Question

Discuss issues associated with deriving the Producer Equilibrium – Isoquant, Isocost and Producer’s Choice. 750 words

Answer 1

The optimum output can be produced with different combinations of factors of production. Producer tried to increase their production through efficient allocation of the scarce resources. The optimum production will achieve maximum output with minimum cost. Producer's equilibrium is closely connected to two concepts; isoquants and iso-cost line. Isoquant curves show the combination of inputs used for the production of same level of output. Isoquant curves are same as the indifference curve in consumer sense. Here producer can choose any combination of inputs for the given level of output. Isoquant curves are downward sloping, they will not intersect and the highest curve shows higher level of output. Iso-cost line is representing the combination of two factors which bought different level of output. This line is same as the budget line in consumer sense. This shows the spending of money for two different factors of production to get higher level of output. The intersection of this two lines or its tangency shows the optimum level of production or producer's equilibrium. Producers determine the combinations which give higher level of output through this equilibrium point. Most of the producers will refer least expansive combinations of factors for their production. The given below graph shows the producer's equilibrium; Capital L* Labour Point E is the point where the tangency of isoquant and iso-cost line. This point is producer's equilibrium. At the equilibrium point, OC* is the level of capital used ad OL* is the amount of labour used. There are several issues associated with the producer's equilibrium. The equilibrium point the firms attain maximum profit. The most important objectives of firms through attaining the equilibrium are achieving the targeted rate of returns, stabilisation of price and profit

margins, realization of targeted market share, prevention over price competition and maximising sales and sales revenue. These objectives are also considered as constraints also. Reduction of total cost and increasing total revenue will get high profit for the firms. Management of the efficient manager and sales system were followed by the firms. If there are inefficient labours in the market, the level of output and the profit will be changed. Most of the firms tried to acquire their financial stability to attain the targeted market share. The equilibrium point is a point to stability and firms tried to maintain this position with attaining normal revenue and low cost.