chapter 7 Technology and Production Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 2
7-2 Learning Objectives Explain how to identify a firms
efficient production methods. Calculate average product and
marginal product and explain how they measure a firms productivity.
Discuss input substitution with two variable inputs. Understand the
concept of returns to scale and its causes. Discuss the sources of
productivity differences across firms and over time. Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 3
7-3 Overview Among all possible production technologies, firms
use the most efficient methods The simplest production function
requires one input, but usually we encounter two or more variable
inputs As firms grow and increase the use of all inputs, the effect
on production may not be proportional returns to scale Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 4
7-4 Production Technologies Outputs: the physical products or
services a firm produces Inputs: the materials, labor, land, or
equipment that firms use to produce their outputs Production
technology: summarizes all possible methods for producing output
Efficient: when there is no way for the firm to produce a larger
amount of output using the same amounts of inputs Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 5
7-5 Production Possibilities Set and Efficient Production
Frontier Copyright 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
Slide 6
7-6 Production Possibilities Set and Efficient Production
Frontier Production possibilities set: contains all combinations of
inputs and outputs that are possible given the firms technology
Efficient production frontier: contains the combinations of inputs
and outputs that the firm can achieve using efficient production
methods Copyright 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
Slide 7
7-7 Production Functions Production function: states the amount
of output a firm can produce from given amounts of inputs using
efficient production methods Copyright 2014 McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
Slide 8
7-8 Production in the Short Run and the Long Run Variable
input: can be adjusted over the time period being considered Fixed
input: cannot be adjusted over the time period being considered
Short run: a period of time over which one or more inputs is fixed
Long run: a period of time over which all inputs are variable
Copyright 2014 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Slide 9
7-9 Average Product Average product of labor: the amount of
output divided by the number of workers employed Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 10
7-10 Production Function and Average Product Curve Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 11
7-11 Marginal Product Marginal product of labor: the extra
output produced due to the marginal units of labor, per unit of
labor Copyright 2014 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Slide 12
7-12 Production Function and Marginal Product Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 13
Law of Diminishing Marginal Returns Law of diminishing marginal
returns: states the general tendency for the marginal product of an
input to eventually decline as its use is increased holding all
other inputs fixed 7-13 Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 14
Average and Marginal Product If the marginal worker is more
productive than average, she brings the average up. If she is less
productive than average, she drives the average down. 7-14
Copyright 2014 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Slide 15
Optimal Assignment of Workers between Two Plants 7-15 Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 16
7-16 Production with Two Variable Inputs Two inputs: labor (L)
and capital (K) Production function: Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 17
7-17 Input Substitution Copyright 2014 McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
Slide 18
Isoquants Isoquant: identifies all the input combinations a
firm can use to efficiently produce a given amount of output Family
of isoquants: consists of the isoquants corresponding to all
possible output levels 7-18 Copyright 2014 McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
Slide 19
7-19 Productive Input Principle Increasing the amounts of all
inputs strictly increases the amount of output the firm can produce
(using efficient production methods). Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 20
7-20 Properties of Isoquants Isoquants are thin Output in A
> B due to productive input principle B and A cannot belong in
the same isoquant Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 21
7-21 Properties of Isoquants Isoquants are thin Isoquants do
not slope upward Output in A > B due to productive input
principle A and B cannot belong in the same isoquant Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 22
7-22 Properties of Isoquants Isoquants are thin Isoquants do
not slope upward An isoquant is the boundary between input
combinations that produce more than a given amount of output and
those that produce less Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 23
7-23 Properties of Isoquants Isoquants are thin Isoquants do
not slope upward An isoquant is the boundary between input
combinations that produce more than a given amount of output and
those that produce less Isoquants for the same technology do not
cross B C By being on the same isoquant, A and B produce the same
output. Similarly, by being on the same isoquant, A and C produce
the same output. By transitivity, B and C should produce the same
output Copyright 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent
of McGraw-Hill Education. B C By being on the same isoquant, A and
B produce the same output. Similarly, by being on the same
isoquant, A and C produce the same output. By transitivity, B and C
should produce the same output However, this is impossible since
the output in C > B due to the productive input principle
Slide 24
7-24 Properties of Isoquants Isoquants are thin Isoquants do
not slope upward An isoquant is the boundary between input
combinations that produce more than a given amount of output and
those that produce less Isoquants for the same technology do not
cross Higher-level isoquants lie farther from the origin Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 25
Substitution between Labor and Capital Along an Isoquant and
the MRTS Marginal rate of technical substitution (MRTS) for input X
with input Y: the rate at which a firm must replace units of X with
units of Y to keep output unchanged starting at a given input
combination 7-25 Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 26
7-26 Declining MRTS Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 27
7-27 MRTS and Marginal Products Along the Same Isoquant
Copyright 2014 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Slide 28
7-28 Input Substitution for Three Special Production
Technologies Perfect substitutes Perfect complements (fixed
proportions) The Cobb-Douglas production function Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 29
Perfect Substitutes If the functions of two inputs are
identical, so that a firm can exchange one for another at a fixed
rate 7-29 Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 30
Perfect Complements (Fixed Proportions) When two inputs must be
combined in a fixed ratio 7-30 Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 31
The Cobb-Douglas Production Function 7-31 Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 32
7-32 Returns to Scale Constant returns to scale Increasing
returns to scale Decreasing returns to scale Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 33
Returns to Scale Constant returns to scale: when a proportional
change in all inputs produces the same proportional change in
output 7-33 Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 34
Returns to Scale Increasing returns to scale: when a
proportional change in all inputs produces a more than proportional
change in output 7-34 Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 35
Returns to Scale Decreasing returns to scale: when a
proportional change in all inputs produces a less than proportional
change in output 7-35 Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 36
7-36 Implications of Returns to Scale With increasing returns
to scale, production is most efficient if there is a single
producer However, a single producer may not operate in a manner
that would benefit consumers More when we discuss natural monopoly
in Chapter 17 Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 37
7-37 Productivity and Technological Change Technological
change: when a firms ability to turn inputs into output changes
over time Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 38
Productivity Improvement Higher productivity: when a firm can
produce more output using the same amounts of inputs Factor-neutral
technical change: a productivity improvement that keeps the MRTS
unchanged at every input combination 7-38 Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 39
7-39 Reasons for Productivity Differences Firms may be subject
to different regulations or market circumstances Examples: labor
laws, union contracts Firms may have different levels of technical,
organizational knowledge, research and development; learning by
doing Copyright 2014 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Slide 40
7-40 Review A production method is efficient if there is no way
to produce larger amounts of outputs using the same amounts of
inputs Production with one variable input: when the marginal
product of labor is (larger than/smaller than/equal to) the average
product of labor, the average product is (increased by/decreased
by/unchanged by) the marginal units of labor. A firm has
(constant/increasing/decreasing) returns to scale if a proportional
change in all inputs leads to (the same/a greater than/a less than)
proportional change in output. A firm is more productive when it
can produce more output using the same amount of inputs. Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 41
7-41 Looking Forward Next, we will learn how firms put together
their production possibilities, with the cost of individual inputs,
to determine the optimal combination of inputs for different
outputs, and the resulting cost of production for each level of
output Copyright 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent
of McGraw-Hill Education.