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Production Theory 1

Short-Run v. Long-Run. Fixed input/factor of production: quantity of input is fixed regardless of required output level, e.g. capital or specialized labourVariable input/factor of production: quantity of input used depends on the level of outputShort run: at least one input/factor is fixedLong ru

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Production Theory 1

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    1. Production Theory 1

    2. Short-Run v. Long-Run Fixed input/factor of production: quantity of input is fixed regardless of required output level, e.g. capital or specialized labour Variable input/factor of production: quantity of input used depends on the level of output Short run: at least one input/factor is fixed Long run: all inputs/factors are variable

    3. Production Function A technology is a process by which inputs (e.g. labour and capital) are converted into output. The output level is denoted by y. The technologys production function states the maximum amount of output possible from an input bundle.

    4. Production Function

    5. Technology Set The collection of all feasible production plans is the technology set.

    6. Technology Set

    7. Technology Set

    8. Technology Set

    9. Technology: Multiple Inputs What does a technology look like when there is more than one input? The two input case: Input levels are x1 and x2. Output level is y. Example of production function is

    10. PREVIEW: ISOQUANT An isoquant is the set of all combinations of inputs 1 and 2 that are just sufficient to produce a given amount of output. The slope of the isoquant = the marginal rate of technical substitution (MRTS) = the technical rate of substitution (TRS) MRTS (TRS): The number of units of K that we can dispose of if one more unit of L becomes available while remaining on the original isoquant.

    11. Technologies with Multiple Inputs The complete collection of isoquants is the isoquant map. The isoquant map is equivalent to the production function. Example

    12. Isoquants with Two Inputs

    13. Isoquants with Two Inputs Properties ?Y/?K>0, ?Y/?L>0 ?2Y/?K2<0, ?2Y/?L2<0 Diminishing marginal product (Diminishing marginal utility)

    14. Cobb-Douglas Technology

    15. Marginal (Physical) Product The marginal product of input i is the rate-of-change of the output level as the level of input i changes, holding all other input levels fixed.

    16. Marginal (Physical) Product

    17. Marginal (Physical) Product

    18. Marginal (Physical) Product

    19. Marginal (Physical) Product

    20. Marginal (Physical) Product The marginal product of input i is diminishing if it becomes smaller as the level of input i increases. That is, if

    21. Technical Rate-of-Substitution

    22. Technical Rate-of-Substitution How is a technical rate-of-substitution computed?

    23. Technical Rate-of-Substitution How is a technical rate-of-substitution computed? The production function is A small change (dx1, dx2) in the input bundle causes a change to the output level of

    24. Technical Rate-of-Substitution

    25. Technical Rate-of-Substitution

    26. Technical Rate-of-Substitution

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