Chapter Eighteen: Technology

Chapter Eighteen
Technology
Technologies
A technology is a process by which

inputs are converted to an output.
 E.g. labor, a computer, a projector,
electricity, and software are being
combined to produce this lecture.
Technologies
 Usually several technologies will

produce the same product -- a
blackboard and chalk can be used
instead of a computer and a
projector.
 Which technology is “best”?
 How do we compare technologies?
Input Bundles
 xi denotes the amount used of input i;

i.e. the level of input i.
 An input bundle is a vector of the
input levels; (x1, x2, … , xn).
 E.g. (x1, x2, x3) = (6, 0, 93).
Production Functions
y denotes the output level.

 The technology’s production
function states the maximum amount
of output possible from an input
bundle.
y  f ( x 1 ,  , xn )
Production Functions
One input, one output
Output Level y = f(x) is the
production
y’ function.
y’ = f(x’) is the maximal
output level obtainable
from x’ input units.
x’ x
Input Level
Technology Sets
A production plan is an input bundle

and an output level; (x1, … , xn, y).
A production plan is feasible if
y  f ( x1 ,, xn )
 Thecollection of all feasible production

plans is the technology set.
Technology Sets
Output Level y = f(x) is the
production
y’ function.
y’ = f(x’) is the maximal
output level obtainable
from x’ input units.
y” y” = f(x’) is an output level
that is feasible from x’
input units.
x’ x
Input Level
Technology Sets
The technology set is
T  {( x1 ,, xn , y) | y  f ( x1 ,, xn ) and

x1  0, , xn  0}.
Technology Sets
Output Level
y’
The technology
set
y”
x’ x
Input Level
Technology Sets
Output Level
Technically
y’ efficient plans
The technology
y” Technically set
inefficient
plans
x’ x
Input Level
Technologies with Multiple Inputs
 What does a technology look like

when there is more than one input?
 The two input case: Input levels are
x1 and x2. Output level is y.
 Suppose the production function is
1/ 3 1/ 3
y  f ( x1 , x 2 )  2x1 x 2 .
 E.g. the maximal output level possible
from the input bundle
(x1, x2) = (1, 8) is
y  2x1/
1
3 1/ 3
x 2  2  11/ 3
 81/ 3
 2  1  2  4.
 And the maximal output level possible
from (x1,x2) = (8,8) is
1/3 1/ 3 1/ 3 1/ 3
y  2x1 x 2  2  8  8  2  2  2  8.
Output, y
x2
(8,8)
(8,1)
x1
 The y output unit isoquant is the set

of all input bundles that yield at most
the same output level y.
Isoquants with Two Variable Inputs
x2
y 
y 
x1
 Isoquants can be graphed by adding

an output level axis and displaying
each isoquant at the height of the
isoquant’s output level.
Output, y
y 
x2 y 
x1
 More isoquants tell us more about

the technology.
x2
y 
y 
y 
y 
x1
Output, y
y 
y 
x2 y 
y 
x1
 The complete collection of isoquants
is the isoquant map.
 The isoquant map is equivalent to
the production function -- each is the
other.
 E.g. y  f ( x1 , x2 )  2 x11 / 3 x21 / 3
x2
y
x1
x2
x1
x2
x1
x2
x1
x2
x1
x2
x1
x1
x1
x1
x1
x1
x1
x1
x1
x1
x1
Cobb-Douglas Technologies
A Cobb-Douglas production function

