Allocation of Capital and Labour + Lerner Diagram Flashcards
Cost minimisation formula
Cx = w Lx + r Kx
Definition of isocost
Represents all possible combinations of two inputs that a firm can purchase for a given cost, at fixed input prices
Definition of Isoquant
Slope of Isoquant
Curve that represents all the possible combinations of two inputs that produce the same level of output.
Slope of Isoquant is the marginal rate of technical substitution (MRTS)
= - Marginal product of Labour (MPl) / Marginal product of Capital (MPk)
In perfect competition, the real price of a factor is equal to?
It’s marginal product
Equilibrium factor prices and factor allocation
Factor prices = w and r
Factor allocation = Lx, Ly, Kx, Ky
Lerner diagram, conditions for equilibrium
- Factor prices (w and r) are determined by zero profit conditions.
- Factor allocation between industries is determined by full employment conditions
Lx + Ly = L
Kx + Ky = K
- Left hand = Demand of factors (National)
- Right hand = Supply of factors (National)
UVI, what does it stand for, explanation, formula and what happens if Px rises.
Unit value Isoquant
Plots all input bundles that produce £1 of revenue in that industry
X = 1/Px
Exogenous to a small open economy, meaning it is influenced by factors outside of the small open economy itself.
If Px rises, UVI shifts inwards as less of X is required to produce £1 in that industry.
UIC, what does it stand for, formula, intercepts, slope and formation of general equilibrium.
Unit Isocost line
Input bundles that cost £1 to hire.
wL + rK = 1
Therefore K = 1/r - w/r L
Intercepts are 1/w and 1/r
Slope = w/r = Relative wage
Endogenous in general equilibrium.
Factor price equalisation theorem
Under free trade, the price of a given factor of production is equalised across all countries that produce both goods and use the same technologies.
