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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. The Organization of Production Inputs –Labor, Capital,

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Presentation on theme: "PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. The Organization of Production Inputs –Labor, Capital,"— Presentation transcript:

1 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. The Organization of Production Inputs –Labor, Capital, Land Fixed Inputs Variable Inputs Short Run –At least one input is fixed Long Run –All inputs are variable

2 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production Function With Two Inputs Q = f(L, K)

3 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production Function With Two Inputs Discrete Production Surface

4 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production Function With Two Inputs Continuous Production Surface

5 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production Function With One Variable Input Total Product Marginal Product Average Product Production or Output Elasticity TP = Q = f(L) MP L =  TP  L AP L = TP L E L = MP L AP L

6 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production Function With One Variable Input Total, Marginal, and Average Product of Labor, and Output Elasticity

7 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production Function With One Variable Input

8 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Optimal Use of the Variable Input Marginal Revenue Product of Labor MRP L = (MP L )(MR) Marginal Resource Cost of Labor MRC L =  TC  L Optimal Use of Labor MRP L = MRC L

9 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Optimal Use of the Variable Input Use of Labor is Optimal When L = 3.50

10 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Optimal Use of the Variable Input

11 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production With Two Variable Inputs Isoquants show combinations of two inputs that can produce the same level of output. Firms will only use combinations of two inputs that are in the economic region of production, which is defined by the portion of each isoquant that is negatively sloped.

12 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production With Two Variable Inputs Economic Region of Production

13 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production With Two Variable Inputs Marginal Rate of Technical Substitution MRTS = -  K/  L = MP L /MP K

14 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Production With Two Variable Inputs MRTS = -(-2.5/1) = 2.5

15 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Optimal Combination of Inputs Isocost lines represent all combinations of two inputs that a firm can purchase with the same total cost.

16 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Optimal Combination of Inputs Isocost Lines ABC = $100, w = r = $10 A’B’C = $140, w = r = $10 A’’B’’C = $80, w = r = $10 AB*C = $100, w = $5, r = $10

17 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Optimal Combination of Inputs MRTS = w/r

18 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Optimal Combination of Inputs Effect of a Change in Input Prices

19 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Returns to Scale Production Function Q = f(L, K) Q = f(hL, hK) If = h, then f has constant returns to scale. If > h, then f has increasing returns to scale. If < h, the f has decreasing returns to scale.

20 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Returns to Scale Constant Returns to Scale Increasing Returns to Scale Decreasing Returns to Scale

21 PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Empirical Production Functions Cobb-Douglas Production Function Q = AK a L b Estimated using Natural Logarithms ln Q = ln A + a ln K + b ln L

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