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Chapter 6 Inputs and Production Functions

This document summarizes key concepts related to production functions and inputs. It defines a production function as the maximum output a firm can produce given inputs. It also defines concepts like average and marginal product of labor, law of diminishing returns, isoquants, marginal rate of technical substitution, and different types of production functions. It concludes by discussing returns to scale, how they differ from marginal returns, and types of technological progress.

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Heap Ke Xin
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355 views3 pages

Chapter 6 Inputs and Production Functions

This document summarizes key concepts related to production functions and inputs. It defines a production function as the maximum output a firm can produce given inputs. It also defines concepts like average and marginal product of labor, law of diminishing returns, isoquants, marginal rate of technical substitution, and different types of production functions. It concludes by discussing returns to scale, how they differ from marginal returns, and types of technological progress.

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Heap Ke Xin
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 6：INPUTS AND PRODUCTION FUNCTIONS

1. Production function – maximum quantity of output a firm can produce given the quantities
of inputs that it uses.
 Q = f(L,K)

2. Average product of labour – Average amount of output per unit of labour


• APL = Q / L

3. Marginal product of labour – Rate at which total output changes as the quantity of labour
the firm uses is changed
• MPL = ∆Q / ∆L

4. Law of diminishing marginal returns – Marginal products decline as the quantity used of
a single input increases

5. Isoquant – Curve that shows all the combinations of labour and capital that can produce a
given level of output

6. Marginal rate of technical substitution (MRTS) – Rate at which the quantity of capital can
be reduced for every unit increase in quantity of labour, so that output remain constant.
 Slope of the isoquant is negative
7. Special Production Functions

 Linear production function– One type of input is perfectly substituted for another
type.
– MRTSLK is constant
– Q = aL + bK
 Fixed-proportions production function– A production function where the inputs
must be combined in a constant ratio to one another (perfect complements).
– Leontief production function
– Q = min (2L,2K)
 Cobb-Douglas Production Function – Intermediate between a linear production
function and a fixed-proportions production.
– Q = ALαKβ
 Constant elasticity of substitution production function – A type of production
function that includes linear production functions, fixed-proportions production
functions, and Cobb-Douglas production function as special cases.
– Q = [aLσ-1/σ + bKσ-1/σ] σ/σ-1

8. Returns to scale – The concept that tells us the percentage by which output will increase
when all inputs are increased by a given percentage.

%  (quantity of inputs)
Returns to Scale 
%  (quantity of all inputs)
• Increasing returns to scale – If a 1% increase in all inputs results in a greater than
1% increase in output
• Constant returns to scale – If a 1% increase in all inputs results in exactly a 1%
increase in output
• Decreasing returns to scale – If a 1% increase in all inputs results in a less than 1%
increase in output

9. Return to Scale vs Marginal Returns


• Returns to scale – All inputs are increased simultaneously
• Marginal returns – Increase in the quantity of a single input holding all others constant
• Marginal product of a single factor may diminish while the returns to scale may not
– Slope of MRTSLK is diminishing along the isoquant

10. Technological Progress


• Neutral technological progress – Increase both MPL and MPK
 Isoquant shifts inward and remains the same shape
• Labour-saving technological progress – Increase MPK only → MRTSLK↓
 Isoquant shifts inward and becomes flatter
• Capital-saving technological progress – Increase MPL only → MRTSLK↑
 Isoquant shifts inward and becomes steeper

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