LN5 Flashcards
Describes how inputs can be transformed into outputs
Production Technology
What are examples of inputs?
land, labor, capital, and raw materials
Long-lived inputs such as land, buildings (factories, stores), equipment (machines, trucks, tools)
Capital (K)
Human services. Includes managers, skilled workers (with specific training/education), and less-skilled workers
Labor (L)
Raw materials (oil, water, wheat); processed products (aluminum, plastic, paper, steel)
Materials (M)
What are examples of outputs?
cars, desks, books, etc.
Indicates the highest output (Q) that a firm can produce for every specified combination of inputs
The Production Function
Shows what is Technologically Feasible when the firm operated efficiently
The Production Function
What’s the production function for two inputs?
Q=f(K,L)
Q=min(2L,4K) means that K&L are?
Perfect Complements
Q=4L+4K means that K&L are?
Perfect Substitutes
Q=L^1/2 K^1/4 means that K&L are?
Imperfect Substitutes
If technology increases, (more/less) output can be produced for a given level of inputs
More
Period of time in which quantities of one or more production factors cannot be changed
Short Run (SR)
What is the fixed input in the Short Run?
Capital (K)
What is the variable input in the Short Run?
Labor (L)
Amount of time needed to make all production inputs variable
Long Run (LR)
-because it takes time to buy/lease machines, and/or build/rent factories
Output per unit of a particular input
Average Product of Labor (APvL)
Measures the productivity of a firm’s labor in terms of how much - on average - each worker can produce
Average Product of Labor (APvL)
Formula for Average Product of Labor
APvL = Q/L
Additional output produced when labor increases by one unit
Marginal Product of Labor (MPvL)
Assume your course grade is based on 3 equally-weighted exams. You’ve taken 2 exams and your course average is currently 85%. Your third exam is considered your “marginal” exam.
If your score on Exam 3 is:
- Greater than 85%, your average will ___
- Less than 85%, your average will ___
- Equal to 85%, your average will ___
- Rise
- Fall
- Remain Constant
If your MPvL > APvL then APvL ___
Rises
If your MPvL
Falls
If your MPvL = APvL then APvL
Remains Constant (doesn’t change)
Slope of a line from the origin to any point on the Total Point Curve
Average Product of Labor (APvL)
Slope of the line tangent to any corresponding point on the Total Product Curve
Marginal Product of Labor (MPvL)
When MPvL = ___ , the total production is at a maximum
0
Maximum MPvL occurs where total production is (steeper/flatter)
steeper (at the highest point on the curve before it declines)
Whats the formula for MPvL?
dQ/dL
As the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease
Diminishing Marginal Returns
When the use of labor is (small/large) and capital is (variable/fixed), output increases considerably since workers begin to specialize
Small
Fixed
Initially, MPvL (increases/decreases)
Increases
Assign Tasks
Specialization (ex. one person sews a shirt and the other person irons on a logo)
When the use of labor input is (large/small), some workers become less efficient
Large
Eventually, MPvL (increases/decreases)
Decreases (diminishes)
Why does MPvL eventually decrease (diminish) when labor input is large?
- Crowding of Fixed Inputs (fixed number of machines and factory size)
- Socialization (amount of talking is directly proportional to the number of workers and increases with each additional worker)
If there are 20 machines, the MP of the 21st worker is (more/less) than the 20th worker
Less
because the 21st worker will have to share a machine and of course higher levels of crowding/socialization
There are 20 machines in a factory. At what point do the negative impacts of crowding and socialization outweigh the benefits of specialization?
Anywhere after L=1 and Before L = 21
Changes in technology will cause shifts in the ___ ___ ___
Total Production Curve
Can labor productivity increase if there are improvements in technology
Yes, even though any given production process exhibits demising returns to labor
Has two variable inputs (Labor and Capital)
Long Run Production
What two things must a firm meet for technologically efficient production?
- Choose the technology that uses smallest possible quantities of inputs to produce a given level of output
- Choose the technology that produces the most output from given quantities of inputs K&L
Curve that shows all technologically efficient combinations of labor and capital that can produce a single (iso) level of output (quantity)
Isoquant
If labor > capital, does that mean that the company is technologically inefficient?
No. It can still be efficient (things can be done by hand or machines can run 24/7 unlike employees)
- only technologically inefficient if:
1. K=6 and L=6 and Q=20
2. K=6 and L=8 and Q=20 INEFFICIENT (more L for same Q)
What is the biggest difference between Isoquant and Indifference Curves?
Isoquants hold something measurable (quantity) constant
Indifference Curves hold something that is not measurable (utility) constant
Isoquants farther from the origin represent (greater, less) levels of output
Greater (quantity is higher)
Isoquants (do/don’t) cross
Don’t (if they do that means one is inefficient)
ex.
L=20 and K=10 and Q=30
L=20 and K=10 and Q=20 INEFFICIENT
Isoquants slope (up/down)
Down (if they slope up then one is inefficient)
ex.
L=20 and K=10 and Q=30
L=30 and K=20 and Q=30 INEFFICIENT
Slope of the isoquant
Marginal Rate of Technical Substitution (MRTS)
Units of K (input in the vertical axis) that can be replaced with an additional unit of L (input on the horizontal axis), keeping the output constant
Marginal Rate of Technical Substitution (MRTS)
The slope of the isoquant (MRTS) becomes ___ as more K is replaced by L
Flatter
Change in Q resulting from using one extra unit of L, holding all other factors (K) constant
MPvL
Change in Q resulting from using one extra unit of K, holding all other factors (L) constant
MPvK
Whats the formula for Marginal Product of Capital?
dQ/dK
Isoquants are (convex/concave)
Convex - implied because diminishing MRTS occurs because of DMR
Replacements value of L in terms of K falls (an additional unit of L replaces fewer and fewer units of K)
Diminishing Marginal Rate of Technological Substitution (DMRTS)
when L goes up, MPvL goes (up/down)
Down
because each additional worker is less useful
when K goes down, MPvK goes (up/down)
Up
because each remaining piece of capital is more useful
Straight line isoquant, constant MPs and MRTS
Perfect Substitutes
MPs=0, MRTS=0/∞, L-shaped
Perfect Complements (no substitution available; cannot increase output unless K and L are both increased in that specific proportion)
Linear production function means perfect ___
Perfect Substitute
Fixed proportions production function means perfect ___
Perfect Complements
How does a firm decide, in the long run, the best way to increase output?
Returns to Scale
Rate at which output increases as inputs are increased proportionately
Returns to Scale
Output more than doubles when all inputs are doubled
Increasing Returns to Scale (IRS)
Larger output associated with lower average cost (ex. auto manufacturing)
Increasing Returns to Scale (IRS)
One firm is more efficient than many (ex. electric utilities)
Increasing Returns to Scale (IRS)
The isoquants get closer together
Increasing Returns to Scale (IRS)
Output doubles when all inputs are doubled
Constant Returns to Scale (CRS)
Size does not affect productivity
Constant Returns to Scale (CRS)
May have a large number of producers
Constant Returns to Scale (CRS)
Isoquants are equidistant
Constant Returns to Scale (CRS)
Output less than doubles when all inputs are doubled
Decreasing Returns to Scale (DRS)
Decreasing efficiency with large size
Decreasing Returns to Scale (DRS)
Reduction of entrepreneurial abilities
Decreasing Returns to Scale (DRS)
Isoquants become farther apart
Decreasing Returns to Scale (DRS)
f(2K,2L) = 2Q
CRS
f(2K,2L) > 2Q
IRS
f(2K,2L)
DRS
