Microeconomics Study Guide

Chapter 6: Production

Production Function: Q=F (K , L)

The short run is the period in which one or more factors are fixed.

Capital is fixed in the short run, labor is variable.

Isoquants show all input that yield same output, they are a level curve.
Average and Marginal Product:

Avg Prod. Of Labor: Q/ L

Q
Marginal prod. Of Labor= MPL= L = (dQ/dL)
MPL<APL -> decreasing APL
MPL>APL-> increasing APL
MPL=APL= Max Avg Prod.

Law of Diminishing Returns- with one factor of production fixed (in the short run)
the use of an input will eventually cause output to decrease. (d2Q/dL2<0). (Without
tech).

Thomas Malthus, apl and mpl for prod of food fell from increased population,
failed to include tech in production of food.
Labor Productivity is the APL for an entire industry/economy.
Stock of Capital- all capital available.

Depreciation- Decreases at a rate of a year.

Most important factor in productivity.

In the long run, fixing labor will also cause diminishing marginal returns to capital.
Marginal Rate of Technical Substitution- amount by which one input can be
decreased when one extra unit of another output is added so that output is
constant.
MPK dK
MRTS= = for a fixed Q.
MPL dL
Slope of Isoquant.
Diminishing MRTS.

Change in output from changing capital= ( MPK ) ( K ) for labor replace with L.

( MPL )( L ) + ( MPK ) ( K )=0

 MPL K MPL
= =MRTS . =MRTS
MPK L MPK

Perfect substitutes have linear isoquants.

Fixed proportion production has L-Shaped Isoquants.

Returns to Scale: Q=F ( K , L)

When <1 decreasing returns to scale.

When >1 increasing returns to scale.
o Tends to lead to large firms present in an industry.
When =1 constant returns to scale.
In the long run we are concerned with scale of operation

Chapter 7: Costs of Production

Economic Cost = Accounting Cost + Opportunity Cost

Sunk Costs should always be ignored.

Fixed are NOT SUNK costs.

Total Cost = Fixed Cost + Variable Cost

TC = FC + VC
Fixed cost is independent of level of output.
FC can only be eliminated by going out of business go out of business
when P<AVC
VC TC
Marginal Cost = =
Q Q

AFC=FC/Q, AVC= VC/Q

Short Run costs:

VC w L w
SR Marginal Cost= = =
Q Q MPL
MC= W/MPL
Where w is the wage rate (cost of labor).
If you increase MPL, decrease MCIncrease Wage, increase MC.

COST OF CAPITAL: r=r+ , where r is rental cost of capital.

Chapter 8: The Supply Curve
Price = Marginal Revenue = Marginal Cost

MR= R / Q

( q )=r ( q )c ( q)

Max profit not revenue.

The SR Demand Curve is the segment of the marginal cost curve above
AVC.
Competitive Firms are

Price takers, homogeneity in products, many sellers, free entry and exit.

Shut down when (MR=MC=P)<AVC

Recall elasticity Type equation here .