Chapter 8

MRTS Equation

--change in capital input/change in labor input -- ^K/^L

3 Production decisions of a firm

1. Production technology-how inputs transformed into outputs 2. Cost Constraints- prices of labor, capital, and other inputs 3. Input Choices- how much of each input to use, prices of different inputs

Marginal product

Additional output produced as an input is increased by one unit. Depends on the amount of capital used.

Labor Productivity

Average product of labor for an entire industry of for the economy as a whole. Determines the real standard of living that a country can achieve for its citizens.

Marginal Product Equation

Change in output/Change in Labor input ^q /^L

Diminishing MRTS

Convex tells us that the productivity of any one input is limited. As more and more labor is added to the production process in place of capital, the productivity of labor falls.

Technological change

Development of new technologies allowing factors of production to be used more effectively.

Theory of the firm

Explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output

Production Function

Function showing the highest amount of output q that a firm can produce for every specified combination of inputs

Marginal Product Curve

Given by the slope of the total product at a specific point

Isoquant map

Graph combining a number of isoquants, used to describe a production function. Each corresponds to a different level of output.

Factors of Production

Inputs into the production process (labor, capital, and materials) Anything that firms use as part of the production process

Perfect Substitutes

MRTS is constant

Returns to scale uniform?

No, Returns to scale can vary across all possible levels of output. For ex. at lower levels of output, the firm could have increasing returns to scale, but constant and eventually decreasing returns at higher levels of output.

Average product

Output per unit of a particular input. Measures the productivity of the firm's workforce in terms of how much output each worker produces on average.

Average Product Equation

Output/Labor input q/L

Fixed input

Production factor that cannot be varied

Constant returns to scale

Situation in which output doubles when all inputs are doubled.

Decreasing returns to scale

Situation in which output less than doubles when all inputs are doubled.

Increasing returns of scale

Situation in which output more than doubles when all inputs are doubled.

Average Product Curve

The slope of the line drawn from the origin to the corresponding point on the total product curve

Stock of capital

Total amount of capital available for use in production

average product maximum

When marginal product equals the average product

Average Product increasing

When the marginal product is greater than the average product

Average Product decreasing

When the marginal product is less than the average product

Organizational Economics

area of research (Theory of a firm) to explain why managers and workers behave the way they do and normative aspects explaining how firms can be best organized so that they operate as efficiently as possible

Given Technology

given state of knowledge about the various methods that might be used to transform inputs into outputs

maximum total product

point where the marginal product curve crosses the horizontal access of the graph because adding a worker in a manner that slows production and decreases total output implies a negative marginal product for that worker.

Production Function Equation

q=F(K,L) (L=labor, K=capital)

Marginal Rate of Technical Substitution (MRTS)

Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant.

Long run

Amount of time needed to make all production inputs variable

Why do firms exist?

Coordination, having managers that direct the production of salaried workers

Isoquant

Curve showing all possible combinations of inputs that yield the same output.

Short run

Period of time in which quantities of one or more production factors cannot be changed. Firms can vary the intensity which they utilize a given plant and machinery but they cannot change fixed inputs.

Law of diminishing marginal returns

Principle that as the use of an input increases with other inputs fixed, a point will eventually be reached that the resulting additions to output will eventually decrease. B/c when there are too many workers, some workers become ineffective and the marginal product of labor falls. Doesn't change quality of labor

Fixed-proportions production function

Production Function with L-shaped isoquants, so that only one combination off labor and capital can be used to produce each level of output. Either the marginal product of capital or the marginal product of labor is zero.

Returns to scale

Rate at which output increases as inputs are increased proportionately.

Flows

The amount of labor and capital used each year and the amount of output produced each year. inputs and outputs for ex. PC manufacturer uses a certain amount of labor each year to produce some number of computers over that year.