Isocost Line

Isocost Line:

The isocost line plays a significant role in determining the combination of factors that the firm will select for generation. An isocost line is stated as locus of points representing different combinations of two factors that the firm can purchase with a specified outlay. Higher isocost lines symbolize higher outlays (i.e., total cost) and lower isocost lines symbolize lower outlays.

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Figure: Iso cost lines

The isocost line based on two things:

(1) Prices of the factors of generation and

(2) The net outlay that a firm has to build on the factors of production. Provided these two, the isocost line can be drawn. The slope of isocost line is equivalent to the ratio of the prices of two factors. Therefore the slope of the isocost line is specified as:

Slope of isocost line = Price of factor X (Capital)
                                  Price of factor Y (Labor)

 

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