Expansion path
The presentation discusses a firm's expansion path. An expansion path shows the optimal input combinations as production scale increases while input prices remain constant. It connects the least costly methods of producing different output levels. The expansion path may not be a straight line or always upward sloping. The document includes a diagram of a sample firm's expansion path, labeled with optimal input combinations at different output levels. It explains that the points on the expansion path occur where the isoquant and iso-cost lines are tangent, meaning the marginal rate of technical substitution equals the slope of the iso-cost line. In conclusion, the expansion path identifies the least cost input combinations for each output level.
Expansion path
- 1. PRESENTAION ON FIRM’S EXPANSION PATH PRESENTED BY: Pawan Kawan Roll No.- 15 MBA-I
- 2. Concepts: In economics, an expansion path is a line connecting optimal input combinations as the scale of production expands. A producer seeking to produce the most units of a product in the cheapest possible way attempts to increase production along the expansion path.
- 3. Economists Alfred Stonier and Douglas Hague defined expansion path as,” that line which reflects least cost method of producing different levels of output, when factors prices remains constant”.
- 4. The Firm’s Expansion Path The expansion path does not have to be a straight line. The expansion path does not have to be upward sloping.
- 5. Y E Firm’s Expansion Path 14 13 12 11 L Expansion Path A 10 9 C Capital (K) 8 J 7 I Optimal inputs combination 6 5 H 14Q III 4 G M 3 K 12Q 2 II 10Q 1 I D B F X 0 2 4 6 8 10 12 14 Labour (L)
- 6. At the points of tangency between isoquants and iso-cost lines, the slope of isoquant (MRTS) is equal to the slope of the iso-cost line. Where, w = wage rate of labour i.e. Slope of iso-cost line = -w/r r = rate of capital Slope of isoquant (MRTS) = -MPL/MPK Optimal inputs combination is: MPL w MPK r we get: MPL MPK w r
- 7. Conclusion Expansion path gives the least cost input combinations for every level of output. The point on an expansion path occur when iso-cost line and isoquant are tangent. At the points of tangency between isoquants and iso-cost lines, the slope of isoquant (MRTS) is equal to the slope of the iso-cost line.
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