Terminology used in Factor-Factor relationship

a) Marginal rate of substitution (MRS)/ MRTS/ RTS:

• The rate at which two factor of production can be exchange at a particular level of production of output and consequently that of each level of the inputs. MRS = ΔX2/ΔX1

b) Isoquant or Iso-product curve:

• It is a graphical representation of various combinations of two resources (inputs) which is used to produce a given level of output.
• Each point on an isoquant is the maximum output that can be achieved with these input combinations.

c) Isoquant map:

• If many isoquant curves are drawn in the same graph, it becomes an isoquant map or a family of isoquant is called isoquant map.

d) Expansion path:

• The line joining or passing through the tangent of isoquant or isocost line is called expansion path.
• Of many isoclines, the isocline which is considered to be most appropriate over a production period is known as expansion path. At any particular time, only one expansion path is possible.

e) Isoclines:

• A line or curve connecting the least cost combination of inputs of all output levels is called isocline.
• This isocline passes through all the isoquant at point where they have same slope.
• Given the isoquant curves, and slope of isocost lines, the minimum cost for each output is represented by their tangency points.
• This line or isocline shows that resources should be used along this line as long as the marginal value of the product is greater than the marginal cost of the resource used.
• All isoclines of course converge at the point of maximum output if the maximum exists.

f) Ridge lines (Boundary line):

• Ridge lines represent the points of maximum output from each input, given a fixed amount of the other input.
• These lines represent the limits of economic relevance, the boundaries beyond which isocline and isoquant maps cease to have any economic meanings.

g) Isocost line (budget line):

• It stands for all possible combinations of two inputs which can be purchased with same amount of fund.