1. ECON6021 Microeconomic Analysis Production I

2. Definitions

3. L Q pt of inflexion Short-run production I IaIa IbIb II III MPLMPL AP L L L1L1 L2L2 L3L3 Short Run Production

4. Law of diminishing Marginal Productivity—eventually, if a variable input is combined with a fixed input,its marginal product will, beyond some point decline, i.e., beyond L 1, Short Run Production

6. 2K B KBKB LBLB 2L B Isoquant (the locus of (K,L) that yields the same quantity of good) 1.Constant returns to scale: a doubling of inputs doubles outputs 2.Decreasing returns to scale: a doubling of inputs less than doubles output. 3.Increasing returns to scale: a doubling of inputs more than double output Isoquants

7. 1.Cardinal—each isoquant represents a certain Q whose value is objective. 2.Coverage—for any point, there is always an isoquant passing through it 3.Negative Slope—because MP L >0, MP K >0 (assuming not in Region III) 4.Can’t cross 5.Bending towards the origin 6.Farther away from the origin, the greater the quantity. Properties of Isoquants

8. Isoquants and Slopes

9. Output Elasticities

11. An Example: Cobb-Douglas Production Function

13. Cobb-Douglas production function In general,

14. L K Linear Production Function

15. Slope= L K Linear Production Function

16. L K 2K=L 2 1 (or aK=bL, in general) Leontief Production Function

17. Cost Minimization:

18. The optimal input mix

19. L K A B C D Isoquant, O Cost minimization: Long Run Problem

21. Optimal choice of (K,L) that yields Q o with min. cost. Optimal Input Choice L K Locus of equal MRTS LK (output-expansion path for given input prices) Iso-cost line wL+rK=const

22. L K Output expansion path Output Expansion Path

23. K L output expansion path Output Expansion Path

24. Leontief Production Function

25. From now on, we use cost function, rather than production function. outcome of cost min. problem Leontief Production Function

26. The End