When you finish this chapter, you should: Understand the information given by a production function; explain two efficiency concepts: technical efficiency and economic efficiency; define and give examples of three types of inputs used in production: variable inputs, fixed inputs, and quasi-fixed inputs;. | Chapter 8: Production and Cost in the Short Run McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Basic Concepts of Production Theory Production function Maximum amount of output that can be produced from any specified set of inputs, given existing technology Technical efficiency Achieved when maximum amount of output is produced with a given combination of inputs Economic efficiency Achieved when firm is producing a given output at the lowest possible total cost Inputs are considered variable or fixed depending on how readily their usage can be changed Variable input An input for which the level of usage may be changed quite readily Fixed input An input for which the level of usage cannot readily be changed and which must be paid even if no output is produced Quasi-fixed input A “lumpy” or indivisible input for which a fixed amount must be used for any positive level of output None is purchased when output is zero Basic Concepts of . | Chapter 8: Production and Cost in the Short Run McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Basic Concepts of Production Theory Production function Maximum amount of output that can be produced from any specified set of inputs, given existing technology Technical efficiency Achieved when maximum amount of output is produced with a given combination of inputs Economic efficiency Achieved when firm is producing a given output at the lowest possible total cost Inputs are considered variable or fixed depending on how readily their usage can be changed Variable input An input for which the level of usage may be changed quite readily Fixed input An input for which the level of usage cannot readily be changed and which must be paid even if no output is produced Quasi-fixed input A “lumpy” or indivisible input for which a fixed amount must be used for any positive level of output None is purchased when output is zero Basic Concepts of Production Theory Short run At least one input is fixed All changes in output achieved by changing usage of variable inputs Long run All inputs are variable Output changed by varying usage of all inputs Basic Concepts of Production Theory Sunk Costs Sunk cost Payment for an input that, once made, cannot be recovered should the firm no longer wish to employ that input Not part of the economic cost of production Should be ignored for decision making purposes Avoidable Costs Avoidable costs Input costs the firm can recover or avoid paying should it no longer wish to employ that input Matter in decision making and should not be ignored Reflect the opportunity costs of resource use Short Run Production In the short run, capital is fixed Only changes in the variable labor input can change the level of output Short run production function Q = f (L, K) = f (L) Production Function 8- Average & Marginal Products Average product of labor AP = Q/L Marginal product of labor MP = .
