lecture4 - Microeconomics I - Lecture #4, March 10, 2009 4...

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Unformatted text preview: Microeconomics I - Lecture #4, March 10, 2009 4 Optimum of the firm, Cost minimization Firms production is constrained by technology. Technology can by described by production set, or production function. In case of only one input (only one factor of production) we can illustrate production set and production function in the following way. Usually, we assume that a firm uses two inputs. In this case we use isoquants to depict production relations. An isoquant is the set of all possible combinations of inputs 1 and 2 that are just sufficient to produce a given amount of output. f { x 1 ,x 2 } = min { x 1 ,x 2 } f { x 1 ,x 2 } = x 1 + x 2 f { x 1 ,x 2 } = Ax a 1 x b 2 Properties of technology: we assume that the production function is: monotonic: if we increase the amount of at least one of the inputs, we will get at least as much output as originally (free disposal) convex: if we can produce output y in two different ways - using ( x 1 ,x 2 ) or ( z 1 ,z 2 ) units of inputs, then their weighted average will produce at least y units of output Lets assume that we are operating at some point ( x 1 ,x 2 ) and that we consider to use a little bit more of factor 1 while keeping factor 2 fixed at level x 2 . The additional output that we get is called marginal product of factor 1 . We typically expect that the marginal product of a factor will diminish as we get more and more of that factor. This is called the law of diminishing marginal product....
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This note was uploaded on 09/21/2011 for the course ECON 1023 taught by Professor Mark during the Spring '11 term at UC Irvine.

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lecture4 - Microeconomics I - Lecture #4, March 10, 2009 4...

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