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ch06 ppt notes - Chapter Six Inputs and Production...

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1 Inputs and Production Functions Chapter Six Chapter Six

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2 Chapter Six Overview 1. Motivation 1. The Production Function Marginal and Average Products Isoquants The Marginal Rate of Technical Substitution 1. Technical Progress 1. Returns to Scale 1. Some Special Functional Forms Chapter Six
3 Chapter Six Production of Semiconductor Chips “Fabs” cost \$1 to \$2 billion to construct and obsolete in 3 to 5 years Must get fab design “right” Choice: Robots or Humans? Up-front investment in robotics vs. better chip yields and lower labor costs? Capital-intensive or labor- intensive production process?

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4 Chapter Six Productive resources, such as labor and capital equipment, that firms use to manufacture goods and services are called inputs or factors of production. The amount of goods and services produces by the firm is the firm’s output. Production transforms a set of inputs into a set of outputs Technology determines the quantity of output that is feasible to attain for a given set of inputs. Key Concepts
5 Chapter Six Key Concepts Example: Q = f(L,K,M) Example: Chips = f1(L,K,M) = f2(L,K,M) The production function tells us the maximum possible output that can be attained by the firm for any given quantity of inputs. A technically efficient is attaining the maximum possible output from its inputs (using whatever technology is appropriate )

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6 Q = f(L) L Q C D A B Production Set Production Function Chapter Six The Production Function & Technical Efficiency
7 Chapter Six Definition: The feasible but inefficient points below the production function make up the firm’s production set. Are firms technically efficient? Shirking, “perquisites” Strategic reasons for technical inefficiency Imperfect information on “best practices” “63% efficient”

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8 Chapter Six 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
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ch06 ppt notes - Chapter Six Inputs and Production...

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