Swati Gupta

Expansion Path Expansion path is the locus of the least-cost input combinations for producing various levels of output assuming that input prices remain constant. Expansion path occurs on that points where iso-cost line and isoquant are tangent to each other. When the scale of production expands, the firm will be in a position to hire larger factor-inputs and attain higher isoquants. As the outlay of the firm increases, the isocost lines shift to the right and it will be parallel to the original line as the factors price remains constant. It is clear from the diagram, as the total outlay increases, isocost lines moves to the right parallel to the previous one from LM to L1M1, L2M2, and L3M3, and so the isoquants. Optimum combinations also shift to the right A to B to C to D. The equilibrium path along which production expands as the total outlay is increased is called the expansion path. All point on the expansion path represents the equilibrium points where isoquants and isocost ...

Long-Run Production Function[With All Inputs Variable] /Returns to Scale Returns to Scale measures the increase in output when all the inputs are increased in the same proportions. The concept of returns to scale is a long-run phenomenon. It explains the behavior of output in response to a proportional and simultaneous change in inputs. When a firm expands its scale by increasing all the inputs proportionately, then, there are three technical possibilities, and, accordingly, there are three kinds of returns to scale: 1. The total output may increase more than proportionately, i.e, increasing returns to scale. 2. The total output may increase proportionately, i.e, constant returns to scale. 3. The total output may increase less than proportionately, i.e, diminishing returns to scale. Increasing returns to scale : It is said to operate when the firm increases the quantity of all the factors proportionately. It leads to a more than proportionate increase in output. Suppose i...

  Economies and Diseconomies of Scale Economies of scale are defined as the benefits that a firm can achieve by expanding its scale of production in the long run. When the firm increase its production on a large scale, it helps to reduce the production cost and establish an optimum size of a firm. There are two types of economies: Internal Economies External Economies 1-Internal Economies: The internal economies arise within a firm itself when it increases the scale of production. There are the following types of internal economies of scale: Technical Economies- These economies arise because of technological improvements and the use of modern techniques of production. When a firm increases the scale of production, it becomes easy to take the mechanical advantage of the use of a large machine. Large machines are more productive and use proportionately less energy. Large scale reduces the cost of production by adopting the latest inventory management techniques. It is also possible ...

  Iso-Cost Line/ Outlay Line Iso-Cost Line:  Iso-cost line represents the different combinations of the two inputs which the firm can purchase at the given prices and the given amount of the total outlay which a firm wants to spend. It is also known as price-line, outlay-line, factor cost line, or budget-line. Suppose the producer has total outlay Rs. 15 to spend on two inputs factor X and factor Y and the price of factor X is Rs 3 per unit and the price of factor Y is Rs 1 per unit. With Rs.15, he can purchase 5 units of factor X [=OF] or 15 units of factor Y[OA]. By joining points A, B, C, D, E, and F, we get the Iso-cost line. It is also called the Price line, Outlay line, or Budget line. This line shows all possible combinations of two factor X and factor Y which the producer can purchase with the given outlay. A producer can purchase any of the combinations of two factors, falling on the line on AF, such as B, C, D, E.  A combination like H is unattainable as it li...

  Optimum Input combination or Least cost Combination A profit-maximizing firm seeks to minimize its cost for a given output or to maximize its output for a given total cost. There are various combinations of factors of production available to produce a given output but a rational producer would seek to produce that output with the ‘optimum’ or ‘least cost’ combination of factors of production. Maximum output with minimum cost is possible at the equilibrium point where the Isoquant curve is tangent to the Iso-cost line. Isoquant curve: An isoquant curve is locus of points representing various combinations of two inputs-capital and labor- yielding the same output. In other words, an isoquant curve shows all those combinations of two variable inputs which yield a given quantity of product. Isoquant Map A number of isoquants representing different amount of output are known as isoquant map. Higher isoquant curve shows higher quantity of output. Iso-Cost Line: Iso-cost line repre...

Consumers equilibrium through indifference curve and budget line Consumer's Equilibrium:   The consumer is said to be in equilibrium when he maximizes his total utility, given his income and market price of the goods he consumes. The ordinal utility approach specifies two important tools for the consumer's equilibrium mentioned below: 1. consumer's indifference map, 2. budget line. Two conditions must be fulfilled for the consumer's equilibrium:  The first condition is that the marginal rate of substitution should be equal to the ratio of commodity prices. MRSxy =  M U x M U y M U x M U y  =  P x P y This is necessary but not a sufficient condition for the consumer's equilibrium. The second condition is that the indifference curve should be convex to the origin and the necessary condition is fulfilled at the highest possible indifference curve. In the diagram, the consumer will be in equilibrium at the point  Q where he will buy OM  quantity of go...