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Lecture10--PRODUCTIONTHEORY

# Lecture10--PRODUCTIONTHEORY - Production Theory and the Law...

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Production Theory and the Law of Diminishing Marginal Returns How the production function limits what we can do under given technology

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The Production Function Describes the relationship between any given combination of inputs and the maximum attainable output from those inputs given current technology We will assume that there are only two inputs, labor (L) and capital (K) Q = f(L, K)
The Period of Production Short run : A period of production during which some inputs cannot be varied Long run : A period of production long enough for all inputs to be varied There is more flexibility in the long run than in the short run to vary production Assume labor is a variable input and that capital is a fixed input in the short run.

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The Total Product Curve The total product of labor is the amount of output (Q) produced over a given period by a certain amount of labor (L) employed together with fixed inputs (K) Marginal product of labor is the extra output produced with one more unit of labor: MP L = Q / L Point of diminishing returns Point of maximum production B A L Q 0 TP L
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Lecture10--PRODUCTIONTHEORY - Production Theory and the Law...

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