What Do You Understand By The Term Least Cost Solution and In What Sense Is It
... The firm’s economical and technical relationship in production needs to be broken down and analysed to establish how a firm achieves its least cost solution. ... In the short run producers are faced with at least one factor of production fixed. ... Firms are productively efficient when they produce at the lowest cost per unit. ... The firm in the long run will therefore use and substitute its variable factors of production accordingly, to reach its lowest cost combination, whilst achieving profit maximisation. ... Therefore productive efficiency is achieved when the two variable factors are substituted to reach the least cost combination, shown by this equation: MPPl = MPPk Pl Pk To look at how the different levels of capital and labour are related to the amount of output the firm is producing, the isoquant curve can be used. ... For firms to determine their least cost solution they need to distinguish the most efficient combination of their two variable factors, which cost the same to employ (Isocost Curve). ... Now understanding the concept of the isoquant and isocost curve, they can be integrated to establish the least cost combination for the firm. The isocost curve is drawn on the assumption of the firm’s cost; therefore the higher the level of total costs the further out the isocost curve.