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Summary Econ 2014 Chapter 7-8
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Chapter 7 and 8: Complete
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ExtraClassesStb 2014...Helping you succeed
Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Economics 214 microeconomics Summary
Chapter 7-8: Production and costs
Chapter 7: Production
Short run: Period of time in which quantities of one or
more production factors can`t be changed (fixed).
Long run: Amount of time needed to make all
production inputs variable.
Law of diminishing marginal returns:
Principle that as the use of an input increases with
other inputs fixed, the resulting additions to output will
eventually decrease.
The relationship between Marginal product (MP)
and Average product (AP):
When MP > AP, AP is increasing
When MP < AP, AP is decreasing
Isoquants:
Curve showing all possible combinations of inputs that yield the same output.
Isoquant map:
Graph combining a number of isoquants,
used to describe a production function.
Put together by Hilde-Mari van Rooyen (MComm). Contact her at hildemari@extraclassesstb.co.za. Visit our website,
www.extraclassesstb.co.za.
, ExtraClassesStb 2014
...Helping you succeed
Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Isoquants when inputs are perfect substitutes:
MRTS is constant. The rate at which Y and X can
be substituted for each other is the same no
matter what level of inputs is being used.
Isoquants when inputs are perfect complements:
Only one combination of X and Y can be used
to produce a given output.
Marginal rate of technical substitution (MRTS):
The amount by which the quantity of one input can be reduced when one extra unit of another input is
used so that output stays constant.
Derivation of MRTS formula:
Additional output from increased use of labour = MPL * ∆L
Reduction in output from decreased use of capital = MPK * ∆K
Because we are keeping output constant by moving along an isoquant, the total change in output must be
zero:
MPL * ∆L + MPK * ∆K = 0
Put together by Hilde-Mari van Rooyen (MComm). Contact her at hildemari@extraclassesstb.co.za. Visit our website,
www.extraclassesstb.co.za.
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