Production. Learning Objectives: What is a Production Function? Where do firms get technology? What is the difference between the short run and long run?

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Presentation transcript:

Production

Learning Objectives: What is a Production Function? Where do firms get technology? What is the difference between the short run and long run? How do firms make input hiring decisions? How do firms substitute one input for another?

Production Function

Where does technology come from? In-house R&D Licensing Publications Reverse engineering Employee poaching Patent filings Location spillover effects

Marginal Product & Average Product

Specialization and Efficiency Efficiency comes from specialization of inputs. As more of an input is added to the production process, the marginal product rises initially, then decreases, and may as well become negative. Example: Hanshin Electric Railway, 2007

Production Table KLQPWage

Profit maximizing input level

Production Functions

Isoquant

Isocost

Cost Minimizing Condition

Optimal Input Substitution If the price of an input rises, firms will substitute the costlier input with cheaper substitutes.

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