computer with graph and bills white bg image by patrimonio designs from Fotolia.com

Isoquants and isocosts are tools developed by economists to describe a firm's production costs and output. An isocost shows the bundles of inputs available to a firm for a given cost. An isoquant shows the bundles of inputs that produce a given level of output. When explaining these functions, capital (K) and labour (L) are traditionally used as the two inputs for these functions. Although there is no mathematical restriction, by limiting yourself to two inputs, you can create a graph using Microsoft Excel.

Determine your isocost equation. It is of the form:

[Pl * L] + [Pk * K] = TC

where Pl is the price of labor

L is the amount of labor

Pk is the Price of Capital

K is the amount of capital

TC is the total cost.

For this example we will use

Pl = 25

Pk = 50

TC = 750

Rewriting the equation with the given values:

(25 * L) + (50 * K) = 750

Solve the equation when L is zero.

(25 * 0) + (50* K) = 750

K = 750 / 50

K = 15

Solve the equation when K is zero.

(25 * L) + (50* 0) = 750

L = 750 / 25

L = 30

Enter the data points

(0, 15), (30,0)

In cell A1 enter 0

In cell A2 enter 30

In cell B1 enter 15

In cell B2 enter 0

Select cells A1, B1, A2, B2

Launch the Excel Chart Wizard.

Select XY (Scatter) as the type from the Standard Types Menu.

Select either subtype "Scatter with data points connected by lines without markers" or "Scatter with data points connected by lines."

Click "Next." Confirm the data range is accurate and "series in columns" is selected.

Complete the labels for the graph. Here are suggestions:

Title: Isocost Line for Firm when Total Cost = £65

Value (X) Axis: Labor

Value (Y) Axis: Capital

Select either "As new sheet" or "As object in."

Click "Finish." Your graph will be displayed.

Determine your isoquant equation. Economists typically use a Cobb-Douglas production function. It is an equation in which the variables are exponents and it is beyond the scope of this article to solve.

Enter your data points. Here are example data points:

(1,5), (1.3, 3), (2, 2), (3, 1,3), (5, 1)

In cell A1 enter 1

In cell A2 enter 5

In cell B1 enter 1.3

In cell B2 enter 3

In cell A3 enter 2

In cell B3 enter 2

In cell A4 enter 3

In cell B4 enter 1.3

In cell A5 enter 5

In cell B5 enter 1

Select cells A1, B1, A2, B2, A3, B3, A4, B4, A5, B5

Launch the Excel Chart Wizard.

Select XY (Scatter) as the type from the Standard Types Menu.

Select either subtype "Scatter with data points smoothed by lines without markers" or "Scatter with data points smoothed by lines."

Click "Next." Confirm the data range is accurate and "series in columns" is selected.

Complete the labels for the graph. Here are suggestions:

Title: Isoquant for Firm when Output = 15 units per day

Value (X) Axis: Labor (workers per day)

Value (Y) Axis: Capital (machines per day)

Select either "As new sheet" or "As object in."

Click "Finish." Your graph will be displayed.

## Most recent

- computer with graph and bills white bg image by patrimonio designs from Fotolia.com