is of the form
a1 a 2 an
y  A x1 x 2  xn .
 E.g.
1/ 3 1/3
y  x1 x 2
with 1 1
n  2, A  1, a1  and a 2  .
3 3
x2
All isoquants are hyperbolic,
asymptoting to, but never
touching any axis.
a1 a 2
y  x1 x 2
x1
x2
touching any axis.
a1 a 2
y  x1 x 2
a1 a 2
x1 x 2  y"
x1
x2
touching any axis.
a1 a 2
y  x1 x 2
a1 a 2
x1 x 2  y"
a1 a 2
x1 x 2  y'
x1
x2
touching any axis.
a1 a 2
y  x1 x 2
y" > y'
a1 a 2
x1 x 2  y"
a1 a 2
x1 x 2  y'
x1
Fixed-Proportions Technologies
A fixed-proportions production
function is of the form
y  min{a1 x1 , a 2x 2 ,, an xn }.
 E.g.
y  min{ x1 , 2x 2 }
with
n  2, a1  1 and a 2  2.
Fixed-Proportions Technologies
x2 y  min{ x1 , 2x 2 }
x1 = 2x2
7 min{x1,2x2} = 14
4 min{x1,2x2} = 8
2 min{x1,2x2} = 4
4 8 14 x1
Perfect-Substitutes Technologies
A perfect-substitutes production
function is of the form
y  a1 x1  a 2x 2    an xn .
 E.g.
y  x1  3x 2
with
n  2, a1  1 and a 2  3.
Perfect-Substitution Technologies
y  x1  3x 2
x2
x1 + 3x2 = 18
x1 + 3x2 = 36
x1 + 3x2 = 48
8
6
All are linear and parallel
3
9 18 24 x1
Marginal (Physical) Products
y  f ( x1 ,  , xn )
 The marginal product of input i is the
rate-of-change of the output level as
the level of input i changes, holding
all other input levels fixed.
 That is, y
MP i 
 xi
E.g. if
1/ 3 2 / 3
y  f ( x1 , x 2 )  x1 x 2
then the marginal product of input 1 is
E.g. if
1/ 3 2 / 3
y  f ( x1 , x 2 )  x1 x 2
 y 1  2/ 3 2/ 3
MP1   x1 x 2
 x1 3
E.g. if
1/ 3 2 / 3
y  f ( x1 , x 2 )  x1 x 2
 y 1  2/ 3 2/ 3
MP1   x1 x 2
 x1 3
and the marginal product of input 2 is
E.g. if
1/ 3 2 / 3
y  f ( x1 , x 2 )  x1 x 2
 y 1  2/ 3 2/ 3
MP1   x1 x 2
 x1 3
and the marginal product of input 2 is
 y 2 1/ 3  1/ 3
MP2   x1 x 2 .
 x2 3
Typically the marginal product of one
input depends upon the amount used of
other inputs. E.g. if
1  2/ 3 2/ 3
MP1  x1 x 2 then,
3
1  2/ 3 2/ 3 4  2/ 3
if x2 = 8, MP1  x1 8  x1
3 3
and if x2 = 27 then
1  2/ 3 2/ 3
MP1  x1 27  3x1 2 / 3 .
3
 The marginal product of input i is

diminishing if it becomes smaller as
the level of input i increases. That is,
if
 MP i    y   2y
     0.
 xi  xi   xi   xi
2
1/3 2/ 3
E.g. if y  x1 x 2 then
1  2/ 3 2/ 3 2 1/ 3  1/ 3
MP1  x1 x 2 and MP2  x1 x 2
3 3
1/3 2/ 3
1  2/ 3 2/ 3 2 1/ 3  1/ 3
MP1  x1 x 2 and MP2  x1 x 2
3 3
so  MP1 2  5 / 3 2/ 3
  x1 x 2  0
 x1 9
1/3 2/ 3
1  2/ 3 2/ 3 2 1/ 3  1/ 3
MP1  x1 x 2 and MP2  x1 x 2
3 3
so  MP1 2  5 / 3 2/ 3
  x1 x 2  0
 x1 9
and  MP
2   2 x1/ 3x  4 / 3  0.
1 2
 x2 9
1/3 2/ 3
1  2/ 3 2/ 3 2 1/ 3  1/ 3
MP1  x1 x 2 and MP2  x1 x 2
3 3
so  MP1 2  5 / 3 2/ 3
  x1 x 2  0
 x1 9
and  MP
2   2 x1/ 3x  4 / 3  0.
1 2
 x2 9
Both marginal products are diminishing.
Returns-to-Scale
 Marginal products describe the

