__ Network 11. Denotes a case where doubling the use of all inputs leads to a doubling of output.__ Fixed cost 12. A period sufficiently long so that all factors, including capital, can be adjusted.__ Adoption 13. Measures the ratio of total.externality__ Process 14. Measures total output divided by total units of an input.innovation.__ Product 15. Consumers derive benefits from a number of other consumers who adopt theinnovation good.__ Productivity 16. Cost associated with an input that is fixed in the short run.
IV. SUMMARY AND CHAPTER OUTLINE
Chapter 6 is divided into two related parts. Section A describes the theory of production; this will provide abasis for your understanding of production costs, as well as firm output decisions. Section B discusses businessorganization in the United States, helping to explain how and why firms do business.
A. Theory of Production and Marginal Products
1. A production function describes a relationship between total product or output of a firm and theemployment of inputs.2. The average product of an input is total output divided by the level of employment of that input. Themarginal product of an input is the rate at which total output changes as employment changes by one unit—allother inputs held constant.3. Marginal product declines in the short run due to the law of diminishing returns. This law states that as youcontinue to add variable inputs to a fixed capital base, eventually marginal product will fall.4. Returns to scale is a long-run concept that reflects the response of total output to proportionate changes inall inputs. Diminishing marginal productivity (which is a short-run concept) can be consistent with increasing,decreasing, or constant returns to scale.5. Time period is critical in defining the sort of adjustments available to firms. In the short run, the firm hastime to manipulate the employment of some inputs (e.g., labor), but the capital stock is usually assumed to befixed. Use of all inputs, including the capital stocks and embodied technology, can be altered only in the longrun.6. When technological change occurs, the production function of the firm may shift. Process innovation leadsto changes in production methods, while product innovation leads to the development of new products for themarketplace.7. Productivity measures the amount of output produced per unit of input; productivity growth measures therate of growth in the level of productivity.
B. Business Organization
1. Business establishments can be organized as individual proprietorships, as partnerships, or as corporations.2. Businesses exist for three important reasons. First, firms exist to exploit economies of mass production,i.e., to take advantage of specialized equipment, assembly lines, and division of labor. Second, entrepreneurscan raise capital more effectively when businesses are carefully structured. Third, the production process isorganized more efficiently when managers direct the activities of all inputs within a firm.3. Corporations allow owners to limit their potential liability to the amount they have invested, but thisstructure usually requires owners to release the reigns of control to a management team.
V. HELPFUL HINTS
1. Make sure that you take time to carefully plot a production function, along with its related average andmarginal cost curves. Practicing this exercise will help you to understand the relationships between inputs andoutput that characterize most production functions.2. Remember that the law of diminishing returns is a short-run concept, because you are adding variableinputs to a fixed capital base. This differs from decreasing returns to scale, which involves the changes inoutput associated with increasing the use of all inputs, including capital. A change in a capital base alwaysinvolves a long-run decision.3. The law of diminishing returns is compatible with increasing, decreasing, and constant returns to scale; thiscan be difficult to understand. Returns to scale and marginal productivity refer to two distinct things: returns to