Isocost Lines - Video Tutorials & Practice Problems
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Isocost Lines
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So firm usually has a specific budget they're working with when they're gonna make their production and they want to make that production at the lowest possible cost. Let's check out these cost curves to see how that helps us make these decisions. So like I said, a firm is gonna want to produce at the lowest possible cost, Right? So if they have a given quantity, let's say they want to make 1000 units. Well, they want to make those 1000 units at the lowest possible cost. Right? So they're gonna have to analyze the cost of their inputs. And like we saw in the ice a quant curves. Right? When we studied the quant curves, Well, that showed us different input combinations that resulted in levels of production. Well now we're gonna see the cost of those different input combinations. Cool. So what this is gonna show us is shows all combinations of two inputs. In this case we're gonna have labor and capital That result in the same cost. Okay, so we're gonna have the same amount of cost for two different inputs. Okay. So let's go ahead and see how this works. In our example. Spooky cookies, bakes cookies with a budget of $24,000 that it can spend on its inputs. Ovens and Baker's ovens cost 6000 per month. And bakers cost 3000 per month. Show spook ease cost line on the graph. Okay. So what we're gonna wanna do is basically the best way to do this is to find how many ovens could we afford? If we just bought ovens, how many bakers could we afford? If we just bought bakers. And then we'll make our cost line based on those two points. Okay. So what we're gonna do is we're gonna put our ovens on one axis here and we're gonna put on the other axis. Um The baker's okay. It could go one way or the other. It doesn't matter which ones which but generally what they do is they have the labor on the X axis and the capital on the Y axis. Generally how it's set up. Uh So what we're gonna use this formula for maximum quantity? Well, if we want to know what the maximum is that we can afford of something. We're gonna take our budget the amount of money we have And divided by the price of that thing. Right? The budget divided by the price is gonna give us the maximum we can afford. So let's see in our example, if we had a budget of 24,000 and we divided by the cost of the ovens. Well 6000 for one oven we have 24,000 divided by a cost of 6000, we can afford four ovens. Right? Four ovens we can afford with 24,000. Not too complicated there. So if we spent no money on bakers, we could afford four ovens. And that's this point. Right here. What about the other side? If we only got bakers and no ovens? Well, we would have 24,000 Divided by 8000, Not 8000? Excuse Me? 3000 is the cost of a baker that lets us have eight bakers. Right? We can afford eight bakers there behind me. Um So let's go ahead and plot that. So that would be a 80.5678. Right here. That's eight bakers we could afford with our 24,000 budget. And all we gotta do is connect the line now. So this is gonna be a straight line because the price isn't changing as we go. So we're just gonna have a straight line here. Try and get it better. My lines are off today. Still one more try here. This doesn't do it. We're gonna just have to Oh yeah, fourth time's the charm. That's how we do it. So what does this cost line show us? So this is our cost line here. This is it right here, the big reveal. This tells us that with $24,000 we can afford any point on that line, meaning we can afford. Right here, we can afford a point, do it in a different color. We can afford this point right here where we have four bakers and two ovens we can afford this point right here where we have two bakers and three ovens, right? Anywhere along that line we can afford. So by finding the maximum of each and just connecting them. That's the easiest way to set up this line. Okay. So this is helpful for a company, right? Because now we know what we can afford different combinations we can afford and we can use our quant lines to see what level of production we want to achieve, and compare it with our cost line to find the lowest possible cost. Okay, so that's about it. For for this video, let's do some practice problems before we move on to the next video.