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Behind the Supply Curve: Production Function I

# Behind the Supply Curve: Production Function I

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10/23/2012

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Behind The Supply Curve:Behind The Supply Curve:Production Function IProduction Function I
1. Production - short run1. Production - short run
Productive efficiencyProductive efficiencyThe Law of diminishing marginal returnsThe Law of diminishing marginal returns
2. Production - long run2. Production - long run
isoquants & isocostsisoquants & isocostsleast cost method of productionleast cost method of production

BackgroundBackground
Firms seek to maximise profit (Firms seek to maximise profit (
ππ
))
ππ
= R - C= R - C
How do firms produce output andHow do firms produce output andminimise costs (C)?minimise costs (C)?
What is production?What is production?
“… “…production is simply the process of production is simply the process of transforming inputs and outputs.” transforming inputs and outputs.”
inputs = capital (K) and labour (L)inputs = capital (K) and labour (L)

A production functionA production function
Functional relationshipFunctional relationship
Q = f(K, L , T)Q = f(K, L , T)
T changes over timeT changes over time
At a point in time T is fixedAt a point in time T is fixed
Productive efficiencyProductive efficiency
“ “A method of production is efficient if, for aA method of production is efficient if, for agiven level of factor inputs, it is impossiblegiven level of factor inputs, it is impossibleto obtain a higher level of output, given theto obtain a higher level of output, given theexisting state of technology.” existing state of technology.”

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