change in output level as a single
input level changes.
 Returns-to-scale describes how the
output level changes as all input
levels change in direct proportion
(e.g. all input levels doubled, or
halved).
Returns-to-Scale
If, for any input bundle (x1,…,xn),
f (kx1 , kx 2 ,, kxn )  kf ( x1 , x 2 ,, xn )
then the technology described by the
production function f exhibits constant
returns-to-scale.
E.g. (k = 2) doubling all input levels
doubles the output level.
Returns-to-Scale
Output Level
y = f(x)
2y’
Constant
y’ returns-to-scale
x’ 2x’ x
Input Level
Returns-to-Scale
f (kx1 , kx 2 ,, kxn )  kf ( x1 , x 2 ,, xn )
then the technology exhibits diminishing
returns-to-scale.
E.g. (k = 2) doubling all input levels less
than doubles the output level.
Returns-to-Scale
Output Level
2f(x’) y = f(x)
f(2x’)
Decreasing
f(x’) returns-to-scale
x’ 2x’ x
Input Level
Returns-to-Scale
f (kx1 , kx 2 ,, kxn )  kf ( x1 , x 2 ,, xn )
then the technology exhibits increasing
returns-to-scale.
E.g. (k = 2) doubling all input levels
more than doubles the output level.
Returns-to-Scale
Output Level
Increasing y = f(x)
returns-to-scale
f(2x’)
2f(x’)
f(x’)
x’ 2x’ x
Input Level
Returns-to-Scale
A single technology can ‘locally’

exhibit different returns-to-scale.
Returns-to-Scale
Output Level
y = f(x)
Increasing
returns-to-scale
Decreasing
returns-to-scale
x
Input Level
Examples of Returns-to-Scale
The perfect-substitutes production
function is
y  a1 x1  a 2x 2    an xn .
Expand all input levels proportionately
by k. The output level becomes
a1 (kx1 )  a 2 (kx 2 )    an (kxn )
function is
y  a1 x1  a 2x 2    an xn .
a1 (kx1 )  a 2 (kx 2 )    an (kxn )
 k( a1x1  a 2x 2    anxn )
function is
y  a1 x1  a 2x 2    an xn .
a1 (kx1 )  a 2 (kx 2 )    an (kxn )
 k( a1x1  a 2x 2    anxn )
 ky.
function exhibits constant returns-to-scale.
The perfect-complements production
function is
y  min{ a1 x1 , a 2x 2 ,  , an xn }.
min{ a1 (kx1 ), a 2 (kx 2 ),  , an (kxn )}
function is
y  min{ a1 x1 , a 2x 2 ,  , an xn }.
min{ a1 (kx1 ), a 2 (kx 2 ),  , an (kxn )}
 k(min{ a1x1 , a 2x 2 ,  , anxn })
function is
y  min{ a1 x1 , a 2x 2 ,  , an xn }.
min{ a1 (kx1 ), a 2 (kx 2 ),  , an (kxn )}
 k(min{ a1x1 , a 2x 2 ,  , anxn })
 ky.
function exhibits constant returns-to-scale.
The Cobb-Douglas production function is
y  x1a1 xa
2
2  x an .
n
a1 a2 an
(kx1 ) (kx 2 ) (kxn )
y  x1a1 xa
2
2  x an .
n
a1 a2 an
(kx1 ) (kx 2 ) (kxn )
a1 a 2 an a 1 a 2 an
 k k k x x x
y  x1a1 xa
2
2  x an .
n
(kx1 ) a1 (kx 2 ) a 2 (kxn ) an
 ka1k a 2 k an x a1 x a 2 x an
a1  a 2  an a1 a 2 an
k x1 x 2  xn
y  x1a1 xa
2
2  x an .
n
(kx1 ) a1 (kx 2 ) a 2 (kxn ) an
 k a1k a 2 k an x a1 x a 2 x an
 k a1  a 2  an x1a1 x a
2
2 x an
n
 k a1  an y.
y  x1a1 xa
2
2  x an .
n
(kx1 ) a1 (kx 2 ) a 2 (kxn ) an  ka1  an y.
The Cobb-Douglas technology’s returns-

to-scale is
constant if a1+ … + an = 1
y  x1a1 xa
2
2  x an .
n

to-scale is
increasing if a1+ … + an > 1
y  x1a1 xa
2
2  x an .
n

to-scale is
increasing if a1+ … + an > 1
decreasing if a1+ … + an < 1.
Returns-to-Scale
 Q:Can a technology exhibit

