Chapter 5: Theory of production

Hierarchy of Isoquants
 It is an array of isoquants which corresponds to different level of resource inputs.
 There is an infinite number of isoquants as there are infinite levels of the capacity
in the hierarchy.
The Isocost Curve and Its Hierarchy
 There are infinite combinations of production resources that a given budget can
buy.
Marginal rate of substitution
 Define as how much of one resource should be given up in order to buy an
additional unit of the other, given a fixed budget.
 𝑀𝑅𝑆= (Δ𝑌 𝑎𝑥𝑖𝑠 )/(Δ𝑋 𝑎𝑥𝑖𝑠 ) 𝑀𝑅𝑆=Δ𝐾/Δ𝐿
The Isoquant and Isocosts Combination
Isoquant curve
 represents what can be produced
Isocost curve
 the cost and budgetary limits of production
Resource mix or combination
 Define as how much of one resource is used per unit of the other. Optimum
combination changes with relative resource price and efficiency.
Productivity
 The efficiency and therefore the power of inputs to produce and measured as
output per unit of input.
 Productivity =𝑸/𝑰
Productivity improvement
 means more output per unit of input as the increase in the efficiency ratio (𝑄/𝐼)
indicates and also means less input for output the decrease in the ratio ‘s inverse
(𝑰/𝑸) indicates.
Average productivity
 Is the efficiency of inputs taken as whole and as measured as their average
output
Marginal productivity
 Is the efficiency of additional inputs and it is measured as their marginal output.
Two Economic efficiencies:
Technical efficiency- capitalizes on the output
Cost efficiency- gives emphasis to the cost of inputs.
Relative Resource Efficiency
Basic Ways to Improve Resource Efficiency:
 Change the nature of the resource through innovation
 Change the external condition of resources
 More balanced resource combination
 Using resource saving technology
Return to scale
 Measures how output change relative to resource inputs in the long run and
indicate how overall resource efficiency changes with plant size.
 𝑹=(%(𝚫𝑸))/(%(𝚫𝑰))