Least cost input combination
Also called: Cost minimisation · Topic: Production Function, Returns and Costs · NCERT: Class 12, Ch 3 "Production and Costs"
Meaning
Many input combinations can produce the same output. At given input prices, the least cost input combination is the cheapest of them, and a profit-seeking firm chooses it. Formally, the isocost line C = wL + rK shows all combinations that cost the same, where w is the wage and r is the rental price of capital. The best choice is where the isocost line just touches the isoquant: MRTS = w/r, or MP_L / w = MP_K / r. At that point, the last rupee spent on each input adds the same output.
Example
50 units can be made with (6L, 3K), (4L, 4K) or (3L, 6K). If w = ₹10 and r = ₹10, these cost ₹90, ₹80 and ₹90. The firm picks (4L, 4K) at ₹80. If labour becomes cheaper, the firm moves to a more labour-intensive mix.
Don't confuse with
- Cost function: it lists the least cost for every output level. The least cost combination is the input choice for one output level.