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Understanding Short-Run Production in Microeconomics: Definitions and Principles

Short-run production in microeconomics involves analyzing the relationships between inputs and outputs, particularly focusing on the law of diminishing marginal productivity. This concept explains how, in the short run, the marginal product of a variable input will eventually decline when combined with a fixed input beyond a certain point. The production process can be illustrated using isoquants, which show different levels of output achievable by varying combinations of inputs. The slope of isoquants indicates output elasticities, with examples such as the Cobb-Douglas and Leontief production functions demonstrating cost minimization and optimal input choices for maximizing output while minimizing costs. By understanding these principles, one can make informed decisions in production optimization.

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Understanding Short-Run Production in Microeconomics: Definitions and Principles

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  1. ECON6021 Microeconomic Analysis Production I

  2. Definitions

  3. Short Run Production Q Short-run production pt of inflexion L I Ib II Ia MPL III APL L L1 L2 L3

  4. Short Run Production Law of diminishing Marginal Productivity—eventually, if a variable input is combined with a fixed input,its marginal product will, beyond some point decline, i.e., beyond L1,

  5. Short Run Production

  6. 2KB KB LB 2LB Isoquants Isoquant (the locus of (K,L) that yields the same quantity of good) • Constant returns to scale: a doubling of inputs doubles outputs • Decreasing returns to scale: a doubling of inputs less than doubles output. • Increasing returns to scale: a doubling of inputs more than double output

  7. Properties of Isoquants • Cardinal—each isoquant represents a certain Q whose value is objective. • Coverage—for any point, there is always an isoquant passing through it • Negative Slope—because MPL>0, MPK>0 (assuming not in Region III) • Can’t cross • Bending towards the origin • Farther away from the origin, the greater the quantity.

  8. Isoquants and Slopes

  9. Output Elasticities

  10. Output Elasticities

  11. An Example: Cobb-Douglas Production Function

  12. An Example: Cobb-Douglas Production Function

  13. Cobb-Douglas production function In general,

  14. K L Linear Production Function

  15. K Slope= L Linear Production Function

  16. Leontief Production Function K 2K=L (or aK=bL, in general) 1 L 2

  17. Cost Minimization:

  18. The optimal input mix

  19. K D A C B Isoquant, L O Cost minimization: Long Run Problem

  20. Cost minimization: Long Run Problem

  21. K Locus of equal MRTSLK (output-expansion path for given input prices) Iso-cost line wL+rK=const L Optimal Input Choice Optimal choice of (K,L) that yields Qo with min. cost.

  22. K Output expansion path L Output Expansion Path

  23. K output expansion path output expansion path L Output Expansion Path

  24. Leontief Production Function

  25. Leontief Production Function From now on, we use cost function, rather than production function. outcome of cost min. problem

  26. The End

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