Production Flashcards
Production
Any activity that creates present or future utility
Production function
The relationship that describes how inputs such as capital and labour(and the other production factors) are transformed into output
Q = F(K,L)
Long run
The shortest period of time required to alter the amounts of all inputs used in the production process
Short run
The longest period of time during which at least one of the inputs used in a production process cannot be varied
Variable input
An input that can be varied in the short run
Fixed input
An input that cannot vary in the short run
Production in the short run
Capital is fixed and labour is variable
Starts at the origin at an increasing rate that later decreases (graph p 198)
Law of diminishing returns
If other inputs are fixed, the increase in output resulting from an increase in the variable input must eventually decline
Not a universal property, but extremely common
Total product curve
A curve showing the amount of output as a function of the amount of variable input
Marginal product of labour
Change in total product resulting from a one-unit change in the variable input
MPL = dQ/dL
Slope of the TP curve
Average product of labour
Total product divided by the number of units of the variable input used in the production process
Also known as labour productivity
Better technology
TP shifts upward still starting at the origin
Look at practical examples
Look at practical examples
Isoquant
The set of all variable input combinations that yield a given level of output
Marginal rate of technical substitution (MRTS)
The rate at which one input can be exchanged for another without altering the total level of output
MRTS = dK/dL
MPL * dL + MPK * dK = 0
MPL/MPK = dK/dL
MPTS = MPL/MPK
