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Introduction to Microeconomics > Lecture 15 - Production functions > Flashcards

Lecture 15 - Production functions Flashcards

1
Q

What is a firm?

A

A firm is an organisation that converts inputs (labour, materials and capital) into outputs

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2
Q

Define capital services (K)

A

Capital services (K) includes the use of long-lived inputs such as land, buildings and equipment

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3
Q

Define labour services (L)

A

Labour services (L) includes the hours of work provided by managers and workers

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4
Q

Define materials (M)

A

Materials (M) includes natural resources and processed products consumed in producing, or incorporated in the final product

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5
Q

What must a firm do to maximise profits?

A
  • To maximise profits, a firm must produce efficiently
  • A firm produces efficiently if it cannot produce more output for a given quantity of inputs
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6
Q

How integral is efficient production in order to maximise profits?

A

Efficient production is a necessary condition for profit maximisation but not a sufficient condition

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7
Q

What is a production function?

A
  • A production function summarises the various ways that a firm can efficiently transform inputs into outputs
  • The production function shows only the maximum amount of output that can be produced from a given combination of inputs
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8
Q

Assuming that labour (L) and capital (K) are the only inputs, what is the production function?

A

The production function is q = f(L,K)

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9
Q

What is the short run?

A

The short run is a period of time so brief that at least one factor of production is fixed

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10
Q

What is the long run?

A

The long run is a period of time long enough that all factors of production are variable

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11
Q

What do we assume about capital and labour in the short run?

A

We assume that in the short run capital is a fixed input and labour is a variable input

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12
Q

State the short run production function

A
  • The short run production function is given by:
    q = f(L,Ꝁ)
  • This shows that in the short run capital is fixed
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13
Q

What does the symbol q represent in production functions?

A
  • q represents output which is also called the total product of labour
  • The total product of labour is the amount of output (total product) that a given amount of labour can produce holding the quantity of other inputs fixed
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14
Q

What is the marginal product of labour?

A

The marginal product of labour is the additional output produced by an additional unit of labour, holding all other factors constant

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15
Q

How do we calculate the marginal product of labour?

A
  • We get the marginal product of labour by differentiating the production function with respect to L
  • MPL = dq/dL
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16
Q

What is the average product of labour and how do we calculate it?

A
  • The average product of labour is the ratio of output to the amount of labour employed
  • APL = q/L
17
Q

State the law of diminishing marginal returns

A
  • The law of diminishing marginal returns states that if a firm keeps increasing an input whilst holding all other inputs and technology constant, the corresponding increases in output will eventually become smaller
  • Mathematically, this occurs when MPL<0
18
Q

In an economy, if there are just two inputs of capital and labour, what is the production function?

A
  • q = f(L,K)
  • This means that the production function is some function of L and K
19
Q

What is an isoquant?

A

An isoquant shows the combinations of inputs that will produce a specific level of output

20
Q

What are the properties of isoquants?

A

Isoquants have similar properties to indifference curves:
1- The further an isoquant is from the origin, the greater the level of output
2- Isoquants do not cross
3- Isoquants slope downwards
4- Isoquants must be thin

21
Q

What is the main difference between indifference curves and isoquants?

A

Isoquants have cardinal properties as well as ordinal ones whereas indifference curves only have ordinal properties

22
Q

What does the shape (curvature) of an isoquant indicate?

A

The shape (curvature) of isoquants indicate how easily a firm can substitute between inputs

23
Q

Draw the general isoquants for perfect substitutes, fixed-proportions and convex

A

See slide 16 of lecture 15

24
Q

What does the gradient/slope of an isoquant tell us?

A

The gradient/slope of an isoquant shows the ability of a firm to replace one input with another (holding output constant)

25
Q

What is the marginal rate of technical substitution (MRTS)?

A

The marginal rate of technical substitution (MRTS) is the gradient/slope of an isoquant at a single point

26
Q

State the formula for calculating the MRTS

A

MRTS = Change in capital/Change in labour = -MPL/MPK

27
Q

What do convex isoquants exhibit?

A

Convex isoquants exhibit a diminishing marginal rate of technical substitution

28
Q

What does moving to higher isoquants and movement along isoquants represent?

A
  • Moving to higher isoquants represents increasing one input while holding the other constant
  • Movement along an isoquant represents increasing one input while decreasing the other by an offsetting amount
29
Q

When does a production function exhibit constant returns to scale?

A
  • A production function exhibits constant returns to scale when a percentage increase in inputs is followed by the same percentage increase in outputs
  • For example, doubling inputs doubles output
30
Q

Do linear production functions have constant returns to scale eg. q =K+L

A

Yes, linear production functions do have constant returns to scale

31
Q

When does a production function exhibit increasing returns to scale?

A

A production function exhibits increasing returns to scale when a percentage increase in inputs is followed by a larger percentage increase in output

32
Q

When does a production function exhibit decreasing returns to scale?

A

A production function exhibits decreasing returns to scale when a percentage increase in inputs is followed by a smaller percentage increase in output

33
Q

What is the general form of a Cobb-Douglas production function?

A

A Cobb-Douglas production function has the general form: q = AL^aK^b

34
Q

What is the general pattern of returns to scale?

A
  • There is typically increasing returns to scale at low levels of output as small firms can gain from greater specialisation of workers and equipment by growing larger
  • There is typically decreasing returns to scale at higher levels of output as organising and coordinating activities becomes more and more difficult as firm size increases
35
Q

How does the spacing of isoquants reflect different returns to scale?

A
  • The closer the isoquants are together, there is increasing returns to scale
  • At medium separation of isoquants, there is constant returns to scale
  • At large separations of isoquants, there is decreasing returns to scale

Introduction to Microeconomics (13 decks)

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