Chapter 6, factors of inputs.

What is the slope of the isoquant curve?

The marginal rate of technical substitution (MRTS(l,k)).

What are 3 causes of technical inefficiency?

1) SHRINKING: Workers don't work as hard as they can. Either because they are lazy, or a union strategy. 2) STRATEGIC REASONS FOR TECHNICAL INEFFICIENCY: Poor production may get government grants, Low profits may prevent competition. 3) IMPERFECT INFORMATION ON "BEST PRACTICES": inferior technology.

What makes a firm Technically Inefficient?

A firm is attaining LESS THAN the maximum possible output from its inputs (using whatever technology is appropriate).

What makes a firm Technically efficient?

A firm is attaining the maximum possible output from its inputs (using whatever technology that is appropriate).

Define Technology.

Determines the quantity of outputs possible for a given set of inputs.

Define Inputs.

Productive resources, such as labor and capital, that firms use to manufacture goods and services (aka Factors of production)

What is the law of diminishing marginal returns?

States that marginal products (eventually) decline as the quantity used of a single input increases. -Generally, the first few inputs are highly productive, but additional units are less productive.

Define Production Function.

Tell us the maximum possible output that can be attained by the firm for any give quantity of inputs. Q=f(L,K,M).

Define Outputs.

The amount of goods and services produced.

What is the marginal product of an input?

The change in output that results from an SMALL change in an input holding constant the levels of all other inputs. -MP(L) = ∆Q÷∆L(holding constant all other inputs) -MP(K)=∆Q÷∆K(holding constant all other inputs)

What is the slope of the TOTAL PRODUCT CURVE?

The marginal product.

What is Average Product?

The total output that is to be produced dived by the quantity of the input used in its production. AP(L)=Q/L AP(K)=Q/K

What does production function calculate?

Total product.

What is an isoquant?

Traces out all the combinations of inputs (labor and capital) that allow that firm to product the same quantity of output.

Define Production.

Transforms inputs into outputs.

What happens when Marginal Product is less than average product? (MP<AP)

average product is decreasing.

What happens when Marginal Product is greater than average product? (MP>AP)

average product is increasing.

What is the rate of technical substitution?

measures the amount of K the firm could give up in exchange for an additional L, in order to just be able to produce the same output as before. MP(L)/MP(K)=−∆K÷∆L=MRTS(l,k)

When is average product MAXIMIZED?

when average product equals marginal product. MP=AP

What is a Production Set?

All points ON OR BELOW the production function. - NOTE: Capital refers to PHYSICAL CAPITAL(goods that are themselves produced goods) and NOT financial capital (the money required to start or maintain production).

What does the MRTS tell us?

As we move down the isoquant, the SLOPE DECREASES, decreasing MRTS → The diminishing rate of technical substitution → as you focus on one input, the other input becomes more productive.