2.1 (Producer Behaviour) Flashcards
Define production set?
The set of all combinations of inputs and outputs that comprise a technologically feasible way to produce
What does a representative firm do?
Uses inputs to produce outputs
What does a production set show?
The technological choices facing a firm
What does a technological constraint represent?
It represents the fact that only certain combinations of inputs can feasibly be used to produce a given amount of output
Draw production set diagram
Now (notes)
What does it mean for a point (x,y) to be in the production set?
It means that it’s technologically possible to produce y output with x amount of input
Define production function?
The maximum possible output that a representative firm can produce from a given amount of input (rational, π max. firm will seek to be on this)
What is an isoquant? Draw one?
An isoquant shows combinations of capital and labour that can produce a given level of output
See notes for diagram
What are the 3 assumptions regarding technology?
Monotonic/free disposal
Convex
Long term and short term (LT all FofP can vary, ST some are fixed)
Explain the monotonic/free disposal assumption?
A firm can have as many inputs as may be, as the disposal is free
Explain the convex assumption?
If there are two ways of producing the same output, then their weighted average will produce at least this output
Define marginal product?
The additional output that can be produced by employing one more unit of that input, holding all other inputs constant
How can you tell that marginal product of K or L has a diminishing rate?
Find derivative of it wrt either K or L and if less than 0 then diminishing
Define technical rate of substitution?
Slope of isoquant; it measures how much the firm has to increase one input in order to give up some of the other input
What is the significance of diminishing TRS?
The absolute value of TRS decreases as one of the FofP is increased, meaning the isoquant are convex
See marginal product but in notes p2 halfway down
Now
What are returns to scale?
Returns to scale describes how output changes if all input levels change by the same proportion
See and learn returns to scale diagram and check I know equations bit too
Notes
Note:
A technology may ‘locally’ exhibit different returns to scale (draw diagram)
Look
To produce an output, a firm needs a fixed ratio of the two inputs tf right angle isoquants
What are cobb-Douglas productions functions?
Well behaved
Prove the TRS equation?
See notes
How do CD production functions work wrt returns to scale? (ie. f(tk, tl) = ?
see notes
Explain technological progress and how it affects isoquants?
As superior prod. techniques develop, the same level of output can be produced with fewer inputs tf isoquant shifts inwards
See
notes just above 2.2 profit max behaviour
