ECON 2100 Lecture Notes - Lecture 8: Production Function, Diminishing Returns, Perfect Competition

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In a case where a farm has fixed machinery in the short term, there is only one input (labor) and one output (corn). The production function is a mathematical description of how the firm can transform inputs into outputs, given technological constraints. Market constraints are constraints on the prices and quantities of the inputs the firm uses and sells. The quantity of output is y; and the quantity of input is x. The production function y= f(x) is the maximum output y that the firm can produce if it uses x units of the input. This is also known as the u-shaped average cost curve or the real world assumption: f(0)=0. Market constraints mean that we operate in perfectly competitive markets. W represents wage rate and p represents output price. Profit is the difference between revenue and cost it is denoted as . Py (x) is another way of writing revenue.

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