Intermediate Microeconomic Theory I
ECON 2300 – Summer 2011 – Mark Melatos
Topic 4 – Production Costs – June 7
The Technology of Production
- A production function indicates the output, Q, that a firm produces for every
possible combination of inputs.
- Production functions describe the maximum output feasible for a given set of
inputs technical efficiency.
Production in the Short Run (SR)
- The SR production function takes the form:
o i.e. there is only one variable input, L. The amount of K is fixed.
Marginal product of L: additional output produced as L is increased
by 1 unit (holding K fixed)
Production in the Long Run (LR)
- The LR production function takes the form:
o i.e. both K and L can be varied.
- Isoquant: A curve that shows all possible combinations of inputs that yield the
o Analogous to the indifference curves we looked at in consumer theory.
- Marginal rate of technical substitution (MRTS): measures the slope of the
isoquant at a given combination of inputs ∆K/∆L the amount by which K can
be reduced when an extra unit of L is employed (holding Q fixed).
Costs in the SR
- Definitions: total cost = fixed cost + variable cost.
- Marginal cost (MC) = the extra cost incurred by producing an additional unit of
- All possible combinations of K and L that can be purchased for a given total cost.