inputs and production ( supply )

Question 1

markets might consist of millions, so where do the demand curves come from ?

Answer 1

the horizontal sum of the demand of individual consumers.

Question 2

firms use productive resources, or inputs to manufacture goods and services. what are they called ?

Answer 2

factors of production

land, labour, capital and enterprise.

the stuff that the factors produce is called output.

Question 3

what determines the level of output that is feasible for a given set of inputs ?

Answer 3

the level of technology

Question 4

what is a production function ?

Answer 4

tells us the max output a firm can produce with any given quantity of inputs.

Q = F (L,K)

normally when drawing; we fix one input and see how it effects Q

Question 5

what is the production set ?

Answer 5

set of technically feasible combinations of inputs and outputs

all efficient and inefficient points technically feasible

Question 6

which points are technically efficient or inefficient ?

Answer 6

all points on line are efficient
q = f(l,k)
all points off line are inefficient
q < f(l,k)

Question 7

what is the labour requirement function ?

Answer 7

labour need to produce a certain level of output. the inverse of the production function.

if Q = root L

L = Q^2

Question 8

name two different types of special production function forms ?

Answer 8

cobb - douglas Q = K^aL^b

single input production functions - total production function. only has one input

Question 9

what is marginal production ?

Answer 9

the change in output that results from one extra unit of one type of input: holding all others equal. how much the total output changes

MPl,k = dQ / d L or K

Question 10

what is the average product ?

Answer 10

the average production of an input is total output divided by the Q of the input used in production.

AP = Q / L or K

Question 11

what is the law of diminishing marginal returns ?

Answer 11

marginal product will decline as the quantity of the input in increased as the other is held.

Question 12

what is the relationship between AP and MP ?

Answer 12

as AP is rising MP is above it

as AP is falling MP is below

MP = AP when the AP is constant

when MP = 0 , TP = maximum

Question 13

what is an isoquant ?

Answer 13

all combinations of inputs that achieve the same output

slope = change K /change L
= dK / dL

downward sloping convex curve

Question 14

what area is the economic region ?

Answer 14

the square inside the curves but not near the ends of the curves

Question 15

what is the marginal rate of technical substitution ?

Answer 15

measures the amount of one input the firm would be willing to sacrafice in exchange for another input, in order to be able to produce the same output. = the negative of the slope of the isoquant

-dK / dL

Question 16

what is the relationship between the MP and MRTS ?

Answer 16

MPl / MPk = -dk/dl

Question 17

what is the elasticity of substitution ?

Answer 17

a measure of how easily a firm can substitute one input for another.

%change in K:L ratio / %change in MRTS

= (changeK/changeL) . ( K/L) /
( changeMRTS / MRTS )

Question 18

for a linear production function… what is the ???

a. MRTS
b. elasticity
c. production function
d. shape of the isoquant
e. slope of the isoquant

Answer 18

a. constant
b. infinity
c. Q = aL + bK
d. downward sloping line
e. a/b constant

Question 19

for fixed proportion production functions… what is the ???

a. shape of the isoquant
b. production function
c. elasticity
d. MRTS

Answer 19

a. L
b. Q = min(L,K)
c. 0
d. infinity or 0

Question 20

for a cobb-douglas production function… what is the ???

a. production function
b. elasticity
c. shape of the production function

Answer 20

a. Q=AK^bL^a
b. 1
c. convex curve negative slope

Question 21

all of the special functions are different types of one specific form, what is it ?

Answer 21

constant elasticity of substitution (CES) production function.

Q = [ aL^(sigma - 1 / sigma) + bK^(sigma - 1 / sigma) ]

Question 22

what are returns to scale ?

Answer 22

the analysis of what happens to output when we increase all the input forms

Question 23

what happens to output when the input increases and you have …..

a. increasing returns to scale
b. constant returns to scale
c. decreasing returns to scale

Answer 23

a. output increases by more than proportional
b. output increases proportionally
c. output increases by less than proportional

Question 24

how do you calculate what returns a function gives ?

Answer 24

Q(L,K) = F(L,K)

Q(lamdaL,lamdaK) = another greek variable x F(L,K)

another greek variable > lamda - increasing returns

another greek variable = lamda - constant returns

another greek variable < lamda - decreasing returns

if the function is a cobb douglas function the final other greek variable is to the power of a + b

a + b , = 1 constant
, > 1 increasing
, < 1 decreasing

Question 25

what is technological progress ( invention ) ?

Answer 25

shifts production function inward as firms can now produce more for the same inputs or produce the same for less inputs. e.g. tesla gigafactory
- robots don’t need any sleep, mistakes or wages

Question 26

what is labour saving tech progress ?

Answer 26

progress that leads to a fall in required labour

Question 27

how do you determine what kind of technological progress it is ?

Answer 27

draw a ray from the origin intersecting isoquants

calculate the MRTSs if it falls = labour saving

increases = capital saving

constant = neutral invention

Question 28

define these types of costs ?

a. explicit
b. implicit
c. opportunity
d. economic
e. accounting
f. sunk
g. non - sunk

Answer 28

a. involves a direct money outlay
b. doesn’t involve a direct money outlay (e.g. time taken to interview labour )
c. the value of a resource in terms of its best alternative. the next best alternative forgone
d. sum of a firms explicit and implicit costs. most relevant for making policy decisions
e. total of a firms explicit costs
f. costs that must be incurred no mater the decision. these costs are not a part of opportunity costs, they are unavoidable. can’t get back.

g. costs incurred when a decision is made. avoidable.
when evaluating alternatives the decision maker should only consider non sunk costs.

Question 29

define cost minimisation:

a. short run

b. long run

Answer 29

a firm seeks to minimise its costs producing a certain level of output.

a. at least one input is fixed
b. all inputs can vary

Question 30

what is the isocost line ?

Answer 30

set of L and K combinations that yield the same total cost for given wage rate and interest rate.

TC = wL + rK

vertical intercept = TC / r

horizontal = TC / w

slope = - w / r