Economics Chapter 5
Production Function
A function that defines the maximum amount of output that can be produced with a given set of inputs. An engineering relation that defines the maximum amount of output with a given set of inputs. Q=F(k,l)
Isocost Line
A line that represents the combinations of inputs that will cost the producer the same amount of money
Average Product
A measure of output produced per unit of output
Linear Production
A production function that assumes a perfect linear relationship between all inputs and total output
Cobb Douglas
A production function that assumes some degree of sustainability among inputs. Outputs inputs are not linear average of product labor will not only depend on how many units at labor are used but also how much capital is used.
Leontief Production
A production function that assumes that inputs are used on fixed proportions
Law of diminishing rate of technical substitution
A property of a production function stating that as less of one input is used increasing amounts of another input must be employed to produce the same level of output.
Isoquants
Defines the combinations of inputs that yield the same level of output
Isocost
Describes the combinations of inputs that produce a given level of output
Marginal Product
The change in total output attribution to last unit of output
Total Product
The maximum level of output that can be produced with a given amount of inputs.
Marginal Rate of Technical Substitution
The rare at which a producer ca substitute between two inputs and maintain the same level of outputs
Value Marginal Product
The value of output produced by last unit of input.
Costs associated with variable inputs that do change when output changes are
Variable costs
Costs that are forever lost once they have been paid are
sunk costs
Short Run
the time frame in which there are fixed factors of production.
Long Run
Horizon over which manager can adjust all factors of production
Costs associated with fixed inputs that do not change when output changes are
fixed costs
