This video shows what isocost lines are, and how important they are when analysing production. We start learning about the budgetary restriction they represent, and explain what happens when the cost of inputs change.
Isocost lines show combinations of productive inputs that cost the same amount. They are the same concept as budget restrictions when looking at consumer behaviour.
In this case, 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).
Learn more by reading the dictionary entry.