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Production (9)
The long run for a particular production process = shortest period of time required to alter the amounts of every input. In the long run, all inputs are variable. Short run = period during which one or more inputs cannot be varied.
Law of diminishing returns: a short run phenomenon which means ? if other inputs are fixed, the increase in output from an increase in the variable input must eventually decline.
Figure 9.4 (a short run production function ? (technical improvements, for example, can cause upward shift in prod function))
Total product curves: Relate the total amount of output to the quantity of the variable input.
Marginal product: The change in the total product that occurs in response to a unit change in the variable input (all other inputs held fixed). For example, MPL=?Q/?L.
Average product: The total product (output) divided by the quantity of the variable input (APL=Q/L)
Figure 9.7 (MPL & APL) ? As long as labor commands a positive wage, a manager would never employ the variable input in the region where its marginal product of labor is negative. Also, he would never employ a variable input past the point where the total product curves reaches its maximum value (where MPl=0)?When the MP curve lies above the AP curve, the AP curve must be rising; and when the MP curve lies below the AP curve, the AP curve must be falling. The two curves intersect at the max value of the AP curve.
Rule for allocating an input efficiently: Allocate each unit of input to the production activity where its MP is highest.
Isoquant: The set of all input combinations that yield a given level of output.
MRTS: The rate at which one input can be exchanged fo ...