Chapter 5 Flashcards
It is the creation of goods and
services using the inputs of production.
Production
The physical relationship between the inputs and outputs of production of goods and services.
Production Function
Production Function
Q=f(x)
Q = output
X = inputs
It refers to the good and services that have been created using the production inputs.
Outputs
It refers to the factors of production which include land, labor, capital, and entrepreneurship.
Input
Classification of Inputs
Fixed and Variable Input
They are those that remain constant regardless of the volume or quantity of production. This means that whether you produce or not, the factors of production is unchanged.
Fixed Inputs
These are those that vary in accordance to the volume or quantity of production; If there is no production, there is no
variable inputs.
Variable Inputs
It states that when successive units of variable input is combined with a fixed input, the total products (TP) or output (Q) will increase, but
beyond some points the resulting increases in output will become smaller and smaller.
Law of Diminishing Marginal Returns
It refers to the total production or output (Q).
Total Product (TP)
It refers to the additional output produced by employing one additional unit of input (X) holding the level of usage of all other inputs are constant.
Marginal Product
MP = △TP / △X
or △Q / △X
It refers to the output produced per unit of the input.
Average Product (AP)
AP = TP / X
or Q / X
Three Stages of Production
Stage 1, 2 and 3
This stage starts at the origin until the highest portion of AP. The TP increases at an
increasing rate whereas both AP and MP increase. It is explained by specialization and teamwork gained from additional input. Moreover at this stage fixed input is grossly underutilized.
Stage 1
This stage goes from highest portion of the AP until MP is zero. The TP increases at a
decreasing rate and the AP and MP decrease.
Stage 2
This stage begins where MP is zero until negative range. The TP decreases and the AP also
decreasing but still positive while MP is already negative.
Stage 3
It represents the various combinations of two inputs that can be used to produce the same level of output.
Isoquants
Characteristics of Isoquants
- They slope downward to the right for those combinations of two inputs that firm will wants to
use. - They do not intersect
- They are convex to origin
It contains all combinations of
inputs that the same budget can purchase at constant prices.
Isocost Line
The _______________ of the Isoquant and Isocost curves shows the best combination
of inputs given the capital outlay.
Point of Tangency
