6 Flashcards
Rate at which output increases as
inputs are increased proportionately.
returns to scale
Situation in which output
more than doubles when all inputs are doubled.
● increasing returns to scale
Situation in which output
doubles when all inputs are doubled.
constant returns to scale
Situation in which output
less than doubles when all inputs are doubled.
decreasing returns to scale
Production function
with L-shaped isoquants, so that only one combination of labor
and capital can be used to produce each level of output.
fixed-proportions production function
Amount by
which the quantity of one input can be reduced when one extra
unit of another input is used, so that output remains constant.
marginal rate of technical substitution (MRTS)
Holding the amount of capital
fixed at a particular level—say 3,
we can see that each additional
unit of labor generates less and
less additional output.
Diminishing Marginal Returns
Graph combining a number of
isoquants, used to describe a production function.
isoquant map
Average product of labor for an entire
industry or for the economy as a whole.
labor productivity
Total amount of capital available for
use in production.
stock of capital
Development of new
technologies allowing factors of production to be used
more effectively.
● technological change
Principle that as the
use of an input increases with other inputs fixed, the resulting
additions to output will eventually decrease.
law of diminishing marginal returns
Output per unit of a particular input.
● average product
Additional output produced as an input is
increased by one unit.
marginal product
Period of time in which quantities of one or
more production factors cannot be changed.
short run
Production factor that cannot be varied.
fixed input
Amount of time needed to make all
production inputs variable.
long run
Inputs into the production
process (e.g., labor, capital, and materials).
factors of production
Function showing the highest
output that a firm can produce for every specified
combination of inputs.
production function
describes how a firm makes cost-
minimizing production decisions and how the firm’s
resulting cost varies with its output.
theory of the firm
