Friday, July 23, 2021

The Economic Region of Production and Ridge Lines

Isoquants may also have positively sloped segments, or bend back upon themselves. Above OA and below OB, the slope of the isoquants is positive, which implies that increases in both capital and labour are required to maintain a certain output rate. If this is the case, the Marginal Product (MP) of one or another input must be negative. Above OA, the MP of capital is negative. Thus the output will increase if less capital is used, while the amount of labour is held constant. Below OB, the MP of labour is negative. Thus, the output will increase if less labour is used, while the amount of capital is held constant. The lines OA and OB are called ridge lines. 

Ridge lines represent the limits of the economic relevance, the boundaries beyond which the isocline and isoquant maps have no economic meaning. The upper ridge line implies that MP of capital is zero and the lower ridge line implies MP of labour is zero. The region bounded by these ridge lines is called the economic region of production. This means the region of production beyond the ridge lines is economically inefficient.

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