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York University
ECON 2300

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 same output. o Analogous to the indifference curves we looked at in consumer theory. Isoquant Slopes - 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 output. Isocost Line - All possible combinations of K and L that can be purchased for a given total cost.
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