5.4 The long run
The analysis so far has assumed that at least one factor is fixed, and in the example of Viking Shoes this factor has been capital, being fixed at three machines. We now need to consider the situation where the firm can vary both of its inputs. This means that we need to examine the input-output data in Table 5.1 in more general terms, with both factors being considered as variable. The data in Table 5.1 can also be represented in a three-dimensional graph, but these are generally not very useful for analytical purposes. In order to proceed with any analysis it is necessary to introduce the concept of isoquants.
5.4.1 Isoquants
An isoquant is a curve that shows various input combinations that yield the same total quantity of output. It is assumed that the output involved is the maximum that can be produced from those combinations of inputs. Thus the position or equation of an isoquant can be derived from the production function. It corresponds to the concept of an indifference curve in consumer theory, and has analogous properties. For example we can talk of an isoquant map, where each curve represents a greater quantity of output as one moves further away from the origin.
The three main properties that isoquants have in common with indifference curves are:
1 Negative slope. This is because the inputs are usually assumed to be substitutable for each other; if a firm uses more of one input it needs less of another.
2 Convexity. This means that their slope is decreasing from left to right; the reason for this relates to the properties of the marginal rate of technical substitution, explained shortly.
3 Non-intersection. It is technically possible for isoquants to intersect, as will be seen in the next section, but this will not occur in the economically feasible range of output. If curves intersect it means that a certain output is being produced using more of both inputs, and this is obviously not efficient in economic terms.
Figure 5.5. Viking Shoes: isoquant map.
Figure 5.5 shows an isoquant map, based on the data in Table 5.1. Points A, B and C correspond to the values indicated in the table. Thus it can be seen that the output of 80 units can be achieved by using either six machines and three workers (point B) or four machines and five workers (point C). On the other hand, in order to produce 100 units of output it is necessary to use five machines and five workers (point A), though other combinations (involving fractions of inputs) can also produce the same output. It should be noted that the isoquant for the output of 100 units starts to curve upwards as more than seven workers are used; this is because it is not possible to produce 100 units
with less than five machines. The maximum output from using only four machines is 90 units, no matter how much labour is used.
5.4.2 The marginal rate of technical substitution
The marginal rate of technical substitution (MRTS) is a measure of the degree of substitutability between two inputs. More specifically, the MRTS of X for Y corresponds to the rate at which one input (X) can be substituted for another (Y), while maintaining total output constant. It is shown by the absolute value of the slope of the isoquant; thus in moving from point B to point C the MRTS is 1,meaning that if two more workers are used we can give up two machines and still produce 80 units of output. The slope of the isoquant is decreasing in absolute magnitude from left to right. This means that as more and more labour is used to produce a given output, the less easily the capital input can be substituted for it. The reason for this is the occurrence of the law of diminishing returns, explained in the previous section. Thus as more labour is used and less capital, the marginal product of additional labour falls and the marginal product of the capital lost increases. Relating this to Viking Shoes, it means that as less and less machinery is used it becomes harder to produce a
given output with increasing amounts of labour.