How to Graph Isocosts & Isoquants in Excel 2007

By Jim Priebe, C.F.A.

Isoquants and isocosts are tools developed by economists to describe a firm's production costs and output. An isocost shows the bundles of inputs available to a firm for a given cost. An isoquant shows the bundles of inputs that produce a given level of output. When explaining these functions, capital (K) and labor (L) are traditionally used as the two inputs for these functions. Although there is no mathematical restriction, by limiting yourself to two inputs, you can create a graph using Microsoft Excel.

Things You'll Need

  • Excel

Graphing the Isocost Equation in Excel

Step 1

Determine your isocost equation. It is of the form:[Pl * L] + [Pk * K] = TCwhere Pl is the price of laborL is the amount of laborPk is the Price of CapitalK is the amount of capitalTC is the total cost.For this example we will usePl = 25Pk = 50TC = 750Rewriting the equation with the given values:(25 * L) + (50 * K) = 750

Step 2

Solve the equation when L is zero.(25 * 0) + (50* K) = 750K = 750 / 50K = 15

Step 3

Solve the equation when K is zero.(25 * L) + (50* 0) = 750L = 750 / 25L = 30

Step 4

Enter the data points(0, 15), (30,0)In cell A1 enter 0In cell A2 enter 30In cell B1 enter 15In cell B2 enter 0

Step 5

Select cells A1, B1, A2, B2

Step 6

Launch the Excel Chart Wizard.

Step 7

Select XY (Scatter) as the type from the Standard Types Menu.

Step 8

Select either sub-type "Scatter with data points connected by lines without markers" or "Scatter with data points connected by lines."

Step 9

Click "Next." Confirm the data range is accurate and "series in columns" is selected.

Step 10

Complete the labels for the graph. Here are suggestions:Title: Isocost Line for Firm when Total Cost = $100Value (X) Axis: LaborValue (Y) Axis: Capital

Step 11

Select either "As new sheet" or "As object in."

Step 12

Click "Finish." Your graph will be displayed.

Graphing the Isocost Equation in Excel

Step 1

Determine your isoquant equation. Economists typically use a Cobb-Douglas production function. It is an equation in which the variables are exponents and it is beyond the scope of this article to solve.

Step 2

Enter your data points. Here are example data points:(1,5), (1.3, 3), (2, 2), (3, 1,3), (5, 1)In cell A1 enter 1In cell A2 enter 5In cell B1 enter 1.3In cell B2 enter 3In cell A3 enter 2In cell B3 enter 2In cell A4 enter 3In cell B4 enter 1.3In cell A5 enter 5In cell B5 enter 1

Step 3

Select cells A1, B1, A2, B2, A3, B3, A4, B4, A5, B5

Step 4

Launch the Excel Chart Wizard.

Step 5

Select XY (Scatter) as the type from the Standard Types Menu.

Step 6

Select either sub-type "Scatter with data points smoothed by lines without markers" or "Scatter with data points smoothed by lines."

Step 7

Click "Next." Confirm the data range is accurate and "series in columns" is selected.

Step 8

Complete the labels for the graph. Here are suggestions:Title: Isoquant for Firm when Output = 15 units per dayValue (X) Axis: Labor (workers per day)Value (Y) Axis: Capital (machines per day)

Step 9

Select either "As new sheet" or "As object in."

Step 10

Click "Finish." Your graph will be displayed.