ECON6021 Microeconomic Analysis

1
ECON6021 Microeconomic Analysis

• Production I

2
Definitions
3
Short Run Production
Q
Short-run production
pt of inflexion
L
I
Ib
II
Ia
MPL
III
APL
L
L1
L2
L3
4
Short Run Production
Law of diminishing Marginal Productivityeventuall
y, if a variable input is combined with a fixed
input,its marginal product will, beyond some
point decline, i.e., beyond L1,
5
Short Run Production
6
Isoquants
Isoquant (the locus of (K,L) that yields the same
quantity of good)

1. Constant returns to scale a doubling of inputs
   doubles outputs
2. Decreasing returns to scale a doubling of inputs
   less than doubles output.
3. Increasing returns to scale a doubling of inputs
   more than double output

7
Properties of Isoquants

• Cardinaleach isoquant represents a certain Q
  whose value is objective.
• Coveragefor any point, there is always an
  isoquant passing through it
• Negative Slopebecause MPLgt0, MPKgt0 (assuming not
  in Region III)
• Cant cross
• Bending towards the origin
• Farther away from the origin, the greater the
  quantity.

8
Isoquants and Slopes
9
Output Elasticities
10
Output Elasticities
11
An Example Cobb-Douglas Production Function
12
An Example Cobb-Douglas Production Function
13
Cobb-Douglas production function
In general,
14
Linear Production Function
15
Linear Production Function
16
Leontief Production Function
K
2KL
(or aKbL, in general)
1
L
2
17
Cost Minimization
18
The optimal input mix
19
Cost minimization Long Run Problem
20
Cost minimization Long Run Problem
21
Optimal Input Choice
Optimal choice of (K,L) that yields Qo with min.
cost.
22
Output Expansion Path
23
Output Expansion Path
24
Leontief Production Function
25
Leontief Production Function
From now on, we use cost function, rather than
production function.
outcome of cost min. problem
26
The End