Figure 8A-3 Isocost Lines
8A.2 Cost Minimization
Finding the cost-minimizing method of producing any output requires
knowledge of the factor prices. Suppose capital is priced at $4 per unit
and labour at $1 per unit. An isocost line shows alternative combinations
of factors that a firm can buy for a given total cost. Four different isocost
lines appear in Figure 8A-3. The slope of each isocost line reflects
relative factor prices. For given factor prices, a series of parallel isocost
lines will reflect the alternative levels of expenditure on factor purchases
that are available to the firm. The higher the level of expenditure, the
farther the isocost line is from the origin.
Each isocost line shows alternative factor combinations that require the
same expenditure. The graph shows the four isocost lines that result
when labour costs $1 per unit and capital $4 per unit and when
expenditure (total cost, TC) is held constant at $12, $24, $36, and $48,
respectively.