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34 Cards in this Set
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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 

shortrun 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. 

longrun 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 profitmaximizing 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
