1. 6.1 Firms and Their Production Decisions
1.1. The Technology of Production
1.1.1. factors of production
1.1.1.1. Inputs into the production process (e.g., labor, capital, and materials).
1.1.1.1.1. Labor inputs include skilled workers (carpenters, engineers) and unskilled workers (agricultural workers), as well as the entrepreneurial efforts of the firm’s managers.
1.1.1.1.2. Materials include steel, plastics, electricity, water, and any other goods that the firm buys and transforms into final products.
1.1.1.1.3. Capital includes land, buildings, machinery and other equipment, as well as inventories.
1.1.2. highly automated capital-intensive factory and using very little labor.
1.1.3. using a substantial amount of labor and very little capital
1.1.3.1. Illustration 1
1.1.3.2. Illustration 2
1.2. The Production Function
1.2.1. ● production function Function showing the highest output that a firm can produce for every specified combination of inputs.
1.2.2. 6.1
1.2.3. Production functions describe what is technically feasible when the firm operates efficiently—that is, when the firm uses each combination of inputs as effectively as possible.
1.3. The Short Run versus the Long Run
1.3.1. short run
1.3.1.1. Period of time in which quantities of one or more production factors cannot be changed.
1.3.1.2. ● fixed input
1.3.1.2.1. Production factor that cannot be varied.
1.3.2. long run
1.3.2.1. Amount of time needed to make all production inputs variable.
1.3.3. Example 1
1.3.4. Example 2
2. 6.4 Returns to Scale
2.1. returns to scale
2.1.1. Rate at which output increases as inputs are increased proportionately.
2.2. increasing returns to scale
2.2.1. Situation in which output more than doubles when all inputs are doubled.
2.3. constant returns to scale
2.3.1. Situation in which output doubles when all inputs are doubled.
2.4. decreasing returns to scale
2.4.1. Situation in which output less than doubles when all inputs are doubled.
2.5. Figure 6.10
2.5.1. Returns to scale need not be uniform across all possible levels of output.
2.5.1.1. For example, at lower levels of output, the firm could have increasing returns to scale, but constant and eventually decreasing returns at higher levels of output.
2.5.2. In Figure 6.10 (a), the firm’s production function exhibits constant returns.
2.5.3. In Figure 6.10 (a), the firm’s production function exhibits constant returns.
2.5.3.1. Twice as much of both inputs is needed to produce 20 units, and three times as much is needed to produce 30 units.
2.5.4. In Figure 6.10 (b), the firm’s production function exhibits increasing returns to scale.
2.5.5. In Figure 6.10 (b), the firm’s production function exhibits increasing returns to scale.
2.5.5.1. Less than twice the amount of both inputs is needed to increase production from 10 units to 20; substantially less than three times the inputs are needed to produce 30 units.
2.5.6. Returns to scale vary considerably across firms and industries. Other things being equal, the greater the returns to scale, the larger the firms in an industry are likely to be.
2.6. Example 6.5
3. 6.2 Production with One Variable Input (Labor)
3.1. Average and Marginal Products
3.1.1. average product
3.1.1.1. Output per unit of a particular input.
3.1.2. marginal product
3.1.2.1. Additional output produced as an input is increased by one unit.
3.1.2.2. Remember that the marginal product of labor depends on the amount of capital used. If the capital input increased from 10 to 20, the marginal product of labor most likely would increase.
3.1.3. Table 6.1
3.1.3.1. Formula
3.2. The Slopes of the Product Curve
3.2.1. Figure 6.1 (1)
3.2.1.1. The Average Product of Labor Curve
3.2.1.1.1. In general, the average product of labor is given by the slope of the line drawn from the origin to the corresponding point on the total product curve.
3.2.1.2. The Marginal Product of Labor Curve
3.2.1.2.1. In general, the marginal product of labor at a point is given by the slope of the total product at that point.
3.2.2. Figure 6.1 (2)
3.2.2.1. When the marginal product of labor is greater than the average product, the average product of labor increases.
3.2.2.2. At C, the average and marginal products of labor are equal.
3.2.2.3. Finally, as we move beyond C toward D, the marginal product falls below the average product.
3.2.2.4. You can check that the slope of the tangent to the total product curve at any point between C and D is lower than the slope of the line from the origin.
3.3. The Law of Diminishing Marginal Returns
3.3.1. ● law of diminishing marginal returns Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease.
3.3.2. Figure 6.2
3.4. Example 6.3
3.5. Example 6.2
3.5.1. Table 6.2
3.5.2. Figure 6.4
4. 6.3 Production with Two Variable Inputs
4.1. Isoquants
4.1.1. ● isoquants
4.1.1.1. Curve showing all possible combinations of inputs that yield the same output.
4.1.2. ● isoquant map
4.1.2.1. Graph combining a number of isoquants, used to describe a production function.
4.1.3. Table 6.4
4.1.4. Figure 6.5
4.1.4.1. By drawing a horizontal line at a particular level of capital—say 3, we can observe diminishing marginal returns. Reading the levels of output from each isoquant as labor is increased, we note that each additional unit of labor generates less and less additional output.
4.1.4.2. Input Flexibility
4.1.4.2.1. Isoquants show the flexibility that firms have when making production decisions
4.1.4.2.2. They can usually obtain a particular output by substituting one input for another.
4.1.4.2.3. They can usually obtain a particular output by substituting one input for another.
4.1.4.2.4. It is important for managers to understand the nature of this flexibility.
4.1.4.3. Diminishing Marginal Returns
4.1.4.3.1. Because adding one factor while holding the other factor constant eventually leads to lower and lower incremental output
4.1.4.3.2. There are also diminishing marginal returns to capital
4.2. Substitution Among Inputs
4.2.1. marginal rate of technical substitution (MRTS)
4.2.1.1. Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant.
4.2.2. DIMINISHING MRTS
4.2.3. Figure 6.6
4.2.4. Production Functions—Two Special Cases
4.2.4.1. Figure 6.7
4.2.4.2. Figure 6.8
4.2.4.2.1. fixed-proportions production function
4.2.4.2.2. The fixed-proportions production function describes situations in which methods of production are limited.
4.3. Example 6.4
4.3.1. Figure 6.9