Download Production Terms

Production
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Production- creation of any good services that has economic value to either
consumers or other producers
Production Function- mathematical description of the various technical
production possibilities faced by a firm Q  f ( x , y) where Q is output and x
and y are inputs
Short-run- corresponds to the period of time in which one or more inputs are
fixed
Fixed input- quantity employed in production is constant
Long-run- corresponds to the period of time in which all inputs are variable
Variable input- quantity employed in the production process varies at the
discretion of the decision maker
Marginal product- incremental change in total output for a change in an
input – note by assumption all other inputs are held constant MPx  Q
x
Average product- ratio of total output to the amount of variable input used in
producing the output APx  Q
x
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3 –Stage Production Function (Total Product, TP or Q)
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Increasing returns- MP, slope of the TP curve is increasing – total product is
increasing at an increasing rate
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Decreasing returns- TP is increasing at a decreasing rate, MP is positive but
decreasing
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Negative returns- TP is decreasing, MP is negative
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Stage I – range over X average product is increasing
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Stage II – point from max AP to where MP=0
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Stage III – range total product is decreasing
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Economic Stage of Production
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Stage III – no-MPx is negative, can reduce amount of input and increase
output, not rationed to produce beyond X3
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Stage I – no, add input productivity is rising so keep adding
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Stage II – yes, in general, as long as no budget constraint, can purchase as
much of X as you want
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Elasticity of production - measures the responsiveness of output changes to
m arg inal product %Q Q
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x
changes in the given input x E x 
x Q
average product
%x
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Law of diminishing marginal returns – given all other inputs remain
constant, the increasing use of one input in the production process will beyond
some point result in diminishing marginal increases in total output
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TVP- total value product, the value of the output and is given by the price of
the product times the amount of physical product produced- TVP = p Q
where p is price
MVP- marginal value product, the exact rate of exchange of total value
product resulting from an infinitesimal change in X holding other factors
constant MVPx  TP
x
AVP-average value product, ratio of total value to the amount of variable
input used holding other inputs constant AVPx  TP
x
Total cost- total input cost is the sum of input prices times the quantity of the
factor employed plus fixed costs C  rx x  ry y  b where ri is the input price
and b is fixed costs.
Productive isoquant- locus of input combinations giving the same output
Perfect subsidies- isoquants are a series of parallel lines, change X and Y in
fixed proportions to get same output
Perfect complements – series of right angle isoquants, zero substitutability
Marginal rate of technical substitution- rate at which one input may be
substituted for another input in the production process while total output
MPx
remains constant MRTS  
MPy
Isocost lines- locus of input combinations that entail the same total cost
Returns to scale- the proportionate increase in output that results from the
given proportionate increase in all the inputs
Increase all inputs by a factor of K what is the increase in output?
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Increasing returns to scale- output increases by more than k that is Q(2) >
KQ(1) Note. Q(1) refers to the output before the change in inputs and Q(2)
refers to the output after the change in inputs.
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Decreasing returns to scale- output increases by less than k that is Q(2) <
KQ(1)
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Constant returns to scale- output increases by exactly K that is Q(2) = KQ(1)
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Homogeneous function- a function that if each input in the function is
multiplied by an arbitrary constant K and this constant can be factored out of
the function
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Cost- sacrifice incurred whenever an exchange or transformation of resources
takes place
Opportunity costs- value of a resource next best alternative
Sunk cost- cost incurred regardless of the alternative action chosen in a
decision making problem
Cost function-relationship showing the minimum achievable cost of
producing various quantities of output
Total cost function- total cost of producing a given quantity of output
TC  VC  FC
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Fixed costs- cost of inputs to the production process that are constant over the
short term, FC
Variable costs- costs of the variable inputs to the production process, VC
Marginal cost- incremental increase in total cost that results in an
infinitesimal change in output, Q, MC  TC
Q
Average Cost Functions
AFC  FC
Q
AVC  VC
Q
ATC  TC  AFC  AVC
Q
Cost curves shapes – see graph
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FC doesn’t change as you change Q
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TC & TVC – increase as you increase output
o Initially at a decreasing rate
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Corresponding MC is decreasing
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Min. point on MC corresponds to maximum point on MP
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Beyond this point TVC & TC increasing at increasing rate, MC must be
increasing
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AVC- decreases to start of stage II, then increases
Long run curves see graph
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Economies of scale- initially as increase output average costs decrease
Diseconomies of scale- as increase output average costs increase