1. PRESENTAION
ON
FIRM’S EXPANSION PATH
PRESENTED BY:
Pawan Kawan
Roll No.- 15
MBA-I
2. Concepts:
In economics, an expansion path is a line
connecting optimal input combinations as the
scale of production expands.
A producer seeking to produce the most units
of a product in the cheapest possible way
attempts to increase production along the
expansion path.
3. Economists Alfred Stonier and Douglas
Hague defined expansion path as,” that line
which reflects least cost method of producing
different levels of output, when factors prices
remains constant”.
4. The Firm’s Expansion Path
The expansion path does not have to be
a straight line.
The expansion path does not have to be
upward sloping.
5. Y
E
Firm’s Expansion Path
14
13
12
11 L Expansion Path
A
10
9
C
Capital (K)
8 J
7 I Optimal inputs combination
6
5 H 14Q
III
4
G M
3 K 12Q
2 II
10Q
1 I
D B F
X
0
2 4 6 8 10 12 14
Labour (L)
6. At the points of tangency between
isoquants and iso-cost lines, the slope of
isoquant (MRTS) is equal to the slope of
the iso-cost line. Where,
w = wage rate of labour
i.e. Slope of iso-cost line = -w/r r = rate of capital
Slope of isoquant (MRTS) = -MPL/MPK
Optimal inputs combination is:
MPL w
MPK r
we get:
MPL MPK
w r
7. Conclusion
Expansion path gives the least cost input
combinations for every level of output.
The point on an expansion path occur when
iso-cost line and isoquant are tangent.
At the points of tangency between isoquants
and iso-cost lines, the slope of isoquant
(MRTS) is equal to the slope of the iso-cost
line.
