Micro Chap. 6

Measures total output divided by total units of an input.

Holds that we will get less and less extra output when we add additional units of an input, all other inputs held fixed

period of time in which firms can adjust production by changing variable factors but not fixed factors such as capital. / The short run is the period of time in which only some inputs, the variable inputs (e.g. workers), can be adjusted. In the short run, f xed factors, such as plant and equipment, cannot be fully modif ed or adjusted.

A period sufficiently long 0 that all factors, including capital, can be adjusted. / The long run is the period in which all factors (e.g. investing capacity) employed by the f rm, including capital, can be changed.

Different people are linked together through a particular medium.

Cost associated with an input that is fixed in the short run.

Consumers derive benefits from a number of other consumers who adopt the good

occurs when new engineering knowledge improves production techniques for existing products.

Occurs when new or improvedproducts are iatroduced in the marketplace

Tells you how much output you will getfrom a given amount of inputs./ The production function specif es the maximum output that can be produced with a given quantity of inputs. It is def ned for a given state of engineering and technical knowledge

the extra product or output added by 1 extra unit of input while other inputs are held constant. / The marginal product of an input is the extra output produced by 1 additional unit of that input while other inputs are held constant

Under thelaw of diminishing returns, a f rm will get less and less extra output when it adds additional units of an input while holding other inputs f xed. In other words, the marginal product of each unit of input will decline as the amount of that input increases, holding all other inputs constant.

Production shows increasing, decreasing, or constant returns to scale when a balanced increase in all inputs leads to a more-than-proportional, lessthan-proportional, or just-proportional increase in output

Denotes a case where doubling the use of all inputs leads to a doubling of output. / Constant returns to scale denote a case where a change in all inputs leads to a proportional change in output. For example, if labor, land, capital, and other inputs are doubled, then under constant returns to scale output would also double. Many handicraft industries (such as haircutting in America or handloom operation in a developing country) show constant returns.

Arise when an increase in all inputs leads to a more-than-proportional increase in the level of output/ Increasing returns to scale (also calledeconomies of scale) arise when an increase in all inputs leads to a more-than-proportional increase in the level of output. For example, an engineer planning a small-scale chemical plant will generally f nd that increasing the inputs of labor, capital, and materials by 10 percent will increase the total output by more than 10 percent. Engineering studies have determined that many manufacturing processes enjoy modestly increasing returns to scale for plants up to the largest size used today.

Occurs when a balanced increase in all inputs leads to a less-thanproportional increase in total product./ Decreasing returns to scale occur when a balanced increase of all inputs leads to a less-thanproportional increase in total output. In many processes, scaling up may eventually reach a point beyond which ineff ciencies set in. These might arise because the costs of management or control become large. One case has occurred in electricity generation, where f rms found that when plants grew too large, risks of plant failure grew too large. Many productive activities involving natural resources, such as growing wine grapes or providing clean drinking water to a city, show decreasing returns to scale

Measures the ratio of total./Productivity is a concept measuring the ratio of total output to a weighted average of inputs. Two important variants are labor productivity, which calculates the amount of output per unit of labor, and total factor productivity, which measures output per unit of total inputs (typically of capital and labor).

Total factor productivity is output divided by an index of all inputs (labor, capital, materials, . . .), while labor productivity measures output per unit of labor (such as hours worked). When output is growing faster than inputs, this represents productivity growth

Economies of scale and mass production have been important elements of productivity growth since the Industrial Revolution. Most production processes are many times larger than they were during the nineteenth century. A proportionate saving in cost gained by an increased level production.

A different kind of eff ciency arises when there areeconomies of scope, which occur when a number of different products can be produced more eff ciently together than apart. E.g. computer software

Business f rms are specialized organizations devoted to managing the process of production. Production is organized in f rms because eff ciency generally requires large-scale production, the raising of signif cant f nancial resources, and careful management and coordination of ongoing activities

Effiient production often requires large-scale enterprises, which need billions of dollars of invested capital. Corporations, with limited liability and a convenient management structure, can attract large supplies of private capital, produce a variety of related products, and pool investor risks.