Chapter Review

Focus now shifts from consumers (demand side) to production and the firm (supply side).
We look at how output varies with the application

of productive inputs in both the short-run and the long-run.

This chapter sets the stage for describing how firms choose their methods of producing given outputs.

The Input-Output Relationship, or Production Function

Production is an output that creates persent or future

utility.
Production requires inputs : land, labour, capital,

Management,technology etc.
A production function describes how inputs are

transformed into outputs.

The Production Function

Q = F(K,L) where Q is output quantity K is capital L is labour
Examples :

F(K,L) = K.L F(K,L) = 2K + 3L

Intermediate products and Value Added

Its important to remember that intermediate products

are necessary to produce output, and it is the value added to the intermediate product that constitutes production.

Fixed and Variable Inputs

Long Run : shortest period of time required to alter the

amounts of every input.

Short Run : longest period of time during which at

least one of the inputs used in a production process cannot be altered.

Fixed and Variable Inputs

Variable Input : one whose quantity may be varied in

the short run and the long run.

Fixed Input : one whose quantity may not be varied in

the short run, but may be varied in the long run.

Production in the Short Run

Consider the following production function

F(K,L) = 2K.L for meals/wk

Let the capital input be fixed at K = 1

thus F(K,L) = 2L

The Relationships among Total, Marginal, and Average Product Curves

When the marginal product curve lies above the

average product curve, the average product curve must be rising; and when the marginal product curve lies below the average product curve, the average product curve must be falling. The two curves intersect at the maximum value of the average product curve.

The Practical Significance of the AverageMarginal Distinction

The general rule for allocating inputs efficiently is to

allocate the next unit of input to the production activity where its marginal product is highest.
DO NOT allocate resources to the activity with the

highest average product!!!

Law Of Returns to Scale

ISOQUANTS