Supply and Production in the Long and Short Term Chap 5 Flashcards
Fixed input
An input to production that does not vary in the short run. The time for which at least one input cannot be changed actually defines the short run.
Long run
A decision-making time frame over which quantities of all inputs to production can be varied.
Production function
The functional relationship that indicates how inputs are transformed into outputs in the most effi cient way.
Production possibilities frontier
The boundary between the combinations of goods that can be produced and those that cannot with the resources available.
Returns to a factor
This measures the addition to output as one factor to production is increased.
Variable input
An input to production that varies directly with the level of output.
Note
If a system is technically ineffi cient then it is possible to produce more commodities and therefore more welfare with current resources.
If a system is already operating at a technically effi cient level, then to increase the quantity produced of one commodity you have to reduce the quantity produced of some other commodity. There is a trade-off, an opportunity cost.
The only other way that more of every product can be produced is if there is technological improvement such that more output can be produced with the same amount of resources or if there is an increase in the amount of resources available (such as an increase in population size).
What happens to fixed costs when putouts rise?
Average fi xed costs are continually diminishing as output rises.
Diminishing returns to scale
A situation when a proportionate increase in all inputs yields a less than proportionate increase in output.
Slope isoquant
The slope of an isoquant is called the marginal rate of technical substitution (MRTS) and tells us the rate at which one input can be given for another while maintaining the same output.
