producer beviour Flashcards
what is the production function?
the production function shows the relationship between inputs and output. it reflects the technology regardless of input availability. it shows the maximum amount of the goods that can be produced using any combinations of inputs
what is the cobb douglas production function?
Q=A x K^a x L^b where A is a multiplier, K is capital and L is labour
what is the average product?
the total output divided by the total amount of an input used
what is the marginal product?
marginal product is the additional output for additional unit of input. MP(labour) = change in Q/ change in L = dQ/dL
what is the short run?
the short run refers to where on factor input is fixed. the formula is Q=f(K(fixed), L), we usually assume that capital is fixed in the short run
what does the short run diminishing marginal returns mean if you want to double output?
you will need to more than double the input of labour to double output
what is the slope of the production function at a given level of labour input?
it is the marginal product of labour
what is the slope from the origin to the current level of production?
the average product of labour
what is the long run?
the long run is when all the factors of production are variable
what are isoquants?
isoquants are a graphical representation of a production function and show the combinations of K and L that can produce a given level of output
what are the features of the isoquants?
there are different isoquants for each different Q
the isoquants do not cross
isoquants usually bend in toward the origin
output rises as we move out from the origin
what is the marginal rate of technical substitution of LK
it describes the rate at which labour (the x axis input) maybe exchanged for capital (the y axis input) while holding the quantity produced constant
what is the formula for the marginal rate of technical substitution?
MRTS(LK) = - change in capital/change in labour = MP(labour)/MP(capital)
what occurs to labour and capital productivity when you increase labour input and decrease capital input?
labour becomes relatively less productive and capital becomes relatively more productive
what is the MRTS when the inputs are perfect substitutes?
when the inputs are perfect substitutes, they can be exchanged in a constant ratio in a production process and thus the MRTS is constant
if the inputs are perfect complements, what must the inputs be?
the inputs must be used in fixed proportion
what are isocost lines?
Isocost lines show the combinations of inputs
that can be bought with a given budget.
what is the formula for the isocost curve?
C=rK +wL where r is the cost of capital, w is the wage rate, K and L is capital and labour so this rearranged to K = C/r -w/r x L is the isocost curve
what is the gradient of the isocost curve?
-w/r is the slope of the isocost line
what is the cost minimising point?
the point at which the isoquant and isocost lines cross is the minimising cost point
what is the formula for the cost minimising output?
w/r =MP(L) / MP(k)
what occurs to the isocost and isoquant curves when the cost of labour falls?
we start off at the equillibrium between the isocost and isoquant curves. when the cost of labour falls, the isocost curve pivots around the capital axis stretching along the labour axis. this moves the isocost curve onto a higher isoquant curve meaning more labour and more capital is employed so there is greater output
what occurs when there is a technological change?
following the development of superior productive technology, the firm can make more output from a given combination of inputs, this is often assumed to be a multiplicatiev improvement which is called the level of total factor productivity
what is the expanision path?
as firms produce more output they use more capital and labour, at each level of output they attempt to minimise costs. the line joining all the cost minimising combinations of K and L is called the expansion path
