Isocost Overview
in real life, the various factors of production are price. For example: the employment of workers required to pay the wages of the workers; to bank loans World steel pipe network editing , need to pay the bank interest; running factories, need to rent the land, to pay the government rent. Vendors to buy these factors of production must have a certain amount of money expenditure, this monetary expenditures constitute the manufacturer's production costs World Pipe network informed. A vendor if you want to maximize profits, we must consider the cost.
And the yield curve tell us, to produce a certain quantity of a product can take a variety of factor combinations to produce a certain number of elements combination is also limited by the overhead of the total budget of the pay producers elements and factor prices. Subject to the constraints of the total costs and factor prices. To this end, the need to introduce this concept of the cost line. Production theory in
cost line is the budget line in a utility theory analysis tools. Production theory in
cost line is also called the corporate budget line is the trajectory of the two factors of production under the conditions of the established cost and prices of production factors producers can buy a variety of number combinations. Cost line that manufacturers limit production, ie it has to purchase the money spent by the factors of production can not be greater than or less than the cost of money. Greater than the cost of money can not be achieved, less than the cost of money will not be able to achieve maximum yield. Assume the established cost equation
[Edit this paragraph] the cost line for C, known labor (L) of the price that the wage rate W, the price of capital (K) known that the interest rate r, pursuant to which we can get the cost line, as shown below. Cost equation:
C, = WL + rK
K =-WL / r + / r
[Edit this paragraph], the characteristics of the cost line 1, the cost equation is linear Therefore, the cost of the line must be a straight line. Figure on the horizontal axis of the point C / W represents the number of established full cost of purchase of labor, the point on the longitudinal axis of the C / r established the full cost of purchase of capital when the number of links of these two segments is such as cost line. It established full cost can buy various combinations of labor and capital.
2, the slope of the cost line-W / r, is the two factors of production, the price ratio is negative. Cost line within the region at any point (eg point A), indicating that the established full cost after that point, the combination of labor and capital used to buy there is a surplus. In the region outside the isocost at any point (eg point B), established full cost to buy a combination of the labor and capital is not enough. Only such as cost-line at any point before the established full cost just to buy a combination of labor and capital.