6355 Lecture Notes - Lecture 4: Ceteris Paribus, Marginal Product, Diminishing Returns
20 Jun 2018
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Week 4 - Technology, Production and Costs
Firm: a organisation that comes into being when a person or a group of people
decides to produce a good or service to meet a perceived demand
Technology: the processes a firm uses to turn inputs into outputs of goods and
services
Technological Change: a change in the ability of a given level of output with a given
quantity of inputs
Productions Function: The relationship between the inputs employed by the firm
and the maximum output it can produce with those inputs
The Behaviour of profit Maximising Firms
All firms must make several basic decisions to achieve what we assume to be their
primary objective - maximum profits
1. How much output to supply
2. Which production technology to use
3. How much of each input to demand
Short run versus long run
Economists distinguish between the short-run and the long run
Short run: a period of time where there is at least one fixed input
Long Run: a sufficient periods of time to allow all inputs to be varied
Fixed Input: any resource where the quantity used cannot change during a specific
period of time
A Variable Input: any resource for which the quantity used can change during a
specific period of time
How long the long run is depends on the industry/business
The Total Product and Marginal Product of Labour
Marginal Product: the additional output that can be produced by adding one more
unit of a specific input, ceteris paribus
Law of Diminishing Returns: the principle that, at some point, adding more of a
variable input, such as labour, to the same amount of a fixed input, such as capital,
will cause the marginal product of the variable input to decline
Shape of the Marginal Product Curve
Increasing Marginal Returns: arises from increased specialisation and division of
labour as the first few workers are hired
Decreasing Marginal Returns: more and more workers are using the same
equipment and work area, so while the total number of copies increases as the 4th
and 5th worker is hired, the rate of increase is slowing
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Document Summary
Firm: a organisation that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. Technology: the processes a firm uses to turn inputs into outputs of goods and services. Technological change: a change in the ability of a given level of output with a given quantity of inputs. Productions function: the relationship between the inputs employed by the firm and the maximum output it can produce with those inputs. All firms must make several basic decisions to achieve what we assume to be their primary objective - maximum profits. Economists distinguish between the short-run and the long run. Short run: a period of time where there is at least one fixed input. Long run: a sufficient periods of time to allow all inputs to be varied. Fixed input: any resource where the quantity used cannot change during a specific period of time.
