Understanding Firm Production: Inputs, Outputs, and Efficiency, Slides of Microeconomics

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Production

• A firm such as labor, materials, energy, and capitalinto outputs, the goods and services that itsells. is an organization that converts inputsWhat is a firm?
  • – – Sole proprietorships single individual. Partnerships controlled by two or more people. Corporations proportion to the numbers of shares of stock theyhold. are businesses jointly owned andare owned by are firms owned and run by a shareholders in

• • What are the categories of inputs? Capital (Labor ( – land, buildings (factories, stores), and equipment(machines, trucks) L ) - K ) - human services long-lived inputs.
• (^) processed products (aluminum, plastic, paper, steel) Materials (^ –^ managers, skilled workers (architects, economists,engineers, plumbers), and less-skilled workers (custodians,^ construction laborers, assembly-line workers) M ) - raw goods (oil, water, wheat) and

• Production function between the quantities of inputs used and themaximum quantity of output that can beproduced, given current knowledge aboutHow firms combine the inputs? is the relationship

technology and organization

The production function may simplybe a table of numbers

The production function may be analgebraic formula

QQQ Just plug in numbersfor L  and 1815 K^24 to get^ L  L Q^0. min.^6 K^120 {.^4 K 24 L , 12 K } docsity.com

• Average product of labor ( output,produce that output:Average Product of Labor Q, to the number of workers, APL ) - the ratio of L, used to APL  QL docsity.com

• When a firm has more than one variable inputit can produce a given amount of output withmany different combinations of inputs – Production with Two Variable Inputs E.g., by substituting K for L

IsoquantsFamily of

K, Units of capital per d^ ay e^ a b c f d 0 1 2 3 6 L, Workers per d ay

(^63)

21 The production function aboveyields the isoquants on the left. q q q = 14= 24= 35 docsity.com

• • • Isoquants are thinDo not slope upwardTwo isoquants do not crossProperties of Isoquants
• Higher-output isoquants lie farther from the origin

Figure 7.10: Properties of Isoquants

• • Rate that one input can be substituted for another is animportant factor for managers in choosing best mix of inputsShape of isoquant captures information about inputsubstitution – Points on an isoquant have same output but different input mixSubstitution Between Inputs
  • Rate of substitution for labor with capital is equal to negative the slope

• marginal rate of technical substitution (MRTS) - the number of extra units of one input needed toreplace one unit of another input that enables afirm to keep the amount of output it producesMarginal Rate of Technical Substitution

constant  MRTS  increaseincreaseinincapitallabor Slope of Isoquant!  DD KL

How the Marginal Rate of Technical Substitution VariesAlong an Isoquant

M K, Units of capital per d ay R 1016 TS 457 0 in a P D (^) K 1 r= inting and Pu – D (^6) L 2 = 1 a – 33 b (^1) – 2 blishing 4 c (^1) – 15 dU 1 .S. 6 Fi e r m (^7) L, W (^8) o (^) rkers per d q 9 = 10 (^10) ay