# Production

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```					Production

Chapter 9
Production
   Defined as any activity that creates
present or future utility

   The chapter describes the production
possibilities available to us with a given
state of technology and resources
The Input-Output Relationship

   Production function
The Production Function
   A means of describing the technically
efficient quantities of outputs corresponding
to all possible combinations of inputs
Technical Efficiency &
Economic Efficiency
   Technical Efficiency is the attainment of
the maximum possible output from a given
combination of inputs

   Economic efficiency occurs when we
produce the given level of output at the
minimum cost
Intermediate Products
   Products that are transformed by a
production process into products of

   For simplification, ignore intermediate
goods in this chapter
Fixed & Variable Inputs
   Long Run: the shortest period of time
required to alter the amounts of all inputs
used in production

   Short Run: the longest period of time
during which at least one of the inputs
used in a production process cannot be
varied
Short Run Production

   Capital levels are fixed
Law of Diminishing Returns

   If other inputs are fixed, the increase in
output resultant from an increase in the
variable input must eventually decline
Total, Marginal & Average Products

   The total product curve shows the amount
of output as a function of the amount of
variable input
Total, Marginal & Average Products

   Marginal product is a change in total
product due to a one-unit change in the
variable input

   The average product is the total output
divided by the quantity of the variable input
The Relationships Between Curves
   When the marginal product curve lies
above the average product curve, the
average product curve must be rising
   When the marginal product curve lies
below the average product curve, the
average product curve must be falling
   The two curves intersect at the maximum
value of the average product curve
Rules for resource allocation
Rule for non-perfectly divisible inputs
Where marginal product of an input is
higher in one activity, allocate each unit of
the input to the activity with the highest
marginal product.
Rule for perfectly divisible inputs
Where marginal product of an input is not
always higher in one activity, allocate each
unit of the input so that marginal product is
the same in every activity.
Production in the Long Run
   All factors are variable

   Isoquants are the set of all technically
efficient input combinations that yield a
given level of output
The Marginal Rate of Technical
Substitution (MRTS)

   The rate at which one input can be
exchanged for another without altering the
total level of output
Returns to Scale
   Tells us what happens to output when all
inputs are increased by exactly the same
proportion

   The concept of returns to scale is a long-
run concept
Returns to Scale: Increasing

   Increasing returns to scale occur when a
proportional increase in every input yields
a more than proportional increase in
output
Returns to Scale
   Constant returns to scale occur when a
proportional increase in every input yields
an equal proportion increase in output

   Decreasing returns to scale occur when a
proportional increase in every input yields
a less than proportional increase in output
Returns to Scale: The Distinction

   Decreasing returns to scale have nothing
to do with the law of diminishing returns

   Decreasing returns to scale mean all
inputs are varied

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 views: 7 posted: 8/11/2012 language: English pages: 21