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## Ch 6 Production

by: Natalie Strawn

12

1

2

# Ch 6 Production ECO 420K

Natalie Strawn
UT
GPA 3.66

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These notes cover production and labor theories, examples, and formulas.
COURSE
MICROECONOMIC THEORY
PROF.
John Thompson
TYPE
Class Notes
PAGES
2
WORDS
CONCEPTS
production, Labor, formulas, Economics, Microeconomics, theories
KARMA
25 ?

## Popular in Economcs

This 2 page Class Notes was uploaded by Natalie Strawn on Monday June 13, 2016. The Class Notes belongs to ECO 420K at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by John Thompson in Summer 2016. Since its upload, it has received 12 views. For similar materials see MICROECONOMIC THEORY in Economcs at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months.

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Date Created: 06/13/16
June 9, 2016 Chapter 6 – Production Producers pay attention to (a) Production technology – a production function (b) Cost and spending constraints – a cost function (c) input choices A production function describes the greatest output a firm can obtain from any combination of inputs: Q = f(K,L,M…) K= physical capital (dollar investment) L= labor M=materials Economic Time Horizon -The short run is a period of time short enough that at least one input is fixed. (We are constrained by our least variable input.) -The long run is a period of time long enough that all inputs can be varied. Short run production -For a two input production function q = f(K,L) we think of K as being least variable, so K is fixed and L is variable. -total product of labor TPl = q = f(L) -average product of labor APl = q/L -marginal product of labor MPl = dq/dL (See figure 6.1) *on exam last spring* -The law of diminishing returns states that with one fixed input, the marginal product of your variable input will eventually decline. -An increase in technology would lead to greater output for a given level of inputs. (more output, same input) Long run production -In the long run, all inputs are variable. -Consider the Cobb-Douglas production function: q = AK^(a)L^(B) *alpha and beta* -q is output, K and L are inputs, and A is “technology” -in this context, human capital would be in the category of technology -the bigger alpha or beta, the bigger output -An isoquant shows all the combinations of K and L that yield the same level of output. (Figure 6.4) -Isoquants are curved in the case of diminishing marginal returns to K and L. -The marginal rate of technical substitution (MRTS) tells you the rate at which K and L can be substituted in order to hold output constant. MRTS = -(deltaK/deltaL) (figure 6.5) -Two extreme cases arise when inputs are: (figure 6.6 and 6.7) (1) perfect substitutes (or) (2) must be used in fixed proportions Production functions: a) Convex q = AK^(a)L^(b) ex. q = 20K^(1/2)L^(1/2) b) Perfect substitutes q =AK + BL ex. q = 80K + 5L c) Fixed proportions q = A X min {AK,BL} ex. q = 200 X min{K,L} -Returns to scale describes the rate at which output increases when all inputs are increased proportionally. Three possibilities: 1) Increasing returns to scale (IRTS) 2) Constant returns to scale (CRTS) 3) Decreasing returns to scale (DRTS)

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