Production Flashcards
Define production.
The process by which a person, company, government or non-profit agency uses inputs to create a good or service for which others are willing to pay
Define production function.
A mathematical relationship that describes how much output can be made from different combinations of inputs
Define short run.
The period of time during which one or more inputs into production cannot be changed
Define long run.
The period of time during which all inputs into production are fully adjustable
What two inputs can a firm use to make its product?
Capital and labour
Name 6 assumption to model producer behaviour.
- ) The firm produces a single good
- ) The firm has already chosen which product to produce
- ) The firm’s goal is to minimise the cost of production
- ) The more input a firm uses the more output it makes
- ) The firm can buy as many capital or labour inputs a it wants at fixed prices
- ) Firms face no capital restraint
What can and can’t firms change in the short run?
They can change labour as much as they want, but not how much capital it uses
What type of marginal returns to a firm’s production exhibit to labour and capital?
Diminishing marginal returns
What variables make up the production function
Capital and labour
What is the general equation for a production function?
Q = f(K,L)
In the long run what do producers behave just like?
Consumers
What is the production function similar to?
The utility function
Define the marginal product of labour.
The extra output that you can produce using one extra unit of labour
Define the marginal product of capital.
The extra output you can produce using one extra unit of capital
Define isoquant.
A curve representing all the combinations of inputs that allow a firm to make a particular quantity of output
What is the isoquant similar to?
The indifference curve
Define marginal rate of technical substitution.
The rate at which the firm can trade input X for input Y holding output constant
In what part of the isoquant is marginal product of labour high relative to the marginal product of capital?
To the left
What is the MRTS the ratio of?
MPL/MPK
What is meant by MRTS being 12?
You are willing to substitute 12 units of capital for one unit of labour
How does MRTS relate to the isoquant?
It is -1 times the slope
Define isocost line.
A curve that shows all of the input combinations that yield the same cost
What is the isocost line similar to?
Budget constrain line
What is the general equation for the isocost line?
C = rK + wL, where r is the unit cost of capital and w the unit cost of labour
Draw a isocost line and isoquant.
Picture
What is held constant as you move along the isoquant?
Units of output
What do producers want to maximise and minimise?
They want to maximise output and minimise costs
What is more useful cost minimisation or output maximisation?
Cost minimisation
What is the name of particular equation we use for the production function?
Cobb-Douglas
What is the Cobb-Douglas equation for production?
Q = K^aL^b
How do we determine the optimum amount of capital and labour we will use from the isoquant and isocost line?
When the slopes are the same
What is meant by output maximisation?
Looking at output subject to costs
What is meant by cost minimisation?
Looking at costs subject to output
How do you find the optimum amount of capital and labour numerically?
The slope of the isoquant = w/r (unit prices) = MRTS
We know MRTS = MPL/MPK so sub in the two equation for MPL and MPK to then set equal to the value of w/r, and find an equation of L in terms of K. Then if we are output maximisation sub into the isocost and if we are cost minimisation sub into the isoquant.
What does the long-run expansion path graph show in this case?
How cost minimising levels of capital and labour change as the market changes
How do you find the long-run expansion path?
Plot different isoquant lines and the corresponding isocost lines and then join up the cost minimisation points
Draw the long run expansion path
Picture.
Does the long run expansion path have to be a straight line.
No
What do total cost curve graphs show?
How the cost changes as output changes
What is fixed in the short run?
Capital
How do you find the optimum levels of output in the short run compared to the long run?
Instead you’ll have to use fixed value for K and then substitute that in
What does the short-run expansion path look like?
A straight line
Why is the short-run expansion path a straight line?
In the short term they must use 70 units of output, so all outputs will lie on this line even if the market changes
How do the cost in the short run and long run compare?
Higher in the short run
What does economics of scale look at?
What happens when you change the units of labour and or capital
Why is economics of scale only a property for the long run?
Because in the short run you can’t change capital so it doesn’t make sense to ask this question
Define returns to scale.
A change in the amount of output in response to a proportional increase in all of the inputs
Define constant returns to scale.
A production function for which changing all inputs by the same proportion changes the quantity of the output by the same proportion
Define increasing returns to scale.
A production function for which changing all inputs but the same proportion changes output more proportionately
Define decreasing returns to scale.
A production function for which changing all inputs by the same proportion changes output less proportionately
If I double all inputs what new and old levels of output show decreasing returns to scale?
Qnew < 2Qold
If I double all inputs what new and old levels of output show constant returns to scale?
Qnew = 2Qold
If I double all inputs what new and old levels of output show increasing returns to scale?
Qnew > 2Qold
Define expansion path.
A curve that illustrates how the optimal mis of inputs varies with total output
Define total cost curve.
A curve that shows a firm’s cost of producing particular quantities
Define diminishing marginal product.
As a firm hires additional units of a given input, the marginal product of that input falls
What is diminishing marginal product similar to?
Diminishing marginal utility
What shows the diminishing marginal product of labour numerically?
If you differentiate MPL with respect to labour it should be <0
Define marginal product.
The additional output that a firm can produce by using an additional unit of an input, holding the other one constant