increasing returns-to-scale even
though all of its marginal products
are diminishing?
Returns-to-Scale
 Q: Can a technology exhibit

increasing returns-to-scale even if all
of its marginal products are
diminishing?
 A: Yes.
 E.g. y  x1 2/ 3 2/ 3
x2 .
Returns-to-Scale
2/ 3 2/ 3 a1 a 2
y  x1 x 2  x1 x 2
4
a1  a 2   1 so this technology exhibits
3
increasing returns-to-scale.
Returns-to-Scale
2/ 3 2/ 3 a1 a 2
y  x1 x 2  x1 x 2
4
3
2  1/ 3 2/ 3
But MP1  x1 x 2 diminishes as x1
3
increases
Returns-to-Scale
2/ 3 2/ 3 a1 a 2
y  x1 x 2  x1 x 2
4
3
2  1/ 3 2/ 3
But MP1  x1 x 2 diminishes as x1
3
increases and
2 2 / 3  1/ 3
MP2  x1 x 2 diminishes as x1
3
increases.
Returns-to-Scale
 So a technology can exhibit

increasing returns-to-scale even if all
of its marginal products are
diminishing. Why?
Returns-to-Scale
A marginal product is the rate-of-
change of output as one input level
increases, holding all other input
levels fixed.
 Marginal product diminishes because
the other input levels are fixed, so the
increasing input’s units have each less
and less of other inputs with which to
work.
Returns-to-Scale
 When all input levels are increased
proportionately, there need be no
diminution of marginal products
since each input will always have the
same amount of other inputs with
which to work. Input productivities
need not fall and so returns-to-scale
can be constant or increasing.
Technical Rate-of-Substitution
 At
what rate can a firm substitute
one input for another without
changing its output level?
x2
x'2
y
x'1 x1
The slope is the rate at which
x2 input 2 must be given up as
input 1’s level is increased so as
not to change the output level.
The slope of an isoquant is its
x'2 technical rate-of-substitution.
y
x'1 x1
 Howis a technical rate-of-substitution

computed?
 How is a technical rate-of-substitution

computed?
 The production function is y  f ( x1 , x 2 ).
 A small change (dx1, dx2) in the input
bundle causes a change to the output
level of
y y
dy  dx1  dx 2 .
 x1  x2
y y
dy  dx1  dx 2 .
 x1  x2
But dy = 0 since there is to be no change
to the output level, so the changes dx1
and dx2 to the input levels must satisfy
y y
0 dx1  dx 2 .
 x1  x2
y y
0 dx1  dx 2
 x1  x2
rearranges to
y y
dx 2   dx1
 x2  x1
so dx 2  y /  x1
 .
dx1  y /  x2
dx 2  y /  x1

dx1  y /  x2
is the rate at which input 2 must be given
up as input 1 increases so as to keep
the output level constant. It is the slope
of the isoquant.
Technical Rate-of-Substitution; A
Cobb-Douglas Example
a b
y  f ( x1 , x 2 )  x1 x 2
so  y a1 b y a b 1
 ax1 x 2 and  bx1 x 2 .
 x1  x2
The technical rate-of-substitution is
a1 b
dx 2  y /  x1 ax1 x 2 ax 2
   .
 y /  x2 1
dx1 bx1axb
2
bx1
x2 1/ 3 2/ 3 1 2
y  x1 x 2 ; a  and b 
3 3
ax 2 ( 1 / 3) x 2 x2
TRS    
bx1 ( 2 / 3 ) x1 2x1
x1
x2 1/ 3 2/ 3 1 2
y  x1 x 2 ; a  and b 
3 3
ax 2 ( 1 / 3) x 2 x2
TRS    
bx1 ( 2 / 3 ) x1 2x1
x2 8
TRS     1
8 2x1 2 4
4 x1
x2 1/ 3 2/ 3 1 2
y  x1 x 2 ; a  and b 
3 3
ax 2 ( 1 / 3) x 2 x2
TRS    
bx1 ( 2 / 3 ) x1 2x1
x2 6 1
TRS    
2x1 2  12 4
6
12 x1
Well-Behaved Technologies
Awell-behaved technology is
monotonic, and
convex.
Well-Behaved Technologies -
Monotonicity
 Monotonicity:
More of any input
generates more output.
y y
monotonic
not
monotonic
x x
Convexity
 Convexity: If the input bundles x’
and x” both provide y units of output
then the mixture tx’ + (1-t)x”
provides at least y units of output,
for any 0 < t < 1.
Convexity
x2
'
x2
x"2
y
x'1 x"1 x1
Convexity
x2
'
x2
 tx'1  (1  t )x"1 , tx'2  (1  t )x"2 

