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Production

# Production

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11/12/2013

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M
ICROECONOMICS
:P
RODUCTION
, C
OST
M
INIMISATION
, P
ROFIT
M
AXIMISATION

T
HE
P
RODUCTION
F
UNCTION
+ M
ARGINAL
+ A
VERAGE
P
RODUCTS
The Production Functionsimply shows theTECHNICALLY POSSIBLE outcomes of a givencombination of inputs.
y
In the form:
Y
= f(x1, ..., xn)
It does NOT consider the availability of those inputs,the affordability of those inputs. It simply shows theprocess of transformation from input
output.
The MARGINAL PRODUCTof an input is the changein output cause by an incremental change in theamount of the input:
y
dY/d
x1 = MPx1
y
W
e assume:
MP is NON ² NEGATIVE, an
d
isDIMINISHING
.
The AVERAGE PRODUCTof an input is the amountof output per unit of input:
y
Y/
x1 = APx1

I
SOQUANTS
+ MRTS
Basically indifference curves for producers, with caveats.
An Isoquant describes the different combinations of inputsthat will result in a constant level of output.
y
F(K,L) =
Y*

would describe an Isoquant at the level Y* of output, forexample.
Isoquants are strictly convex and they do not cross.
HO
W
EVER:
Isoquants are a CARDINAL measure
, whilstIndifference curves are ORDINAL.
The slope of an Isoquant shows the
Marginal Rate of Technical Substitution
;
i.e., the rate at which you wouldhave to substitute two inputs to retain the same level of output.
You can derive the MRTS thusly:
y
Y = F(K,L)
y
dY = MPK. dK + MPL. dL = 0
y
-
d
K

d
L = MPL
MPK = MRTS of L for K
Production functions are HOMOTHETIC:
y
Any trade off implied by the MRTS is due to
the Ratio of twoinputs, NOT the scale of output.
y
This suggests that all Isoquants are radial expansions of one another.