So let's discuss how we can maintain the same level of production with different levels of inputs. These are called isoquant lines. The idea is that we're going to produce a certain level of production, say in this case, 10,000 cookies. We can hire a bunch of bakers, illustrating all the combinations of 2 inputs that yield the same level of output. In our example here, we've got spooky cookies baking cookies using the information in the table below. Graph the isoquant curves for Spooky's production of cookies based on combinations of labor and capital. So generally, when we deal with isoquant curves, we're going to be dealing with the scenario where if we hire more workers, we don't need as much capital and vice versa. If there's a lot of machinery, robots can produce the cookies instead of labor, or they hire many people instead of investing heavily in robots.
We're going to discuss the ovens and the number of bakers we have making the cookies. Notice in our tables, we'll hit a certain level of production, for example, a production of 500 cookies can be reached with any of these bundles of production. So in bundle A, we have one oven and 9 bakers, which will produce 500 cookies. We can have more ovens so that more cookies can be baked at the same time, and we would need fewer bakers at that point. On one axis, we'll have the quantity of ovens, and on the other, the quantity of labor.
Now, let’s graph our isoquant lines starting with bundles A through D for a production level of 500 cookies. If we have 1 oven, we'll need 9 bakers; that's A right there. The next one, 2 ovens, and we'll only need 4 bakers, and so forth. We’ll mark these points on the graph representing each bundle. We're now moving to the production level of 750 cookies. As you imagine, to produce more cookies, we'll need either more labor or more ovens to handle this higher production level. So by mapping bundles E through H, we will be able to produce 750 cookies at each point. This analysis helps us find the most cost-efficient way to produce these cookies.
ISO quant lines showcase this because 'ISO' means the same and 'quant' refers to quantity. Each production level makes the same quantity along these curves. The isoquant lines will be curved and show different utilization of resources. The steeper the curve, the higher the use of resources for higher production. The concept of the marginal rate of technical substitution (MRTS) is crucial here, representing how we can substitute one input for another and still maintain the same production level. The MRTS is calculated as the slope of the isoquant curve at a particular point.
For example, using 7 ovens, if we reduce to 4 ovens and increase one baker, our production remains the same, making the MRTS 3 in this context. If we decrease from 4 to 2 ovens and add 2 more workers, each oven lost equates to one additional worker needed, making the MRTS 1. Finally, if only 2 ovens are used, reducing to 1 oven means we must hire 5 additional workers to maintain output, indicating a MRTS of 0.2. This varying MRTS illuminates how the value of each oven or worker changes depending on how many are already in use.
This session demonstrates many parallels to studying indifference curves in economics. By understanding these concepts in one area, you will find it easier to apply similar logic to others, such as isoquant lines in production settings. Let's continue to expand on these ideas in our next video.
