Production Flashcards
Production Function
q=f(L,K)
Returns to scale
the rate of change in the output relative to the level of input.
there can be increasing, constant and decreasing returns to scale.
Increasing
Output increases more than proportion to an equal increase in inputs.
Decreasing
Output is less than proportion to the level of input
Constant
whereby the level of output is equivalent to the level of input.
Average cost and Returns to scale
Average cost falls when firm exhibits increasing returns to scale, etc
COBB DOUGLAS FUNCTION
Q(L,K) = A Lβ Kα
Profit
profit = TR-TC
TOTAL COST
=wL + rK (labour and capital, receiving wages and rent)
how does a firm select between capital and labour?
wage rate and rental rate are determined by supply and demand, a firm employs labour until marginal revenue is equal to the wage rate/rental rate.
competitive firm maximises profit
MPl/MPk = w/r
ISOQUANT
indifference curves - indicates the various combinations of two factors of production which give the same level of output per unit of time. EQUAL LEVELS OF SATISFACTION
ISOCOST
budget line - combination of production with in budget constraint - keeping total cost the same
point on tangency
this is where cost are minimised - or profit maximisation imply the same level of output in PERFECT COMPETITION know as duality.
fixed factor inputs
fixed factors that do not change as output is increased/decreased
variable factor input
variable factors are those that do change with output, meaning they are employed when output increases/decreases
the very short run
the only way to increase output in by using up the existing stock
short run
increase output by using more variable factors - such as hiring workers, they do not use extra fixed factors (at least one factor of production is fixed)
the long run
when the scale of operations have increased - means no factors of production is fixed and all are variable. meaning the firm can expand, or rent larger premsis
the law of diminishing returns
whenever a firm tries to increase output by applying additional variable inputs to a fixed factor. the marginal returns generated from adding new variable factors will not be constant, it will rise at first, reaching an optimum point and then eventually diminish
product curve
marginal returns curve increases and then decreases, the marginal curve cuts the average curve at its peak
shape of the curves
marginal returns increase quickly as specialisation occurs, and efficiency increases. this allows labour to develop skill and become more productive. eventually starts to diminish as the effect of specialisation and new skills wear off.
