Microeconomics 6
Production
Production
Set of flashcards Details
| Flashcards | 22 |
|---|---|
| Language | English |
| Category | Macro-Economics |
| Level | University |
| Created / Updated | 17.11.2012 / 13.03.2015 |
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Theory of the firm
The theory of the firm describes how a firm makes costminimizing production decisions and how the firm’s resulting cost varies with its output.
production decisions
1. Production Technology
2. Cost Constraints
3. Input Choices
factors of production
Inputs into the production process (e.g., labor, capital, and materials).
production function
Function showing the highest output that a firm can produce for every specified combination of inputs.
q = F(K,L)
Production functions describe what is technically feasible
when the firm operates efficiently.
short run
Period of time in which quantities of one or
more production factors cannot be changed.
long run
Amount of time needed to make all
production inputs variable.
average product
Output per unit of a particular input.
Output/labor input = q/L
marginal product
Additional output produced as an input is
increased by one unit.
Change in output/change in labor input = q/L
Total, marginal, average product
To the left of point E in (b), the marginal product is above the
average product and the average is increasing; to the right of E, the
marginal product is below the average product and the average is decreasing.
As a result, E represents the point at which the average and marginal
products are equal, when the average product reaches its maximum.
At D, when total output is maximized, the slope of the tangent to the total product curve is 0, as is the marginal product.
law of diminishing marginal returns
Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease.
labor productivity
Average product of labor for an entire
industry or for the economy as a whole.
stock of capital
Total amount of capital available for use in production.
technological change
Development of new technologies allowing factors of production to be used
more effectively.
isoquant
Curve showing all possible combinations of inputs that yield the
same output. F(C,L)
isoquant map
Graph combining a number of isoquants, used to describe a production function.
marginal returns
change in output given by an additional unit of labor
marginal rate of technical substitution (MRTS)
Amount by which the quantity of one input can be reduced when one extra
unit of another input is used, so that output remains constant.
fixed-proportions production function
Production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output. The fixed-proportions production function describes situations in which methods of production are limited.
returns to scale
Rate at which output increases as inputs are increased proportionately.
increasing returns to scale
Situation in which output
more than doubles when all inputs are doubled.
constant returns to scale
Situation in which output
doubles when all inputs are doubled.
decreasing returns to scale
Situation in which output
less than doubles when all inputs are doubled.
