The iso-cost line is an important
component in analysing producer’s
behaviour. The iso-cost line illustrates all the possible combinations of two factors that can be used at given costs and for a given producer’s budget. Simply stated an iso-cost line represents different combinations of inputs which shows the same amount of cost. The iso-cost line gives information on factor prices and financial resources of the firm. It is otherwise called as “iso-price line” or “iso-income line” or “iso-expenditure line” or “total outlay curve”.Suppose that a producer has a total budget of ₹120 and for producing a certain level of output, he has to spend this amount on two factors Labour (L) and Capital (K). Prices of factors K is ₹30 and L is ₹10. Iso Cost Curve can be drawn by using the following hypothetical
As shown in Table, there are
five combinations of capital and labour such as combination A represents 4 units of capital and zero units of labour and this combination costs ₹120. Similarly other combinations (B,C,D and E) cost same amount of rupees (₹120).
4K + 0L= ₹.120
3K + 3L= ₹.120
2K + 6L= ₹.120
1K + 9L= ₹.120, and
0K + 12L= ₹.120.
Thus, all the combinations A, B, C, D and E cost the same total expenditure.
From the figure 3.10, it is shown that the costs to be incurred on capital and labour are represented by the triangle OAE. The line AE is called as Iso-cost line.