PRESENTAION ON

FIRM’S EXPANSION PATH

PRESENTED BY: Pawan Kawan Roll No.- 15

MBA-I

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.

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”.

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.

Firm’s Expansion Path

9

1

23

8

4

8

7

6

11

12

5

13

14

64

10

2 10 12 14Labour (L)

Capi

tal (

K)

E

F

A

B

C

D

I

H

G MK

L

J

0

14Q

12Q10Q

Expansion Path

Optimal inputs combination

Y

X

I

II

III

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.

i.e. Slope of iso-cost line = -w/r

Slope of isoquant (MRTS) = -MPL/MPK

Optimal inputs combination is:

MPL

MPK

we get:

MPL MPK

w r

Where,

w = wage rate of labourr = rate of capital

w r

ConclusionExpansion 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.

THANK YOU