Isocost lines show combinations of productive inputs which cost the same amount. They are the same concept as *budget restrictions* when looking at consumer behaviour. Mathematically, they can be expressed as:

*rK + wL = C*

Where r is the cost of capital and w is the cost of labour. Generally, we think of r as the interest rate the financial markets offer, as capital requires investment. Even if the capital can be paid for using a company’s own resources, r is still equivalent to the opportunity cost of having the money tied up in investments rather than in liquid assets which offer a return (r) by lending it to the markets. The cost of labour (w) is the salary paid to employees per unit of time.

Isocosts are usually represented graphically together with *isoquant* lines (which are combinations of productive inputs which produce a fixed quantity of outputs). The two have a tangency point, which determines the optimal production (where *production is maximised* or *cost minimised*).

**Video – Isocosts:**