In
managerial economics, isoquants are typically drawn along with
isocost curves in
capital-labor graphs, showing the technological tradeoff between capital and labor in the
production function, and the decreasing marginal returns of both inputs. In managerial economics, the unit of isoquant is commonly the net of
capital cost. As such, isoquants by nature are downward sloping due to operation of diminishing
marginal rates of technical substitution (MRTS). The slope of an isoquant represents the rate at which input x can be substituted for input y. This concept is the MRTS, so MRTS=slope of the isoquant. Thus, the steeper the isoquant, the higher the MRTS. Since MRTS must diminish, isoquants must be convex to their origin. Adding one input while holding the other constant eventually leads to decreasing marginal output. The contour line of an isoquant represents every combination of two inputs which fully maximise a firm's use of resources (such as budget, or time). Full maximisation of resources is usually considered 'efficient'. Efficient allocation of
factors of production occur only when two isoquants are tangent to one another. If a firm produces to the left of the contour line, then the firm is considered to be operating inefficiently, because they are not maximising use of their available resources. A firm cannot produce to the right of the contour line unless they exceed their constraints. curve (linear) A family of isoquants can be represented by an
isoquant map, a graph combining a number of isoquants, each representing a different quantity of output.An isoquant map can indicate decreasing or increasing
returns to scale based on increasing or decreasing distances between the isoquant pairs of fixed output increment, as output increases. If the distance between those isoquants increases as output increases, the firm's production function is exhibiting decreasing returns to scale; doubling both inputs will result in placement on an isoquant with less than double the output of the previous isoquant. Conversely, if the distance is decreasing as output increases, the firm is experiencing increasing returns to scale; doubling both inputs results in placement on an isoquant with more than twice the output of the original isoquant. A firm can choose to utilise the information an isoquant gives on returns to scale, by using it as insight how to allocate resources. Knowing how to allocate resources is a concept pertinent to managerial economics. Isoquants can be useful to graphically represent this issue of
scarcity. They show the extent to which the firm in question has the ability to substitute between two different inputs (x and y in the graph) at will in order to produce the same level of output (see: Graph C)). They also represent different quantity combinations of two goods which adhere to a
budget constraint. Thus, they can be used as a tool to help management make better informed decisions regarding production and profit dilemmas, such as cost or waste minimization, and revenue and output maximization. A firm can determine the
least cost combination of inputs to produce a given output, by combining isocost curves and isoquants, and adhering to
first order conditions. As with indifference curves, two isoquants can never cross. Also, every possible combination of inputs is on an isoquant. Finally, any combination of inputs above or to the right of an isoquant results represents a higher level of output, and vice versa. Although the
marginal product of an input decreases as you increase the quantity of the input while holding all other inputs constant, the marginal product is never negative in the empirically observed range since a
rational firm would never increase an input to decrease output. ==Shapes==