Long Run Production Function
Long Run Production Function: Production in the short run in which the functional relationship between input and output is explained assuming labor to be the only variable input, keeping capital constant. In the long run production function, the relationship between input and output is explained under the condition when both, labor and capital, are variable inputs.
In the long run, the supply of both the inputs, labor and capital, is assumed to be elastic (changes frequently). Therefore, organizations can hire larger quantities of both the inputs. If larger quantities of both the inputs are employed, the level of production increases. In the long run, the functional relationship between changing scale of inputs and output is explained under laws of returns to scale. The laws of returns to scale can be explained with the help of isoquant technique.
Long Run Production Function
Isoquant Curve
The relationships between changing input and output is studied in the laws of returns to scale, which is based on production function and isoquant curve. The term isoquant has been derived from a Greek work iso, which means equal. Isoquant curve is the locus of points showing different combinations of capital and labor, which can be employed to produce same output.
It is also known as equal product curve or production indifference curve. Isoquant curve is almost similar to indifference curve. However, there are two dissimilarities between isoquant curve and indifference curve. Firstly, in the graphical representation, indifference curve takes into account two consumer goods, while isoquant curve uses two producer goods. Secondly, indifference curve measures the level of satisfaction, while isoquant curve measures output.
Some of the popular definitions of isoquant curve are as follows:
According to Ferguson, “An isoquant is a curve showing all possible combinations of inputs physically capable of producing a given level of output.”
According to Peterson, “An isoquant curve may be defined as a curve showing the possible combinations of two variable factors that can be used to produce the same total product”
From the aforementioned definitions, it can be concluded that the isoquant curve is generated by plotting different combinations of inputs on a graph. An isoquant curve provides the best combination of inputs at which the output is maximum.
Following are the assumptions of isoquant curve:
- Assumes that there are only two inputs, labor and capital, to produce a product
- Assumes that capital, labor, and good are divisible in nature
- Assumes that capital and labor are able to substitute each other at diminishing rates because they are not perfect substitutes
- Assumes that technology of production is known
On the basis of these assumptions, isoquant curve can be drawn with the help of different combinations of capital and labor. The combinations are made such that it does not affect the output.
an isoquant curve for four combinations of capital and labor:
IQ1 is the output for four combinations of capital and labor. Figure 1 shows that all along the curve for IQ1 the quantity of output is same that is 200 with the changing combinations of capital and labor. The four combinations on the IQ1 curve are represented by points A, B, C, and D.
Some of the properties of the isoquant curve are as follows:
- Negative Slope
Implies that the slope of isoquant curve is negative. This is because when capital (K) is increased, the quantity of labor (L) is reduced or vice versa, to keep the same level of output.
- Convex to Origin
Shows the substitution of inputs and diminishing marginal rate of technical substitution (which is discussed later) in economic region. This implies that marginal significance of one input (capital) in terms of another input (labor) diminishes along with the isoquant curve.
- Non-intersecting and Non-tangential
Implies that two isoquant curves (as shown in Figure-1) cannot cut each other.
- Upper isoquant have high output
Implies that upper curve of the isoquant curve produces more output than the curve beneath. This is because of the larger combination of input result in a larger output as compared to the curve that s beneath it. For example, in Figure-5 the value of capital at point B is greater than the capital at point C. Therefore, the output of curve Q2 is greater than the output of Q1.
Forms of Isoquants
The shape of an isoquant depends on the degree to which one input can be substituted by the other. Convex isoquant represents that there is a continuous substitution of one input variable by the other input variable at a diminishing rate.
However, in economics, there are other forms of isoquants, which are as follows:
- Linear Isoquant
Refers to a straight line isoquant. Linear isoquant represents a perfect substitutability between the inputs, capital and labor, of the production function. It implies that a product can be produced by using either capital or labor or using both, if capital and labor are perfect substitutes of each other. Therefore, in a linear isoquant, MRTS between inputs remains constant.
The algebraic form of production function in case of linear isoquant is as follows:
Q = aK + BL
Here, Q is the weighted sum of K and L.
Slope of curve can be calculated with the help of following formula:
- MPK = ∆Q/∆K = a
- MPL = ∆Q/∆L = b
- MRTS = MPL/MPK
- MRTS = -b/a
However, linear isoquant does not have existence in the real world.
- L-shaped Isoquant
Refers to an isoquant in which the combination between capital and labor are in a fixed proportion. The graphical representation of fixed factor proportion isoquant is L in shape. The L-shaped isoquant represents that there is no substitution between labor and capital and they are assumed to be complementary goods.
It represents that only one combination of labor and capital is possible to produce a product with affixed proportion of inputs. For increasing the production, an organization needs to increase both inputs proportionately.
In Figure-3, it can be seen OK1 units of capital and OL1 units of labor are required for the production of Q1. On the other hand, to increase the production from Q1 to Q2, an organization needs to increase inputs from K1 to K2 and L1 to L2 both.
This relationship between capital and labor can be expressed as follows:
- Q = f (K, L) = min (aK, bL)
- Where, min = Q equals to lower of the two terms, aK and bL
- For example, in case aK > bL, then Q = bL and in case aK < bL then, Q = aK.
L-shaped isoquant is applied in many production activities and techniques where labor and capital is in fixed proportion. For example, in the process of driving a car, only one machine and one labor is required, which is a fixed combination.
- Kinked Isoquant
Refers to an isoquant that represents different combinations of labor and capital. These combinations can be used in different processes of production, but in fixed proportion. According to L-shaped isoquant, there would be only one combination between capital and labor in a fixed proportion. However, in real life, there can be several ways to perform production with different combinations of capital and labor.
For example, there are two machines in which one is large in size and can perform all the processes involved in production, while the other machine is small in size and can perform only one function of production process. In both the machines, combination of capital employed and labor used is different.
Let us understand kinked isoquant with the help of another example. For example, to produce 100 units of product X, an organization has used four different techniques of production with fixed-factor proportion.