How Markets Organise Production

Question 1

What is Production?

Answer 1

• The Process of turning inputs into outputs
• This could be simplified into 2 things- Labour (L) and Capital (K)
• f(K,L) = Q

Question 2

How to Maximise Production Function?

Answer 2

• Labour: Advertise, Hire, Interview
• Capital: New Machinery, Raise Funds, Train Labour, Find Space

Question 3

Why is Production dependant on time frame?

Answer 3

• SR vs LR
• In the SR, Capital is fixed
• In the LR, anything is variable

Question 4

What are the two Stages of the Short Run Production Graph?

Answer 4

• 1. Specialisation and DoL
• 2. Law of Diminishing Returns

Question 5

How can the Output curve shift upwards?

Answer 5

• If there is technical progress with the same inputs, we create a greater output

Question 6

Define Total Product

Answer 6

• The total amount of output from the production process
• The same as Q

Question 7

Define Average Product

Answer 7

• The average product you produce per unit inputs
• Q/L (SR)

Question 8

Define Marginal Product

Answer 8

• The additional product from every additional unit of input
• dQ/ dL

Question 9

What is an Isoquant?

Answer 9

• A way to show all possible input combinations that yield the same output
• You have 3 variables (Q,K,L) in the LR, so must fix one of them

Question 10

What is the Gradient of the Isoquant?

Answer 10

• The Marginal Rate of Technical Substitution (MRTS)

Question 11

How do you calculate MRTS?

Answer 11

• MRTS = MPL/MPK

Question 12

How to prove MRTS for cost curves (graphically)?

Answer 12

• Moving from point x to point y
• Less L decreases Q by MPL X deltaL
• More K increases Q by MPK X deltaK
• The product of the two sums to 0
• As they are on the same Isoquant, by rearranging:
  deltaK/deltaL = - MPL/MPK

Question 13

What are the 3 Returns to Scale?

Answer 13

• Increasing: f(xK,xL) > xQ
• Decreasing: f(xK,xL) < xQ
• Constant: f(xK,xL) = xQ