00:01
So when we think of input choice, the type of analysis that economists usually do is talking about an iso -cost versus an iso -quant, right? and i'll try to explain this in words.
00:14
Imagine that you're a firm and you're making a choice between inputs.
00:16
Let's call them capital and labor, right? the first thing is that there's a price of labor and a price of capital.
00:24
Sometimes we call those the wage, right, and the rental price.
00:28
You have to pay your workers ' wages, you have to rent your capital.
00:32
If you don't rent it, it still has an opportunity cost that's equivalent to rent.
00:36
So the first thing is the prices of inputs matter, right? that generates an iso -cost line.
00:44
And an iso -cost line might look something like this, and this reflects, again, the prices.
00:51
Right? the slope is telling you something about how much one labor is worth via one capital.
00:58
The second thing that we're concerned about is the productivity of inputs.
01:10
Sometimes you might have seen statements like the marginal product of labor has to equal the wage or the marginal product of capital has to equal the rental rate, right? the productivity of inputs.
01:21
And those are summarized by the isoquant, right? and isoquant looks like an indifference curve, right? which would be something like this.
01:30
And this would indicate the optimal, the tangency between the isocost and the isoquant would indicate an optimal level of production, right? so the productivity here is telling you how far out this is.
01:48
If the inputs are productive, the same inputs would be able to produce more, right? so for example, this might be the quantity equals 50 isoquant, right? every point on that blue line produces 50 outputs...