equilibrium implies the situation where producer maximizes his output. It is
also known as optimum combination of the
factors of production. In short, the producer manufactures a given amount
of output with ‘least cost combination of
factors’, with his given budget.
there is output maximisation for given inputs or
there is cost minimisation for the given output.
conditions that are to be fulfilled for the attainment of producer equilibrium
The iso-cost line must be tangent to iso-quant
At point of tangency, the iso-quant curve must be
convex to the origin or MRTSLk must be declining.
outlay and prices of two factors, namely, labour and capital are given,
producers attain equilibrium (or least cost combination of factors is attained
by the firm) where the iso-cost line is tangent to an iso-product curve. It is
illustrated in the following Diagram 3.11.
above figure, profit of the firm (or the producer) is maximised at the point of
point of equilibrium, the slope of the iso cost line is equal to the slope of
iso product curve (or the MRTS of labour for capital is equal to the price
ratio of the two factors)
can be stated as follows.
E, the firm employs OM units of labour and ON units of capital. In other words,
it obtains least cost combination or optimum combination of the two factors to
produce the level of output denoted by the iso-quant IQ.
points such as H, K, R and S lie on higher iso cost lines indicating that a
larger outlay is required, which exceeds the financial resources of the firm.