November 14, 2015

Ch. 19 Technology Summary - Intermediate Microeconomics - Varian


19.1 Inputs and Outputs

 Inputs to production are called factors of production. Factors of production are often classified into broad categories such as land, labor, capital, and raw materials. The input capital may require some more explanation.  Capital goods are those inputs to production that are themselves produced goods. Basically capital goods are machines of one sort or another: tractors, boiler, computer etc. that do certain jobs more efficiently than men.

Inputs and outputs of a production process are measured in flow units: a certain amount of labor per week and a certain number of machine hours per week will produce a certain amount of output a week.

19.2 Technological Constraints

A. Technology: What patterns of inputs and outputs are feasible

C. Technological constraints

(1) Production set - combinations of inputs and outputs that are feasible

(2) Production function: Upper bondary

(3) Isoquants: All possible combinations of inputs which yield the same level of output

D. Examples of isoquants

(1) Fixed proportions - Leontieff

(2) Perfect substitutes

(3) Cobb-Douglas

(4) Can't take monotonic transformations

E. Well-behaved technologies

(1) Montonic - more inputs produce more output

(2) Convex - averages produce more than extremes

 F. Marginal product

(1)  MP1: How much extra output you get from increasing input 1 - holding input 2 fixed

(2) MP1= d f(x1, x2)/ d x1

G. Technical rate of substitution (TRS)

(1)  Like MRS

(2) TRS= dx2/dx1= - = ¶ f/¶ x1/ ¶ f /¶ x1

H. Diminishing marginal product

(1) Law of diminishing return

I. Diminishing technical rate of substitution

(1) Equivalent to convexity

(2) Diminishing TRS is not the same as diminishing MP

J. Long run and short run

(1) Some factors fixed: Short run

(2) All factors varied: Long run

H. Returns to scale

(1) Constant returns

(2) Increasing returns

(3) Decreasing returns

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