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34 Cards in this Set

  • Front
  • Back
Production function
defines the relationship
between inputs and the maximum amount that
can be produced within a given period of time
with a given level of technology.
production function;
Mathematically, the production function can be
expressed as
Q=f(X1, X2, ..., Xk)
Q
level of output
X1, X2, ..., Xk
inputs used in the production
process
production function of two inputs
Q=f(X, Y)
III.Q: output
IV.X: Labor
V.Y: Capital
short-run production function
shows the
maximum quantity of good or service that can
be produced by a set of inputs, assuming the
amount of at least one of the inputs used
remains unchanged.
long-run production function
 shows the
maximum quantity of good or service that can
be produced by a set of inputs, assuming the
firm is free to vary the amount of all the inputs
being used.
Marginal product (MP)
 change in output
(or Total Product) resulting from a unit
change in a variable input.
MPx= /\Q
------
/\X
Average Product (AP):
Total Product per
unit of input used.
APx = Q
---
X
If MP > AP
AP is
rising.
If MP < AP
then AP is
falling.
MP=AP
when AP is
maximized.
Law of Diminishing Returns
As additional
units of a variable input are combined with a
fixed input, at some point the additional output
(i.e., marginal product) starts to diminish
The Three Stages of Production in the
Short Run
Stage I: From zero units of the variable input
to where AP is maximized (where MP=AP)
B.Stage II: From the maximum AP to where
MP=0
C.Stage III: From where MP=0 on
In the short run, rational firms should only be
operating in
Stage II
Why In the short run, rational firms should not be
operating in Stage III
Firm uses more variable inputs to produce less output
Why In the short run, rational firms should not be
operating in Stage I
Underutilizing fixed capacity
B.Can increase output per unit by increasing the
amount of the variable input
Total Revenue Product (TRP)
market value of
the firm’s output, computed by multiplying the
total product by the market price.
TRP =
Q · P
Marginal Revenue Product (MRP):
change in
the firm’s TRP resulting from a unit change in
the number of inputs used.
MRP =
MP · P
Total Labor Cost (TLC)
total cost of using the
variable input, labor, computed by multiplying
the wage rate by the number of variable inputs
employed.
TLC=
= w · X
Marginal Labor Cost (MLC):
change in total
labor cost resulting from a unit change in the
number of variable inputs used. Because the
wage rate is assumed to be constant regardless
of the number of inputs used, MLC is the same
as the wage rate (w).
A profit-maximizing firm operating in perfectly
competitive output and input markets will be using
the optimal amount of an input at the point at which
the monetary value of the input’s marginal product is
equal to the additional cost of using that input.
B.MRP = MLC
If all inputs into the production process
are doubled, three things can happen:
output can more than double
1.increasing returns to scale (IRTS)
B.output can exactly double
1.constant returns to scale (CRTS)
C.output can less than double
1.decreasing returns to scale (DRTS)
One way to measure returns to scale is to use a
coefficient of output elasticity:
Eq = percent change in Q
-------------------------------------
percent change in all inputs
If EQ > 1
then IRTS
If EQ = 1
then CRTS
If EQ < 1 \
then DRTS
Returns to scale can also be described
using the following equation
hQ = f(kX, kY)
If h > k
then IRTS
If h = k
then CRTS
If h < k
then DRTS