inputs and production ( supply ) Flashcards
markets might consist of millions, so where do the demand curves come from ?
the horizontal sum of the demand of individual consumers.
firms use productive resources, or inputs to manufacture goods and services. what are they called ?
factors of production
land, labour, capital and enterprise.
the stuff that the factors produce is called output.
what determines the level of output that is feasible for a given set of inputs ?
the level of technology
what is a production function ?
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
what is the production set ?
set of technically feasible combinations of inputs and outputs
all efficient and inefficient points technically feasible
which points are technically efficient or inefficient ?
all points on line are efficient
q = f(l,k)
all points off line are inefficient
q < f(l,k)
what is the labour requirement function ?
labour need to produce a certain level of output. the inverse of the production function.
if Q = root L
L = Q^2
name two different types of special production function forms ?
cobb - douglas Q = K^aL^b
single input production functions - total production function. only has one input
what is marginal production ?
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
what is the average product ?
the average production of an input is total output divided by the Q of the input used in production.
AP = Q / L or K
what is the law of diminishing marginal returns ?
marginal product will decline as the quantity of the input in increased as the other is held.
what is the relationship between AP and MP ?
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
what is an isoquant ?
all combinations of inputs that achieve the same output
slope = change K /change L
= dK / dL
downward sloping convex curve
what area is the economic region ?
the square inside the curves but not near the ends of the curves
what is the marginal rate of technical substitution ?
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
what is the relationship between the MP and MRTS ?
MPl / MPk = -dk/dl
what is the elasticity of substitution ?
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 )
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
a. constant
b. infinity
c. Q = aL + bK
d. downward sloping line
e. a/b constant
for fixed proportion production functions… what is the ???
a. shape of the isoquant
b. production function
c. elasticity
d. MRTS
a. L
b. Q = min(L,K)
c. 0
d. infinity or 0
for a cobb-douglas production function… what is the ???
a. production function
b. elasticity
c. shape of the production function
a. Q=AK^bL^a
b. 1
c. convex curve negative slope
all of the special functions are different types of one specific form, what is it ?
constant elasticity of substitution (CES) production function.
Q = [ aL^(sigma - 1 / sigma) + bK^(sigma - 1 / sigma) ]
what are returns to scale ?
the analysis of what happens to output when we increase all the input forms
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
a. output increases by more than proportional
b. output increases proportionally
c. output increases by less than proportional
how do you calculate what returns a function gives ?
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
what is technological progress ( invention ) ?
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
what is labour saving tech progress ?
progress that leads to a fall in required labour
how do you determine what kind of technological progress it is ?
draw a ray from the origin intersecting isoquants
calculate the MRTSs if it falls = labour saving
increases = capital saving
constant = neutral invention
define these types of costs ?
a. explicit
b. implicit
c. opportunity
d. economic
e. accounting
f. sunk
g. non - sunk
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.
define cost minimisation:
a. short run
b. long run
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
what is the isocost line ?
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
