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Lecture - Print Version
Lecture - Print Version
Production
1. Motivation
3. Technical Progress
4. Returns to Scale
Chapter Six 2
Key Concepts
Productive resources, such as labor and capital
equipment, that firms use to manufacture goods and
services are called inputs or factors of production.
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Key Concepts
The production function tells us the maximum possible
output that can be attained by the firm for any given
quantity of inputs.
Production Function:
Q f ( L, K )
Production Function
Q = f(L)
D
•
Copyright (c)2014 John Wiley & Sons, Inc.
C
• •B
Production Set
•A
L
Chapter Six 5
Chapter Six 6
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L g (Q)
Copyright (c)2014 John Wiley & Sons, Inc.
L Q2 Q L
Chapter Six 8
Chapter Six 9
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Chapter Six 10
K: 0 10 20 30 40 50
L:
0 0 0 0 0 0 0
10 0 10 14 17 20 22
Copyright (c)2014 John Wiley & Sons, Inc.
20 0 14 20 24 28 32
30 0 17 24 30 35 39
40 0 20 28 35 40 45
50 0 22 32 39 45 50
Chapter Six 11
Total Product
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Total Product
MPL = Q/L
• (holding constant all other inputs)
Copyright (c)2014 John Wiley & Sons, Inc.
MPK = Q/K
• (holding constant all other inputs)
Example: Q = K1/2L1/2
MPL = (1/2)L-1/2K1/2
MPK = (1/2)K-1/2L1/2
Chapter Six 14
APL = Q/L
APK = Q/K
Copyright (c)2014 John Wiley & Sons, Inc.
Example:
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L Q APL MPL
6 30 5 -
12 96 8 11
18 162 9 11
Chapter Six 16
Chapter Six 17
Chapter Six 18
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Chapter Six 19
Isoquants
Definition: An isoquant traces out
all the combinations of inputs
(labor and capital) that allow that
firm to produce the same quantity
of output
Copyright (c)2014 John Wiley & Sons, Inc.
Example: Q = K1/2L1/2
20 = K1/2L1/2
Chapter Six 20
Isoquants
Q* = K1/2L1/2
Copyright (c)2014 John Wiley & Sons, Inc.
Q*2 = KL
K = Q*2/L
Chapter Six 21
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Isoquants
K
All combinations of (L,K) along the
isoquant produce 20 units of output.
Slope=K/L Q = 10
0 L
Chapter Six 22
MPL(L) + MPK(K) = 0
Chapter Six 23
Or
Copyright (c)2014 John Wiley & Sons, Inc.
Therefore
Chapter Six 24
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Isoquants
Isoquants
K MPK < 0 Example: The Economic and the
Uneconomic Regions of Production
Copyright (c)2014 John Wiley & Sons, Inc.
Q = 20
MPL < 0
Q = 10
0 L
Chapter Six 26
Q Q
MPK MPL
K
L is held const
L
K is held const
Copyright (c)2014 John Wiley & Sons, Inc.
MPL
MRTS L , K
MPK
Chapter Six 27
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Elasticity of Substitution
Chapter Six 28
Elasticity of Substitution
Definition: The elasticity of substitution, , measures how
the capital-labor ratio, K/L, changes relative to the change in
the MRTSL,K.
Percentagechangein MRTS L , K
K
%
L
%MRTS L , K
Chapter Six 29
Elasticity of Substitution
• MRTSL,KA = 4, KA/LA = 4
• MRTSL,KB = 1, KB/LB = 1
Copyright (c)2014 John Wiley & Sons, Inc.
= [(K/L)/MRTSL,K]*[MRTSL,K/(K/L)] = (-3/-3)(4/4) = 1
Chapter Six 30
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Elasticity of Substitution
K
=1
= 5
=
0 L
Chapter Six 31
Returns to Scale
%(quantity of output)
Returns to Scale
%(quantity of all inputs)
Chapter Six 32
Returns to Scale
output, Q
• Increasing returns:
• Decreasing returns:
• Constant Returns:
Chapter Six 33
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Returns to Scale
• How much will output increase when ALL inputs increase by a
particular amount?
Returns to Scale
K
2K
Copyright (c)2014 John Wiley & Sons, Inc.
Q = Q1
K
Q = Q0
0 L
L 2L
Chapter Six 35
Returns to Scale
Copyright (c)2014 John Wiley & Sons, Inc.
Chapter Six 36
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Chapter Six 37
• Production
function with
CRTS but
Copyright (c)2014 John Wiley & Sons, Inc.
diminishing
marginal
returns to
labor.
Chapter Six 38
Technological Progress
Chapter Six 39
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Technological Progress
Chapter Six 40
Technological
progress that
decreases the
amounts of labor
and capital
Copyright (c)2014 John Wiley & Sons, Inc.
needed to
produce a given
output. Affects
MRTSK,L
Chapter Six 41
Technological
progress that
causes the
marginal
Copyright (c)2014 John Wiley & Sons, Inc.
product of
capital to
increase relative
to the marginal
product of labor
Chapter Six 42
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Technological
progress that
causes the
marginal product
Chapter Six 43
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