Microeconomics 7: Technology, production and costs

Question 1

Describe technology’s relationship with production function

Answer 1

• We can view technology as a constraint on the
  firm’s behaviour – it defines what, at the present
  time, a firm can produce for given inputs.
  – Technology converts inputs into output.
• The inputs are factors of production:
  – labour (the input of workers)
  – capital (machinery, buildings and other man-made inputs)
  – land (including other naturally-occurring inputs).
• We will generally denote output as y and inputs
  as x1, x2, …

Question 2

Describe the ‘production function’

Answer 2

The production function defines the maximum
output possible for given quantities of inputs
* It is the boundary of the production set, which
includes all points that can be produced for
given quantities of inputs.
* We will often use examples with two inputs –
either y = f(x1, x2) using general inputs x1 and
x2, or y = f(L, K) using labour L and capital K.
* This model shows the production function
and set with a single input, y = f(x):
*“x”-axis and “y”-axis with a slope with positive gradient but negative…