Lecture - Chap 5 - The Production Process and Costs 5-2...

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The Production Process and Costs
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Overview I. Production Analysis Total Product, Marginal Product, Average Product Isoquants Isocosts Cost Minimization II. Cost Analysis Total Cost, Variable Cost, Fixed Costs Cubic Cost Function Cost Relations III. Multi-Product Cost Functions 5-2
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Production Analysis Production Function Q = F(K,L) Q is quantity of output produced. K is capital input. L is labor input. F is a functional form relating the inputs to output. The maximum amount of output that can be produced with K units of capital and L units of labor. Short-Run vs. Long-Run Decisions Fixed vs. Variable Inputs 5-3
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Production Function Algebraic Forms Linear production function: inputs are perfect substitutes. Leontief production function: inputs are used in fixed proportions. Cobb-Douglas production function: inputs have a degree of substitutability. bL aK L K F Q , cL bK L K F Q , min , b a L K L K F Q , 5-4
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Productivity Measures: Total Product Total Product (TP): maximum output produced with given amounts of inputs. Example: Cobb-Douglas Production Function: Q = F(K,L) = K .5 L .5 K is fixed at 16 units. Short run Cobb-Douglass production function: Q = (16) .5 L .5 = 4 L .5 Total Product when 100 units of labor are used? Q = 4 (100) .5 = 4(10) = 40 units 5-5
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Productivity Measures: Average Product of an Input Average Product of an Input: measure of output produced per unit of input.
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