Production Function: Q = f ( L, K ). L Q, TP K 0.

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The Production Function

The Production Function

Presentation transcript:

Production Function: Q = f ( L, K )

L Q, TP K 0

MP, AP L L TP L1L1 L2L2 L3L3 AP MP 0

Marginal Product of a Factor: It is the change in output associated with a one unit increase in the factor input.

Average Product of a Factor: It is the total product divided by the number of units of input employed.

Product or Output Elasticity of Labor (Capital) The measure of the responsiveness of output with respect to changes in Labor (Capital)

Marginal Revenue Product of Labor (Capital) How much each additional unit of Labor or Capital adds to total revenue. MRP L = (MP L ) (MR) MRP K = (MP K ) (MR)

Marginal Resource Cost of Labor (Capital): How much each additional Labor (Capital) adds to total cost.

A firm should continue to hire labor/capital as long as,- MRP L > MRC L or, MRP K > MRC K

Production Isoquant: This represents various combinations of two inputs that the firm can use to produce a specific level of output.

L Q, TP K 0 Q0Q0

L K

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.