x"2
y
x'1 x"1 x1
Convexity
x2
'
x2
 tx'1  (1  t )x"1 , tx'2  (1  t )x"2 

x"2 y
y
x'1 x"1 x1
Convexity
x2 Convexity implies that the TRS
increases (becomes less
'
x2 negative) as x1 increases.
x"2
x'1 x"1 x1
Well-Behaved Technologies
x2 higher output
y
y y
x1
The Long-Run and the Short-Runs
 The long-run is the circumstance in

which a firm is unrestricted in its
choice of all input levels.
 There are many possible short-runs.
 A short-run is a circumstance in
which a firm is restricted in some way
in its choice of at least one input
level.
 Examples of restrictions that place a

firm into a short-run:
temporarily being unable to install,
or remove, machinery
being required by law to meet
affirmative action quotas
having to meet domestic content
regulations.
A useful way to think of the long-run

is that the firm can choose as it
pleases in which short-run
circumstance to be.
 What do short-run restrictions imply
for a firm’s technology?
 Suppose the short-run restriction is
fixing the level of input 2.
 Input 2 is thus a fixed input in the
short-run. Input 1 remains variable.
x2
y x1
x2
y x1
x2
y
x1
x2
y
x1
x2
x1
x2
x1
x2
y
x1
x2y
x1
x2
x1
x2 x1
x1
x1
x1
Four short-run production functions.

1/ 3 1/3
y  x1 x 2 is the long-run production
function (both x1 and x2 are variable).
The short-run production function when
x2  1 is y  x11 / 3 11 / 3  x11 / 3 .
The short-run production function when

x2  10 is y  x11 / 3 101 / 3  2  15x11 / 3 .
y  x11 / 3 101 / 3
y  x11 / 3 51 / 3
y  x11 / 3 21 / 3
y y  x11 / 3 11 / 3
x1
Four short-run production functions.

Chapter Eighteen: Technology

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter Eighteen: Technology

Uploaded by

Copyright:

Available Formats

Chapter Eighteen

A technology is a process by which

 Usually several technologies will

 xi denotes the amount used of input i;

y denotes the output level.

A production plan is an input bundle

 Thecollection of all feasible production

T  {( x1 ,, xn , y) | y  f ( x1 ,, xn ) and

 What does a technology look like

 The y output unit isoquant is the set

 Isoquants can be graphed by adding

 More isoquants tell us more about

A Cobb-Douglas production function

 The marginal product of input i is

 Marginal products describe the

A single technology can ‘locally’

(kx1 ) a1 (kx 2 ) a 2 (kxn ) an  ka1  an y.

The Cobb-Douglas technology’s returns-

(kx1 ) a1 (kx 2 ) a 2 (kxn ) an  ka1  an y.

The Cobb-Douglas technology’s returns-

(kx1 ) a1 (kx 2 ) a 2 (kxn ) an  ka1  an y.

The Cobb-Douglas technology’s returns-

 Q:Can a technology exhibit

 Q: Can a technology exhibit

 So a technology can exhibit

 Howis a technical rate-of-substitution

 How is a technical rate-of-substitution

 tx'1  (1  t )x"1 , tx'2  (1  t )x"2 

 tx'1  (1  t )x"1 , tx'2  (1  t )x"2 

 The long-run is the circumstance in

 Examples of restrictions that place a

A useful way to think of the long-run

Four short-run production functions.

The short-run production function when

Four short-run production functions.

You might also like