Advanced Micro · intermediate
What moves on the Producer Theory (Isoquants & Isocosts) diagram
A higher wage pivots the isocost line in along the labour axis, so the cost-minimizing mix moves toward capital: factor substitution in action.
The firm starts at its cost-minimizing mix of labour and capital.
A sector-wide agreement raises the hourly wage. Machines cost the same as before.
The isocost line pivots inward on the labour axis: the same budget now buys fewer hours.
The firm substitutes toward capital. This is the mechanism behind automation responses to wage rises.
Examiners ask this as: wage agreement, union pay deal, labour costs rise, minimum wage sector, enterprise bargaining.
Other scenarios on Producer Theory (Isoquants & Isocosts)