Midterm B

FACTOR FACTOR RELATIONSHIPS

When a producer faces the decision of varying two or more inputs/resources to produce an output.

PRODUCT PRODUCT RELATIONSHIP

When a producer faces the decision of what product/output to produce that will result in the most profitable outcome for the firm.

RESOURCE SUBSTITUTION

When one resource can be increased to compensate for the reduction of another while maintaining the same level of output.

PERFECT SUBSTITUTES

when inputs can be perfectly substituted for one another without affecting the level of output

IMPERFECT SUBSTITUTES

when larger and larger amounts of one variable resource (input) are required to replace equal incremental reductions of the other resource (input) while maintaining the same level of output

PERFECT COMPLEMENTS

when two inputs can only be used in a fixed ratio, an additional amount of one resource will add nothing to total output without the required amount of the other

ISOCOST LINE

Identifies all the combinations of two inputs that can be afforded by the firm to produce a given level of output

properties of isoquants

They are downward sloping to the right., They cannot cross one another., They are convex to the origin.

Isoquant

Shows various combinations of inputs that can produce a given amount of output or product.

Least Cost Combination

A combination of two or more resources in a way that the resource cost of producing that level of output is at the minimum.

IMPERFECT SUBSTITUTES

A form of resource (input) substitution where larger and larger amounts of a second variable resource (input) are required to replace equal incremental reductions of the first resource (input) while maintaining the same level of output

Expansion Path

A line connecting the least cost combination points along the production surface. Also, a line connecting the most profitable combination points for each of several production possibilities curves.

MARGINAL RATE OF SUBSTITUTION (MRS)

As we move downward and to the right along an isoquant, the reduced level of output resulting from decreased use of X2 is compensated for by increased output from the increased use of X1

SLOPE OF THE ISOCOST LINE

Is negative, so the calculation = -PX1/PX2

Ridge Line

Line on a production surface that connects all points of zero marginal physical product for each of two variable inputs as the other is held constant at different levels

MARGINAL RATE OF PRODUCT SUBSTITUTION (MRPS)

MRPS measures the differing rates at which either product will replace (substitute for) the other along the production possibilities curve

Perfect Complements

Resources that must be used in a fixed ratio in order to produce a product.

Perfect Substitutes

Resources that substitute for one another in production at a constant rate.

Imperfect Substitutes

Resources whose marginal rate of substitution changes as their proportions are changed, ceteris paribus.

Production Possibilities Curve

Shows all combinations of products that can be produced with a given set of resources.

Isorevenue Line

Shows all the combinations of products sold that will produce the same total revenue.

Isocost Line

Shows the various combinations of resources that can be purchased with a given dollar amount.

Resource Substitution

The ability of resources to substitute for one another in producing goods and services.

PPC

The firm can produce any combination of products on the PPC, or anything within the boundaries of the PPC. The area inside of and including the boundary is the feasible set.

Factor - Product Relationship

The functional relationship between a factor of production and its product.

LEAST COST COMBINATION

The least cost combination occurs where the isoquant is tangent to the isocost line.

PRODUCT PRODUCT RELATIONSHIPS

The producer also faces the decision of what combination of two or more outputs to produce what will be the most profitable for the firm.

Production Surface

The product surface projected for a family of isoquants showing all the different output quantities resulting from using different proportions of two variable inputs

Marginal Rate of Substitution (MRS)

The rate at which one good (or resource) can be substituted for another at the margin without changing satisfaction (or output).

Marginal Rate of Product Substitution (MRPS)

The rate that one product substitutes for another, measured along a production possibilities curve.

MARGINAL RATE OF SUBSTITUTION (MRS)

The rate that one resource can be substituted for another without changing output.

Product - Product Relationship

The relationship between a firm's enterprises or products.

Factor / Factor Relationship

The relationship between two factors or inputs used in production.

RESOURCE SUBSTITUTION

The technical relationship that occurs when one input can be substituted for another in production while yielding the same level of output.

THE RATE OF SUBSTITUTION

between the two inputs is equivalent of the ratio of the prices of the two inputs

THE ISOCOST LINE For the firm is the equivalent of the

budget line for the consumer.

THE LEVEL OF OUTPUT

by the Marginal Physical Product (MPP) of the reduced input multiplied by the magnitude of the change of that reduced input.

Isoquants that are located further upward and to the right represent

higher levels of production.

AN ISOQUANT

is the graphical equivalent in production economics to what the indifference curve is to consumption economics

TPP CURVE

is the graphical representation of the one variable input production function

ISOQUANT

is the graphical representation of the two variable input production function. shows all combinations of two variable inputs that can be used to produce a given quantity of output

ISOREVENUE LINE

shows all possible combinations of two products sold that will bring the same total revenue

PRODUCTION POSSIBILITIES CURVE (PPC)

shows all possible combinations of two products that can be produced given the set of resources in the firm's control