6 Producer Behavior

G. / The Basics
Of Production
B Production : The Process by which Someone creates a good 1service others are willing to Pay for
A- final good : A good That is bought by the Consumer
* Intermediate good : A good That is Used to Produce Other goods .

Bi Production font : Mathematical Relationship that describes how much out Put That can be made from
different Combinations of Inputs

•
key Assumptions

Labor:.lntang
① The firm Produces a Single good Capital : a
Tangible
② The firm has already chosen What Product to Produce
③ The firms goal is to minimize Cost of Production

④ The firm Uses two in pots : capital and labor

⑤ In the short run : a firm can choose to employ as much l little labor as it wants

but , it cannot do that for its Capital .

In the long run : A firm can choose both .

•
Fixed Inputs : Inputs that cannot be changed in The short Run .

•
Variable Inputs Inputs : that can be changed in The Short Run .

⑥ More Input = More Output

⑦ A firm's Production exhibits diminishing marginal returns to labor & Capital
If Capital is constant each Additional worker
eventually generate less
•

Output than before

•
Vice -

Versa
•
A mix of labor & capital is more Productive than one alone .

⑨ The firm can buy as many Capital or labor inputs as it wants at fixed Price

⑨ If there is a well functioning capital Market

-

leg Banks &

. investors ) , The firm doesn't have a
budget constraint

As long as the firm is Prov i table

•

•
Production function
$7 Mathematical Relationship of Input -10 Output
↳ l labor & capital
"t lui

Q=

Cobb Douglas function

-
f.2 II
'
! iori:
a=fu E- fix capital

B Pah amin

. . . .
} Marginal Product of labor

•
Marginal Product
* The additional output that a firm Can Produce by Using an additional Unit Of an Input

mn=o It .
Yagi:
"

# I = -
'

IT
•
Diminishing Marginal Product : AS a firm hires additional Units of inputs the marginal Product
, of
that input falls
•
Average Product : The Quantity of output
Produced Per Unit of input

APL Average
ex : Iroduct of labor
 Max Output
.

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.

omsiowm
"

g.
if
"

middle

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'
o

i export
"'
"
slow groth growth
mid
prop.ir TO MP : Ap
Beginning •

T echnical
optimum
TO
•

€i¥¥÷€¥ .

Pengangurantoselubcng
G}
Production in The
.
long Run
Remember That firms in The long run Can change Both Their labor inputs & capital
This gives them Two important Benefits
,
.

① In The long run firms are able to lessen the Sting of diminishing Marginal Products
, .

② Producers are able to Substitute labor for capital & Vice Versa -

• The Long Run Production function

-

Q=fC
now , k is no longer fixed .

f.4 The firm 's

Cost minimization Problem
-

•
Cost Minimization : A firm 's goal of Producing A specific Quantity of output at Minimum Cost

firms Uses two concepts to a chive Cost Minimization

① 150 Quarts
② 150 cost lines

.
150 Quarts ( alot like Indi ference Curve)
Bor A- Curve Representing all the combinations of Inputs that allow afirm to make a Particular Quantity
Of Output
L
Marginal Rate of Technical Substitution ( MRTS ) ( a lot like MRS ) xx

⑧ The rate at which the firm Can Trade in Pot X for Y .

↳ Substituteability
°
How curved an 15090ant Shows how easily firms can Subtitute one input for another
in Production Mrts doesn't change much while Moving along the curve
.

no
•
When a Curve is Straight = A firm can Substitute k & L without changing its output level
,

Regardless of wheat her it is already Using alot 1 little capital

•
When a Curve is Curved = Two inputs are Poor Subsidies .

The relative Usefulness of substituting depends on how much K & L

The firm is already Using
"Bi
Perfect Substitutes and Perfect Complements in Production
• IS OC OT LINES

⑧ A Curve That Shows all of the Input Combinations that Yields the Same Cost .

C=Rkt
R= Rental rate per unit of capital ( Purchase t lost Afterwards)
W : Wage Per Unit of labour

①② higher total from Origin

150 Lot lines for expenditure are further away the
150 cot lines are Parallel

0
•
Identifying Minimum Cost : Combining Iso Quant s & 150 COST lines

•
Slope of ISO Quant
↳ the negative of MRTS he
so at Point B :
,

-E=mn
MwPI=M£ - Minimum cost

Thefirms Benefit Ratio for Capital for Labor

If ,
Meth Mwd to cost is higher than
•

>
•
firm can Replace Some of its labor While keeping its output of Quantity
the same
• or , it could Substitute Capital for labor in a way That kept its

total cost but Raise it out Put

• Input Price Changes

G.5
Returns To
Scale
* A Change in The amount of Output Resulting from A Proportional increase in all the Inputs
•
Constant Returns to scale : a Production function for which A change in all inputs by the Same
Proportion Changes The Quantity of output by the Same Proportion .

•
Increasing Returns to Scale : changing all inputs by Some Multiple Changes output more Than
Proportionately
•
Decreasing Returns to scale : - " -
less Than Proportionately

•
Look at Q funut

If I

}
coef = I

Q : ko
-
'
Lao Const .

O -
Gto g. , .

::: s.hn
If I coef 7 '
im
on

f C Def

µec
IF L l
.

0.3 O .
o
Q = k L

O 3t
-
0.8--0.7

•
factors Affecting Returns To Scale
① fixed lost : An Input cost that doesn't Vary with The amount of Output
② Learning bydoing : The Process by which a firm becomes More efficient at Production as it Produces
More Output

6 G Change
Technologie , a

.
• Total factor Productivity Growth Technological Change
or

* An Improvement in Technology that Changes the firms Production function Such That
More output is obtained from The Same Input

Q=A A Technological change Constant

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.
 6 Producer Behavior
f.7
The firms Expansion Path
And Total Cost Curves
•
Expansion Path : A curve That illustrates how The Optima, mix of inputs Varies with total out Put
•
Total Cost Curve : A Curve That Shows a firm's cost of Producing Particular Quantities