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Production
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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
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final good
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a good that is bought by a customer
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intermediate good
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goods that are used to produce another good
-ex. sugar, electricity, or advertising services
-ex. sugar, electricity, or advertising services
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production function
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a mathematical relationship that describes how much output can be made form different combinations of inputs
-Q= f(K,L)
-relates the quantities of inputs that a producer uses to the quantity of output it obtains from them
-Q= f(K,L)
-relates the quantities of inputs that a producer uses to the quantity of output it obtains from them
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capital
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assets used for the production of goods and services
-ability to adjust capital inputs (which firms enjoy in the long run) has two important implications:
(1) the firm can alleviate diminishing marginal products of labor by increasing the amount of capital it uses at the same time
(2) has an ability to substitute between capital and labor
-ability to adjust capital inputs (which firms enjoy in the long run) has two important implications:
(1) the firm can alleviate diminishing marginal products of labor by increasing the amount of capital it uses at the same time
(2) has an ability to substitute between capital and labor
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diminishing marginal returns/product
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the reduction in the incremental output obtained from adding more and more labor
-why the production function curve flattens at higher quantities of labor
-why the production function curve flattens at higher quantities of labor
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marginal product
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the additional output that a firm can produce by using an additional unit of an input (holding use of the other input constraint)
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average product
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the total quantity of output divided by the number of units of inuput used to produce it
-APL=Q / L
-APL=Q / L
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short run in production
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the period of time which one or more inputs into production cannot be changed
-firms can choose to employ as much or as little labor as it wants, but it cannot rapidly change how much capital it uses
-fixed inputs
-firms can choose to employ as much or as little labor as it wants, but it cannot rapidly change how much capital it uses
-fixed inputs
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fixed inputs
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inputs that CANNOT be changed in the short run
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long run in production
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the amount of time necessary for all inputs in production to be fully adjustable
-the firm can freely choose the amounts of both labor and capital it employs
-variable inputs
-the firm can freely choose the amounts of both labor and capital it employs
-variable inputs
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variable inputs
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inputs that CAN be changed in the short run
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Isoquant
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a curve representing all the combinations of inputs that allow a firm to make a particular quantity of output
-further from origin=higher output levels
-cannot cross each other
-convex to origin
-further from origin=higher output levels
-cannot cross each other
-convex to origin
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iso
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the same
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quant
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shortened version of the word "quantity"
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marginal rate of technical substitution (MRTSxy)
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the rate at which the firm can trade input X for input Y, holding output constant
-quantity change in input Y necessary to keep output constant if the quantity of input X changes by 1 unit
-quantity change in input Y necessary to keep output constant if the quantity of input X changes by 1 unit
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Isocost line
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a curve that shows all the input combinations that yield the same cost
-connects all combinations of labor and capital that the firm can purchase for a given total expenditure on inputs
-relative costs of capital and labor determine slope of isocost line
-connects all combinations of labor and capital that the firm can purchase for a given total expenditure on inputs
-relative costs of capital and labor determine slope of isocost line
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isocost line equation
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C=RK + WL
-R= the price (rental rate) per unit of capital
W=the price (the wage) per unit of labor
-K and L= the number of units of capital and labor that the firm hired
-R= the price (rental rate) per unit of capital
W=the price (the wage) per unit of labor
-K and L= the number of units of capital and labor that the firm hired
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cost minimization
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a firm's goal of producing a specific quantity of output at minimum cost
-minimizing the total cost of producing the firm's desired output quantity
-key objective of any producer
-minimizing the total cost of producing the firm's desired output quantity
-key objective of any producer
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change in price of labor or capital in isocost/isoquant diagram
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isocost lines for higher total expenditure levels are further from the origin- reflects the fact that, as a firm uses more inputs, total expenditure on those inputs increases
-isocost lines are PARALLEL- they have the same slope, regardless of what total cost level they represent
-when labor becomes more expensive, isocost line becomes steeper
-isocost lines are PARALLEL- they have the same slope, regardless of what total cost level they represent
-when labor becomes more expensive, isocost line becomes steeper
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how to show a change in overall cost or output level in isocost/isoquant diagram
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-isocost lines rotate when relative prices change
-when overall capital becomes more expensive, the isocost line becomes flatter
-changes in price of capital also rotates isocost line
-when overall capital becomes more expensive, the isocost line becomes flatter
-changes in price of capital also rotates isocost line
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technological productivity growth (technological change)
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an improvement in technology that changes the firm's production function such that it gets more output from the same amount of inputs
-Q=Af(K,L)
-A=the level of total factor productivity, a parameter that affects how much output can be produced from a given set of inputs
-Q=Af(K,L)
-A=the level of total factor productivity, a parameter that affects how much output can be produced from a given set of inputs
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how to show a change in technology in isocost/isoquant diagrams
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a production function changes over time so that a fixed amount of inputs can produce more output
-reflected by a shift of production function TOWARDS the origin
-isocost lined DO NOT change (because price of input remained fixed)
-WILL affect isoquants because A is a part of the production function
-reflected by a shift of production function TOWARDS the origin
-isocost lined DO NOT change (because price of input remained fixed)
-WILL affect isoquants because A is a part of the production function
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fixed cost
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an input cost that does not vary with the amount of output, even if the output is zero
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returns to scale
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a change in the amount of output in response to a proportional increase in all the inputs
-a property of production functions that describes how the level of output changes when all inputs are simultaneously changed by the same amount
-a property of production functions that describes how the level of output changes when all inputs are simultaneously changed by the same amount
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constant returns to scale
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a production function for which changing the amount of capital and labor by some multiple changes the quantity of output by exactly the same multiple
-ex. Q=K^0.5 +L^0.5
-ex. Q=K^0.5 +L^0.5
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increasing returns to scale
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a production function for which changing all inputs by the same proportion changes output MORE than proportionately
-doubling capital and labor more than doubles output
-doubling capital and labor more than doubles output
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decreasing returns to scale
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a production function for which adjusting all inputs by the same multiple changes output by LESS than the multiple
-output does not fully double when inputs are doubled
-output does not fully double when inputs are doubled
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expansion path
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a curve that illustrates how the optimal mix of inputs varies with total output
-line connecting three cost-minimizing input combinations
-uses isoquants and isocost curves to show how its input choices changes with output
-line connecting three cost-minimizing input combinations
-uses isoquants and isocost curves to show how its input choices changes with output
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total cost curve
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a curve that shows firm's cost of producing particular quantities
-another way to show the information in the expansion path
-relates the cost tied to the isocost lines and the quantities tied to the isoquants that intersect the expansion path
-another way to show the information in the expansion path
-relates the cost tied to the isocost lines and the quantities tied to the isoquants that intersect the expansion path
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BOTH total cost curve and expansion paths show.....
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how when the firm is minimizing its cost of producing any given quantity, the firm's' minimized cost changes when its output changes
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