1. L14
Technology

2. Technology Producers: have a technology
A technology - a process converting inputs to an output
Typical Inputs: labor, physical and human capital, land, R&D, marketing capital
To make our life simpler: only two inputs
capital ( ) and labor ( )
Technology given by production function

3. Production function: GeometryL z
All bundles in I1 are
strictly preferred to all in I2. K

4. Production function: GeometryL z
All bundles in I1 are
strictly preferred to all in I2. K

5. Production function: GeometryL z
All bundles in I1 are
strictly preferred to all in I2. K

6. Production function: Geometry5 L 3 z
All bundles in I1 are
strictly preferred to all in I2. K

7. Production function: Geometry
f(K,L) y 5 L 3
All bundles in I1 are
strictly preferred to all in I2. K

8. 3 Classic Examples
Cobb-Douglass
Fixed Proportions
Perfect Substitutes

9. Marginal Product MPK and MPL
Economic Interpretation of MPK – how much product goes up if K increases by 1
Geometric Interpretation
MPL analogous but for L

10. MPK Increasing, Constant, Decreasing?
Cobb-Douglass
More generally

11. MPK Increasing, Constant, Decreasing?
Fixed Proportions
Perfect Substitutes

12. Technical Rate of Substitution
TRS: slope of isoquant
Interpretation:
Formula:

13. What’s new? Long run and Short run ( fixed)
Monotone transformation? Nooooo!
Returns to Scale (Idea)

14. Returns to scale Constant Returns to Scale (CRS)
Increasing (IRS), Decreasing (DRS)

15. CRS: Geometry L 2z z K All bundles in I1 are
strictly preferred to all in I2. K

16. Marginal Product and Returns to Scale

17. Marginal Product and Returns to Scale