Firms and Technology

Firms and Technology <–

Click the link above to access an explanation of Firms and Technology, including information on Special Isoquants.

 

 

Isoquants show the locus of input combinations for which output is constant.

Isoquants cannot cross.

Marginal rate of substitution which measures the slope of an isoquant.

The isoquants for perfect substitutes are parallel straight lines.

The isoquants for perfect complements are in the form of an L.

The technology has increasing, constant or decreasing returns to scale depending upon whether, when we increase the scale of inputs by s, the output goes up by more, the same or less than this scale factor s.

 

The expression for the marginal rate of substitution, that is, the slope of an isoquant, is given by:

f(q1, q2) = constant

If we take the total derivative of this expression we get:

[∂f(q1, q2)/∂q1]dq1 + [∂f(q1, q2)/∂q2]dq2 = 0

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