Expansion Path

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 lines are tangent. This expansion path is a straight line path which shows that the capital / labour ratio remains unchanged for all levels of output. It is also called the scale line.

 

 

Dr. Swati Gupta

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