1. Production

2. 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?

3. Production Function

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

5. Marginal Product & Average Product

6. 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

7. Production Table KLQPWage 500----5-50 515155552550 5215110 7.5550 5330115 1057550 54 120 12.25510050 5575125 15512550 56105130 17.5515050 57125120 17.85510050 58140115 17.557550 591301-10 14.445-5050

8. Profit maximizing input level

9. Production Functions

10. Isoquant

11. Isocost

12. Cost Minimizing Condition

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