ch06 - 1 Chapter 6: Inputs and Production Functions Chapter...

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Unformatted text preview: 1 Chapter 6: Inputs and Production Functions Chapter 6: Inputs and Production Functions 2 Definition: Productive resources, such as labor and capital equipment, that firms use to manufacture goods and services are called Definition: The amount of goods and services produces by the firm is the firm’s Definition: transforms a set of inputs into a set of outputs Definition: determines the quantity of output that is feasible to attain for a given set of inputs. inputs or factors of production . output . Production Technology 3 Definition : tells us the maximum possible output that can be attained by the firm for any given quantity of inputs. The production function Example: Q = f(L,K,M) Example: Q = f(P,F,L,A) Example: Chips = f 1 (L,K,M) = f 2 (L,K,M) 4 • Definition: is attaining the maximum possible output from its inputs (using whatever technology is appropriate) A technically efficient firm 5 Example: The Production Function and Technical Efficiency Q = f(L) L Q • • • • C D A B Production Set Production Function 6 • Definition: The feasible but inefficient points below the production function make up the firm’s Are firms technically efficient? • Shirking, “perquisites” • Strategic reasons for technical inefficiency • Imperfect information on “best practices” • “63% efficient” production set . 7 • The variables in the production function are flows (the amount of the input used per unit of time), not stocks (the absolute quantity of the input). Example : stock of capital is the total factory installation; flow of capital is the machine hours used per unit of time in production (including depreciation). • Capital refers to physical capital (definition: goods that are themselves produced goods) and not financial capital (definition : the money required to start or maintain production). 8 Q = (1/192)[K 2-(1/36)K 3 ][L 2 – (1/36)L 3 ] Q = K 1/2 L 1/2 9 Production Function Q = K 1/2 L 1/2 in Table Form K: L: 10 20 30 40 50 10 10 14 17 20 22 20 14 20 24 28 32 30 17 24 30 35 39 40 20 28 35 40 45 50 22 32 39 45 50 10 10 Production Function Utility Function Output from inputs Preference level from purchases Derived from technologies Derived from preferences Cardinal(Defn: given amount of inputs yields a unique and specific amount of output) Ordinal Marginal Product Marginal Utility 11 11 Isoquant(Defn: all possible combinations of inputs that just suffice to produce a given amount of output) Indifference Curve Marginal Rate of...
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This note was uploaded on 04/13/2008 for the course ECON 203 taught by Professor Dastan during the Spring '08 term at Rutgers.

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ch06 - 1 Chapter 6: Inputs and Production Functions Chapter...

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