# Unit-3 Identical Product Curve and Producer Equilibrium POE | BBA First Year

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**Â Definition IDENTICAL PRODUCT CURVE AND PRODUCER EQUILIBRIUM**

- Economic output is the result of the output we generate by employing factors such as land, labour, capital and entrepreneurship. By considering various combinations of these inputs it is possible to determine the optimum quantity of production. Such resolution balance. manufacturer’s said

## Manufacturer’s Balance

- The value of all assets used for production is finite. Therefore, the producer has to use such combination of inputs which gives him maximum output and profits. This optimal level of production, also called producer equilibrium, is achieved when maximum output is achieved at minimum cost.
- To achieve this, producers must first classify their resources into different combinations. Each combination will provide different amounts of output. The combination which provides maximum amount of yield at minimum cost is the optimum level of production.
- To find producer’s equilibrium, we first need to understand isoquant curves and iso-cost lines. These two concepts help us calculate optimum production.

## ISOQUANT CURVE

- These lines represent different input combinations that produce the same level of output. The manufacturer can choose any of these combinations available to him as their outputs are always the same. Thus, we can also call these as identical-product curves or production indifference curves.
- Like indifference curves, isoquants are also negatively-sloped and convex in shape. They never meet each other. When there is more than one curve, the curve on the right shows more output and the curve on the left shows less output.
- Consider the table given below. It shows four combinations, namely A, B, C and D, which produce different levels of output.

- Plotting these data on a graph gives us the following curve (Figure 1):

- The X-axis represents units of labour, while the Y-axis represents units of capital. Points A, B, C and D are the combinations of factors at which the level of IQ output is, i.e. 100 units. IQ1 and IQ2 represent more possible outputs.

## Isocost Lines

- Isocost lines represent combinations of two factors that can be purchased with different outlays. In other words, it shows how we can spend money on two different factors for maximum output. These lines are also called budget lines or budget constraint lines.
- Suppose a farmer has Rs. Labor cost for farming and Rs 1,000 will have to be spent on plough. The cost of one such plow and wages per laborer is Rs. 100. Considering his total outlay of Rs. 1,000, he can spend that money in the following combinations:

- In this case, the farmer can either spend the entire amount. Rs 1,000 by purchasing only 10 ploughs. Similarly, he can spend all the money on labor by employing 10 workers. He can also buy both labor and plow using different combinations as shown above. Total outlay Rs. 1,000 will remain the same. Therefore, the isocost line will remain straight as shown below:
- The x-axis represents units of plough, and the Y-axis represents units of labour. Output levels are shown by a straight line because they remain constant.

## PRODUCTION BALANCE

- As we learned above, isoquant curves show us input combinations that we can use to produce certain levels of output. Furthermore, isocost lines help us determine the combination of two factors in which we can invest our outlay to produce output. The combination of these two graphs gives us the optimal production level, i.e. producer’s equilibrium.
- Using this balance, the manufacturer can determine different combinations to increase production. He can also use this information to find ways to cut costs using the same inputs and make more profit as a result. We can find the least expensive combination of factors by superimposing the isoquant curves on the isoquant lines.

### PLOTTING BALANCE

- The graph below shows how we can use isoquant curves and isocost lines to determine the optimal producer equilibrium.

- In the picture shown above, the isoquant curve represents the target output, i.e. 200 units. Ecocost lines EF, GH and KP show three different combinations in which we can use the total expenditure of inputs, ie capital and labor.
- The isoquant curve crosses all three isocost lines at points R, M and T. These points show how much it will cost us to produce 200 units. All three combinations produce the same product of 200 units, but the most expensive point for the manufacturer is at the point where the isocost line is tangent to the isoquant curve.
- Point A and T also cross the isoquant curve and produce the same 200 units, but they are more expensive because they are on the high isocost line of KP. Bindu R will cost more capital, and labor will be more expensive at Bindu T.
- Thus, the point M is the balance of the producer. It will produce the same product of 200 units, but it will be a more profitable combination because its cost will be lower. Therefore, the manufacturer should spend OC money on capital and OL money on labor.

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