Chapter 10 Flashcards
Definition of short run, in terms of production
The longest period of time during which at least one of the inputs used in production process cannot be varied
Definition of long run, in context of production
The shortest period of time required to alter the amounts of all inputs used in production process.
Production function
The relationship that describes how inputs like capital and labour are transformed into output, tells us how output will vary if some or all inputs are varied
Variable input
An input that can be varied in the short run
Fixed input
An input that cannot vary in the short run
Properties found in production functions observed in practice
•It passes through the origin
•Initially the addition of variable inputs augments output at an increasing rate
•At some point, additional units of variable inputs gives rise to smaller increments in output (Sometimes even decline).
Law of diminishing returns
IF OTHER VARIABLES ARE FIXED, the increase in output from an increase in the variable output must eventually decline
Total product cruves
A curve showing the amount of output as a function of the amount of variable inputs.
Marginal product
Change in total product due to a unit change in the variable input. DELTA Q OVER DELTA L (L being the variable input)
Average product
Total output divided by the quantity of the variable input (AP = Q/L) (when the variable input is labour the avg product is AKA labour productivity)
When the marginal product curve lies ABOVE the avg product curve
The avg product curve must be rising
When the marginal product curve lies BELOW the avg product curve
The APC must be falling
The average product curve and marginal product curve intersect at
The maximum value of the avg product curve
Marginal rate of technical substitution (MRTS) is
The rate at which one input can be exchanged for another without altering the total level of output
The MRTS at any point A is
The absolute value of the slope of the isoquant that passes through that point A
To calculate MRTS = MPLA/MPKA (marginal product of labour at A over MP of capital at A)
The shape of isoquants for Perfect substitutes look like _________ and for perfect complements look like _________.
Straight Lines connecting x axis to y axis (triangles), right angles
Returns to scale tells us
What happens to output when all inputs are increased by exactly the same proportion.
Increasing return to scale
The property of a production process whereby a proportional increase in every input yields a more than proportional increase in output
( F(zL,zK) > zF(L,K) )
Constant returns to scale
The property of a production process whereby a proportional increase in every input yields an equal proportional increase in output
( F(zL,zK) = zF(L,K) )
Decreasing returns to scale
The property of a production process whereby a proportional increase in every input yields a less than proportional increase in output
( F(zL,zK) < zF(L,K) )
The problem of allocating a fixed resource between two production activities is solved by…
Equating the marginal product of the resource in each.
The general rule for allocating an input, that isn’t divisible, efficiently is to
Allocate the next unit of the input to the production activity where its marginal product is highest
Allocating a divisible input (or resource) efficiently
Allocate the input so that its marginal product is the same in every activity
Isocost line
A set of input bundles each of which costs the same amount
