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  • Chapter 6 - Production

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    oyuka oyunbolor
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    I. Production technology determines how inputs can be transformed into outputs. Firms aim to minimize costs by choosing an optimal input combination based on input prices and production technology. II. The production function shows the maximum output possible from a given set of inputs. It can indicate changing technology over time. Short-run production holds some inputs fixed, while long-run production allows variation in all inputs. III. Key concepts include diminishing marginal returns, isoquants, marginal rate of technical substitution, returns to scale, and special cases like perfect substitutes and complements.

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    Chapter 6- Production

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    I. Production technology determines how inputs can be transformed into outputs. Firms aim to minimize costs by choosing an optimal input combination based on input prices and production technology. II. The production function shows the maximum output possible from a given set of inputs. It can indicate changing technology over time. Short-run production holds some inputs fixed, while long-run production allows variation in all inputs. III. Key concepts include diminishing marginal returns, isoquants, marginal rate of technical substitution, returns to scale, and special cases like perfect substitutes and complements.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    0 views5 pages

    Chapter 6 - Production

    Uploaded by

    oyuka oyunbolor
    I. Production technology determines how inputs can be transformed into outputs. Firms aim to minimize costs by choosing an optimal input combination based on input prices and production technology. II. The production function shows the maximum output possible from a given set of inputs. It can indicate changing technology over time. Short-run production holds some inputs fixed, while long-run production allows variation in all inputs. III. Key concepts include diminishing marginal returns, isoquants, marginal rate of technical substitution, returns to scale, and special cases like perfect substitutes and complements.

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    © All Rights Reserved
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    of 5

    I Productiontechnology How be

    inputscan transformedintooutputs
    of
    Factors production
    Inputs labormaterial capital
    t.ro
    Goalofafirm choose a combinationatinputsthatminimizeitscosts
    Thecombination isdeterminedby
    1Inputprices
    2 Productiontechnology

    II Productionfunction showsthehighestoutputthatafirmcanproducefor a specifiedcombination ofinputs


    Q1
    Showswhatis technicallyfeasiblewhenfirmoperatesefficiently

    Functionfor 2inputs L labor K capital Q FfKL


    thesameinputscanyielddifferentoutputs
    Changes intechnology A means

    Q A xFCKL
    p
    Techdoesn'talwaysmeanmachines itcanalsorefertorules4guidelines
    III ShortRunusLongRun tochangesininputs
    referring

    shortRun whenquantitiesofoneormoreinputscannotbechangedy
    FirmschangetheINTENSITYwith Fixed
    input
    whichtheyutilizeofKdL KB
    varied L
    by
    LongRun whenallproductioninputsbecomevariable
    VarytheSIZEofinputnotsomuchINTENSITY
    bevariedby k kL

    I buditions Kisfixed Lisvariable


    Indicatesshortrunproduction

    II DiminishingMaginalReturnsi asuseatoneinputincreases withotherinputsFIXED therateatwhich


    outputincreases eventually declines
    DoesNOTmeannegativereturns additionaloutput candeclinewhiletotaloutputincreases
    Resultsfromthelimitationsontheuseatfixed K not thedeclineinqualityof L

    I IiB
    mini Ins
    II
    MPoflaborincreases
    II
    MPWL decreases
    sina.ae
    ix usedatmanaman
    Aoutputincreases alot BOutputincreasesbylittle
    mayincoutputinspiteofDMR asmoreoutput is
    TECHNOLOGICALCHANGE producedw sameinputs
    II Avg AMarginalproducts
    1 Marginalproduct oflabor MPL additionaloutputproducedwhenlaborincreases
    by 1 unit
    Mrsftp.ddQ slope atthetotaloutputat a specificpoint

    2 Averageproductoflabor APL averageproductivityovera range ofinputs


    ARs QQ slopeofpointsfromtheorigin
    MK
    I

    the
    From
    graphs how
    theleftofD
    On output

    MP AP APisincreasing A
    A AtA An
    MPis atmax 1
    Maxlaborspecialization
    AtD
    MP AP APisatmax
    ThismeansthatMPcrossesAPatAP'smaxpoint to
    ontherightofD
    MRAP APisdecreasing
    At E K9.3
    MPs0 totaloutputis atMax

    II Isoquarts curveshowing allpossible combinations ofinputsthat


    yieldthe SAMEoutput
    Isoquantmapgraphcombiningmultipleisoquants
    14year Iso
    quart
    Features
    Smoothcurves firmscanusefractionsofinput
    Changesinoutputreflect of
    DMR 55,75
    existence 90
    F A off theother MRTS
    Slopereflectstrade btwusingoneinputover

    is c III king
    F placeoflabormakesthe
    E9 Dmr audrditironmoafecawpinutaef.in

    q.gov suggests thatincreasinglaborwhilstkeeping kconstant


    4 Llyear willmakethecurveLINEAR
    Laborbecomeslessproductive
    II MRTS Marginal Rate of substitution
    LBAmountbywhichoneinputcanbereduced whenoneextraunitofanotherisused toproducethesameamrit
    I mass 4 Murphy

    MRTSis diminishing because ofDMR productivity ofany1 oneinput islimited


    Makesisoquantsconvex

    I Specialcases

    1 CobbDouglas Q AkaLb Il Perfectsubstitutes Q ak t bL


    a MPE AbKalb AMRTSisconstant
    Sameoutputcanbeproduced
    b MRE AaKaLb w extremesofcapital labor
    4 MRTS1414 Mufti bq.kz z QsKt L
    MRTS
    2 10
    41Perfectcomplements Q min ah bk Q
    I Qz
    FixedPROPORTIONS µ
    intermsofK make K I dfigureoutL
    lo 20 30
    Nosubstitution possible

    Outputcanbemadewith a SPECIFIC
    proportion ofcapital labor
    If Q min K L and q 1 then KLs 1
    Kel Ls1
    IP Qsmin2KLl andgel then Ks 1
    Ks t 2 2
    K
    as

    I L
    4
    VI Returns to scale rate atwhich OUTPUTincreases asinputsareincreasedproportionately
    Tosolve Q 2k Ll
    Example
    Double14Lintheproductionfunction
    Compareoutputwith
    theoriginaloutput
    1 21421 1 I
    42 21441244 21442 21122114 20
    thanDOUBLE Increasing
    More 3 i Constantreturnsofscale
    constant
    ExactlyDOUBLE
    thanDOUBLE Decreasing
    Less
    CobbDouglas Q AkaLb
    1 QlykyL AyatbkaLb
    2 Atb I Inc
    Atb1 constant

    atb4 Decreasing

    INCREASING CONSTANT DECREASING


    What x2input outputmorethan x2input outputEXACTLY x2inputoutputLESSthan
    doubles doubles doubles
    Largeoutput_towercost Firmsitedoesntaffect ADecreasingproductivity w
    oneepeicientproducer Productivity instead replicate
    costeffective lagersze
    Ineqmtherecanbemany
    producers BIneqmmanysmallfirms
    AIndivisibility blimitedresources
    causes Limitedsizesalinputs
    secomplexityatmgmt
    B'scaleofproductionenables
    specialization BLimitedsupplyofentrepreneurial
    talent
    specialization
    Pscaleatproductionenables
    laborspecialization

    K K K

    Graphing 20
    y y y
    o
    z no I z
    Tl
    ql
    o
    l l l
    l t l l L
    5 to L 5 10 L 105
    Isoquartsmorecloser Isoquantsareequidistant AIsoquantsarefurtherapart
    higherquartitesofboth asinputsincrease
    inputs

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