Long Run Theory Of Production Flashcards
Define production function?
Describes relationship between inputs and outputs in the production process
Define an isoquant?
An isoquant is a curve that shows all possible combinations of input that yield the same output
What is an isoquant map?
A graph with a number of isoquants that represent the production function
Axis of an isoquant graph?
Y axis - capital (K)
X axis - labour (L)
Define marginal rate of technical substitution?
The rate at which one input can be substituted for another at a given level of output
Explain what diminishing marginal product means?
In the short run, as the use of an input increases there comes a point where resulting additions to output per unit of added input decreases
Explain diminishing MRTS?
Since labour and capital are not perfect substitutes, as we go further down the isoquant the absolute value of MRTS falls therefore diminishes
If labour and capital are perfect substitutes, what does the isoquant look like?
Straight negative gradient line (constant MRTS)
Note: doesn’t have to equal 1 since perfect substitution could be 2workers = 1capital
If labour and capital are perfect complements, what does the isoquant look like?
‘L’ shaped again (undefined MRTS)
Given the returns to scale function:
f(aL,aK) = bQ
Explain what it means if:
1) a<b>b
3) a=b ?</b>
1) increasing returns to scale
2) decreasing returns to scale
3) constant returns to scale
What does inc, dec, and constant RtS look like on an isoquant map?
Increasing - lines getting closer as output increases
Decreasing - lines getting wider apart as output increases
Constant - lines with equal gaps as output increases
Note: this is when output is increasing by the same amount each time
Wage P(L) = ?
Cost/worker/year
Capital cost (eg.rent) P(K) = ?
Cost/capital/year
What is an isocost?
A line showing all the combinations of two input factors that give the same total cost
What is the change in total cost along an isocost?
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