1. Marginal Rate of Technical Substitution: The rate at which one factor can be substituted for another factor while maintaining a constant level of output. MRTS = Slope of the Isoquant.

2. A B L K KK LL Q=10 0

4. The shape of the isoquant reflects the degree to which one input can be substituted for another in production. The smaller the curvature of an isoquant, the greater is the degree of substitutability of inputs in production. LL K K Perfect Substitutes Perfect Compliments

5. Isocost Line: An Isocost line shows the various combinations of inputs that a firm can purchase or hire at a given cost. C = wL + rK

6. L K 0

7. A B C D 0 L 10 20 30 K Expansion Path

9. To minimize production costs or to maximize output for a given cost outlay, the extra output or marginal product per dollar spent on labor must be equal to the marginal product per dollar spent on capital.

10. Profit Maximization: MRP L = MRC L = w MRP K = MRC K = r

11. 0 3 6 3 6 Q=100 Q=200 L K 0 3 6 3 6 Q=100 Q=300 L 0 3 6 3 6 Q=100 Q=150 L

12. Cost Analysis: Explicit Costs: The actual expenditure of a firm to hire, rent, or purchase the inputs it requires in production. For example, the wages to hire labor, the rental price of capital, equipment and buildings, and the purchase price of rawmaterials and semifinished products.

13. Implicit Costs: The opportunity cost of the inputs owned and used by the firm in its own production. Even though the firm does not incur any actual expenditure to use these inputs, they are not free in the sense that the firm could have sold or rented them out to other firms. The amount for which the firm could sell or rent out these inputs, constitutes the implicit cost of production.

14. Short Run: The time period during which some of the firm’s inputs remain fixed. Long Run: The time period when all the inputs can be varied and only technology remains fixed Very Long Run: Everything can change.

15. Components of S.R Cost Function: TC = TFC + TVC

17. TC, TVC, TFC Q Q Q1Q1 Q2Q2 ATC MC AVC AFC 0 0

18. Long-Run Total Cost: Total Cost Q $ 0 Constant Returns to Scale 2 3

19. Total Cost Q $ 0 Decreasing Returns to Scale or Increasing Costs

20. Total Cost Q TC 0 Increasing returns to scale or decreasing cost

21. Increasing Returns Decreasing Returns Q TC 0 Total Cost

22. Elasticity of Cost with respect to Output: If, E C < 1, increasing returns or decreasing cost. If, E C = 1, Constant Returns If, E C > 1, Decreasing returns or Increasing cost.

23. Short-run Vs. Long-run Average Cost Q $ per unit of Output SRAC A SRAC B SRAC C SRAC D Q1Q1 Q2Q2 Q3Q3 0 LRAC