Chapter 6 - Inputs and production functions. This chapter presents the following content: Motivation, the production function, technical progress, returns to scale, some special functional forms. | 1 Inputs and Production Functions Chapter 6 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Six Overview Motivation The Production Function Marginal and Average Products Isoquants The Marginal Rate of Technical Substitution Technical Progress Returns to Scale Some Special Functional Forms Chapter Six Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Six Production of Semiconductor Chips “Fabs” cost $1 to $2 billion to construct and are obsolete in 3 to 5 years Must get fab design “right” Choice: Robots or Humans? Up-front investment in robotics vs. better chip yields and lower labor costs? Capital-intensive or labor-intensive production process? Copyright (c)2014 John Wiley & Sons, Inc. 4 Chapter Six Productive resources, such as labor and capital equipment, that firms use to manufacture goods and services are called inputs or factors of production. The amount of goods and services produces by the firm is the firm’s output. Production transforms a set of inputs into a set of . | 1 Inputs and Production Functions Chapter 6 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Six Overview Motivation The Production Function Marginal and Average Products Isoquants The Marginal Rate of Technical Substitution Technical Progress Returns to Scale Some Special Functional Forms Chapter Six Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Six Production of Semiconductor Chips “Fabs” cost $1 to $2 billion to construct and are obsolete in 3 to 5 years Must get fab design “right” Choice: Robots or Humans? Up-front investment in robotics vs. better chip yields and lower labor costs? Capital-intensive or labor-intensive production process? Copyright (c)2014 John Wiley & Sons, Inc. 4 Chapter Six Productive resources, such as labor and capital equipment, that firms use to manufacture goods and services are called inputs or factors of production. The amount of goods and services produces by the firm is the firm’s output. Production transforms a set of inputs into a set of outputs Technology determines the quantity of output that is feasible to attain for a given set of inputs. Key Concepts Copyright (c)2014 John Wiley & Sons, Inc. 5 Chapter Six Key Concepts The production function tells us the maximum possible output that can be attained by the firm for any given quantity of inputs. The production set is a set of technically feasible combinations of inputs and outputs. Production Function: Q = output K = Capital L = Labor Copyright (c)2014 John Wiley & Sons, Inc. 6 Q = f(L) L Q • • • • C D A B Production Set Production Function Chapter Six The Production Function & Technical Efficiency Copyright (c)2014 John Wiley & Sons, Inc. 7 Chapter Six The Production Function & Technical Efficiency Technically efficient: Sets of points in the production function that maximizes output given input (labor) Technically inefficient: Sets of points that produces less output than possible for a given set of input (labor) Copyright (c)2014 John Wiley & Sons, Inc. 8 Chapter
