1. L14
Producers

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 z
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
MPL analogous but for L
Geometric Interpretation

10. MPK Increasing, Constant, Decreasing?
Cobb-Douglass
Fixed Proportions
Perfect Substitutes

11. What’s new? Monotone transformation! Nooooo!
Long run and Short run ( fixed)
Constant Returns to Scale (CRS)
Increasing (IRS), Decreasing (DRS)

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

13. Marginal Product and Returns to Scale

14. Profit Maximization (Short run)
Objective of the firm
Here: maximization of Profit
Short Run
Secret of happiness?

15. Profit Maximization (Short run)
Objective of the firm
Here: maximization of Profit
Short Run
Secret of happiness?

16. Profit Maximization (Short run)