7.

4 PRODUCTION FUNCTION WITH TWO VARIABLE

INPUTS
Now we turn to the case of production where two inputs (say capital and
labour) are variable. Although, we restrict our analysis to two variable inputs,
all of the results hold for more than two also. We are restricting our analysis
to two variable inputs because it simply allows us the scope for graphical
analysis. When analysing production with more than one variable input, we
cannot simply use sets of AP and MP curves like those discussed in section
7.3, because these curves were derived holding the use of all other inputs fixed
and letting the use of only one input vary. If we change the level of fixed
input, the TP, AP and MP curves would shift. In the case of two variable
inputs, changing the use of one input would cause a shift in the MP and AP
curves of the other input. For example, an increase in capital would probably
result in an increase in the MP of labour over a wide range of labour use.
Production Isoquants
In Greek the word ‘iso’ means ‘equal’ or ’same’. A production isoquant
(equal output curve) is the locus of all those combinations of two inputs which
yields a given level of output. With two variable inputs, capital and labour, the
isoquant gives the different combinations of capital and labour, that produces
the
same level of output. For example, 5 units of output can be produced using
either 15 units of capital (K) or 2 units of labour (L) or K=10 and L=3 or K=5
and L=5 or K=3 and L=7. These four combinations of capital and labour are
four points on the isoquant associated with 5 units of output as shown in Figure
7.2. And if we assume that capital and labour are continuously divisible, there
would be many more combinations on this isoquant.
Now let us assume that capital, labour, and output are continuously divisible in
order to set forth the typically assumed characteristics of isoquants. Figure 7.3
illustrates three such isoquants. Isoquant I shows all the combinations of
capital and labour that will produce 10 units of output. According to this
isoquant, it is possible to obtain this output if K0 units of capital and L0 units of
labour inputs are used. Alternately, this output can also be obtained if K1 units
of capital and L1 units of labour inputs or K2 units of capital and L2 units of
labour are used. Similarly, isoquant II shows the various combinations of
capital and labour that can be used to produce 15 units of output. Isoquant III
shows all combinations that can produce 20 units of output. Each capitallabour
combination can be on only one isoquant. That is, isoquants cannot
intersect. These isoquants are only three of an infinite number of isoquants that
could be drawn. A group of isoquants is called an isoquant map. In an
isoquant map, all isoquants lying above and to the right of a given isoquant
indicate higher levels of output. Thus, in Figure 7.3 isoquant II indicates a
higher level of output than isoquant I, and isoquant III indicates a higher level
of output than isoquant II. In general, isoquants are determined in the following
way. First, a rate of
output, say Q0, is specified. Hence the production function can be written as
Q0 = f (K,L)
Those combinations of K and L that satisfy this equation define the
isoquant for output rate Q0
Types Of Isoquants :
• Linear

• Input- Output/ Leontif

• Kinked/Activity Analysis/Linear programming

• Smooth Convex