All that being said, the iscost-isoquant approach is wrong-headed. The problem with the analysis is that it misunderstands the nature of entrepreneurial decisions. It takes output as given, and portrays profit maximization as simply a matter of achieving that output while minimizing costs.
The entrepreneur’s role is not merely to minimize costs, but to maximize the spread between his costs and income. And doing that takes much more than high-school level math. It takes successful forecasting of demand for his product. Based on those forecasts, he must choose both his output and input with the aim of maximizing that spread.
Furthermore, the anlaysis can be misleading. It represents factor hire prices as simply given to the entrepreneur. While to a single entrpreneur in a large market, the “prevailing price” may appear as given, it is fundamentally entrepreneurial demand for the factors that determines factor prices.
No, the point of the diagram is to illustrate that for any given output (isoquant), the least-cost combination of inputs is the point of tangency on the isocost curve that is closest to the origin, but still touching the given isoquant.
OK, what I should have said, which I think would have communicated what I meant better, is that if the price of either of the factors changes, then the slope of the isocost will move, and hense the point of tangency will change to a different isoquant. So wouldn’t output be affected?
For example:
Say the budget is such that the isocost is N1 on this diagram. Then the cost of labour goes up so that N1 shifts inwards to N2. The possible output that can be achieved is reduced from isoquant i1 to isoquant i2. The point of tangency of N2 and i2 is the cheapest way that this output can be achieved.
In case you missed it, I answer you’re original question in the previous post.
Thank you for your response. Sorry about the belated reply, I was mulling over your answer for a while but then got distracted by essays and the like.
The entrepreneur’s role is not merely to minimize costs, but to maximize the spread between his costs and income
Could you explain a bit more about this please? How does maximising the spread between costs and income differ from inimising costs? They Sound the same to me.