Chapter 6 Flashcards
production function.
Mathematical relationship between amount of output and various combinations of inputs
Short run
Period of time in which one more inputs used in production cannot be changed
Long Run
Period of time when all inputs in production can be changed.
diminishing returns.
If the amount of capital is held constant, each additional worker produces less incremental output than the last, and vice versa.
Marginal Product
additional output that a firm can produce using an additional unit of an input.
Marginal Product of Labor Formula (non-calc)
Change in Quantity / Change in Labor
diminishing marginal product
As a firm employs more of one input, while holding all others fixed, the marginal product of that input will fall.
Marginal Product of Labor Formula (calc)
Partial derivative of Q with respect to L
How to find marginal cost from total cost
MC is derivative of total cost
To minimize any equation…
Set = 0 and solve
Average Product Formula
Quantity/Labor
isoquant
curve representing combinations of inputs that allow a firm to make a particular quantity of output
marginal rate of technical substitution
The rate at which the firm can trade input X for input Y, holding output constant
MRTSxy
MPx/MPy
If an isoquant is relatively straight
inputs are relatively substitutible
If an isoquant is relatively curved
inputs are relatively complementary
When two goods are perfect substitutes
isoquant is straight
When two goods are perfect complements
isoquants at right angles
Isocost line
shows all of the input combinations that yield the same cost.
Where is cost minimized?
Where isoquant is tangent to lowest isocost line
Cost is minimized when (formula)
MPk/r = MPl/w
Returns to Scale
Increase in Input when all inputs are increased in the same proportion
Constant Returns to Scale
production increases proportionally with inputs
Example: inputs double, outputs double
Increasing Returns to Scale
changing all inputs by the same proportion changes output more than proportionally.
Example: inputs double, outputs quadruple
Decreasing Returns to Scale
changing all inputs by the same proportion changes output less than proportionally.
Example: quadruple inputs, output only doubles
Technological change shifts isoquant
left (inward)
