Isoquant Curve

What is the 'Isoquant Curve'

The isoquant curve is a graph, used in the study of microeconomics, that charts all inputs that produce a specified level of output. This graph is used as a metric for the influence that the inputs have on the level of output or production that can be obtained. The isoquant curve assists firms in making adjustments to inputs in order to maximize outputs, and thus profits.

Isoquant Curve

BREAKING DOWN 'Isoquant Curve'

The term "isoquant," broken down in Latin, means “equal quantity,” with “iso” meaning equal and “quant” meaning quantity. The isoquant curve is a company’s counterpart to the consumer’s indifference curve. Essentially, the curve represents a consistent amount of output. The isoquant is known, alternatively, as an equal product curve or a production indifference curve. It may also be called an iso-product curve.

Isoquant Curve vs Indifference Curve

The isoquant curve is a contoured line that is drawn through points that produce the same quantity of output, while the quantities of inputs – usually two or more – are changed. The mapping of the isoquant curve addresses cost minimization problems for producers. The indifference curve, on the other hand, helps to map out the utility maximization problem that consumers face.

The Properties of an Isoquant Curve

Property 1: An isoquant curve slopes downward, or is negatively sloped. This means that the same level of production only occurs when increasing units of input are offset with lesser units of another input factor. This property falls in line with the principal of Marginal Rate of Technical Substitution (MRTS). As an example, the same level of output could be achieved by a company when capital inputs increase, but labor inputs decrease.

Property 2: An isoquant curve, because of the MRTS effect, is convex to its origin. This indicates that factors of production may be substituted with one another. The increase in one factor, however, must still be used in conjunction with the decrease of another input factor.

Property 3: Isoquant curves cannot be tangent or intersect one another. Curves that intersect are incorrect and produce results that are invalid, as a common factor combination on each of the curves will reveal the same level of output, which is not possible.

Property 4: Isoquant curves in the upper portions of the chart yield higher outputs. This is because, at a higher curve, factors of production are being more heavily employed. Either more capital or more labor input factors result in a greater level of production.

Property 5: An isoquant curve should not touch the X or Y axis on the graph. If it does, the rate of technical substitution is void, as it will indicate that one factor is responsible for producing the given level of output without the involvement of any other input factors.

Property 6: Isoquant curves do not have to be parallel to one another; the rate of technical substitution between factors may have variations.

Property 7: Isoquant curves are oval shaped, allowing firms to determine the most efficient factors of production.

RELATED TERMS
  1. Marginal Rate of Technical Substitution

    The rate at which one factor has to be decreased in order to ...
  2. Learning Curve

    A concept that describes how new skills or knowledge can be quickly ...
  3. Normal Yield Curve

    A yield curve in which short-term debt instruments have a lower ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments ...
  6. Positive Butterfly

    A non-parallel yield curve shift in which short- and long-term ...
Related Articles
  1. Investing

    Trade Bond ETFs Using Yield Curves

    Different types of yield curves provide important insights for trading bond-based securities.
  2. Markets

    Understanding Term Structure of Interest Rates

    The term structure of interest rates is a common method of valuing bonds.
  3. Markets

    What is an Indifference Curve?

    An indifference curve determines the combinations of two goods that will provide equal satisfaction.
  4. Investing

    Understanding the Inverted Yield Curve

    An inverted yield curve occurs during the rare times when short-term interest rates are higher than long-term interest rates.
  5. Markets

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  6. Investing

    The Impact Of An Inverted Yield Curve

    Find out what happens when short-term interest rates exceed long-term rates.
  7. Managing Wealth

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  8. Markets

    Bond Yield Curve Holds Predictive Powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  9. Markets

    Understanding the Laffer Curve

    The Laffer Curve is a graph that shows how changes in tax rates can influence economic growth.
  10. Markets

    Law of Demand

    The law of demand is one of the most fundamental principles in microeconomics. It's all about how price affects demand. According to the law of demand, for all other things remaining constant, ...
RELATED FAQS
  1. What is the difference between term structure and a yield curve?

    Understand the difference between the term structure of interest rates and a yield curve, if any. Learn what the yield curve ... Read Answer >>
  2. What is the current yield curve and why is it important?

    Understand what the current yield curve represents, and learn how market analysts commonly interpret various changes in the ... Read Answer >>
  3. What does the yield curve actually predict?

    Find out what an inverted yield curve represents, how it has performed as a leading indicator and why it appears to hold ... Read Answer >>
  4. Can you calculate the production possibility frontier in n-dimensional space?

    Find out how PPF in n-dimensional space can interpret the relationship between production inputs and outputs required for ... Read Answer >>
  5. Why are microeconomic models different in the short run than the long run

    Find out why short-run and long-run microeconomic models treat production, costs and variable change using different given ... Read Answer >>
  6. Do production possibility frontiers have multiple possible equilibria?

    Explore when production possibility frontiers can have multiple equilibria. Learn how backward-bending curves such as labor ... Read Answer >>
Hot Definitions
  1. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  2. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  3. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  4. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  5. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
  6. Security

    A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship ...
Trading Center