EC4004 Lecture 9Production

Dr Stephen Kinsella

Last Time

Game Theory

Prisoner’s DilemmaMatching Pennies

Battle of Sexes

{Players, Strategies, Payoffs}Nash Eqm,Subgame Perf . EqmBackward Induction

Production.

?

Production Function

production function, a mathematical relationship between inputs and outputs.

Combine Capital

Combine Capital

Combine Capital

Combine Capital and Labour

Combine Capital and Labour to produce

output

q :output of a particular good during a period,

K: capital used

L: labour input

M: raw materials

MarginalProducts

Diminishing Marginal Product

Outputper week

Labor inputper week

TotalOutput

L*(a) Total outputMPL

L*(b) Marginal product

Relationship between Output and Labour Inputs Holding Other Inputs Constant

Labor input per week

Isoquant Maps

Capitalper week

KAA

B q = 10 KB

Labourper weekLBLA

0

Capitalper week

KAA

B q = 10 KB

Labourper weekLBLA

0

q = 20

q = 30

Rate of Technical Substitution

The RTS and Marginal Products

Demo

Remember:

Diminishing Marginal Utility, Indifference Curves, Marginal Rate of Substitution

Constant Returns to Scale

Capitalper week

4

A

321

Laborper week1 2 3

(a) Constant Returns to Scale

40q = 10

q = 20

q = 30q = 40

Decreasing Returns to Scale

Capitalper week

4

A

321

Laborper week1 2 3

(a) Constant Returns to Scale

40

Capitalper week

4

A

321

Laborper week1 2 3

(b) Decreasing Returns to Scale

40q = 10 q = 10

q = 20q = 20q = 30

q = 30q = 40

Increasing Returns to Scale

Capitalper week

K2

A

q2

q1

q0

K1

K0

Laborper weekL0 L1 L2

0

Capitalper week

K1

A

q’0

q0

K0

Laborper weekL1 L00

Technical Change

CostsDo 7.1, 7.2, 7.7Read Chapter 8

Next Time

EC4004 Lecture 9Production

Dr Stephen Kinsella