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Microeconomics and Behaviour
Microeconomics and Behaviour
Robert H. Frank, Cornell University
Ian C. Parker, University of Toronto
Production

Chapter Outline

  1. A production function shows the relationship of inputs to output.
    1. The output involved is the value added to the raw materials.
    2. The long run is the time period where all inputs are variable and the short run has at least one fixed input and at least one variable input.
  2. The short-run production theory has capital levels fixed.
    1. Total, average, and marginal products are derived from the total product function.
    2. The marginal product of the variable input will eventually decline as the variable input is increased.
  3. The average and marginal product curves are derived from the total product curve.
    1. If the marginal product curve is above the average product curve, the average product curve is rising.
    2. If the marginal product curve is below the average product curve, the average product curve is falling.
    3. The marginal product curve intersects the average product curve at the peak of the average product curve.
    4. The slope of the total product curve equals the marginal product.
    5. The relationship between marginal product and average product is illustrated by the fisherman allocating his boats between two areas of a lake. The marginal product of a resource should be the same in all activities in which it is used.
  4. Long-run production theory is depicted with isoquants.
    1. The slope of the isoquant is the rate at which the inputs can be traded in production while output remains constant. It is also the ratio of the marginal products of the two inputs.
    2. Perfect substitutes in production have straight-line isoquants and perfect complements have L-shaped isoquants.
    3. Long-run production can have increasing, decreasing, or constant returns to scale.
  5. The appendix discusses several mathematical extensions and applications of production theory.
    1. When playing tennis, the optimal percentage of lobs is a point where the lob has a much higher chance of succeeding than a passing shot, but its marginal gain is no greater.
    2. The production mountain is the geometric construct from which isoquants can be found.
    3. The Cobb-Douglas production function is the most commonly used function that exhibits the standard production relationships.
    4. A Leontief production function illustrates fixed proportions in production.




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