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1 Short Run Production Function

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1 4 .0 1 P r inc iple s o f Mic r o e c o no mic s , Fa ll 2 0 0 7 C hia - Hui C he n O c to b e r 1 , 2 0 0 7

Lecture 11

Production Functions

Outline

1 . C ha p 6 : Short Run Production Function

2 . C ha p 6 : Long Run Production Function

3 . C ha p 6 :

Returns to Scale

1 Short Run Production Function

I n the s ho r t r un, the c a pita l input is ﬁx e d, s o we o nly ne e d to co ns ide r the cha ng e o f la b o r . T he r e fo r e , the pr o duc tio n func tio n

q = F (K,L )

ha s o nly o ne va r ia ble L (s e e Fig ur e 1).

Average Product of Labor.

AP L =

O utput L a b o r I nput

q

=

L

.

Slo p e fr o m the o r ig in to (L ,q ).

Marginal Product of Labor.

MP L =

O utput L a b o r I nput

∂q

∂L

=

.

Additio na l o utput pr o duc e d by a n a dditio na l unit o f la b o r .

So me pr o p e r tie s a b o ut AP a nd MP (s e e Fig ur e 2).

Whe n

O utput is ma x imiz e d.

Whe n

AP is inc r e a s ing .

MP = 0 ,

MP > AP,

1 Short Run Production Function

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Q

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35
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0
0
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L
Fig ur e 1 : Sho r t Run P r o duc tio n Func tio n.
10
9
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5
AP
4
3
2
1
MP
0
0
1
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Fig ur e 2 : Ave r a g e P r o duc t o f L a b o r a nd Ma r g ina l P r o duc t o f L ab o r .

2 Long Run Production Function

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Whe n

AP is de c r e a s ing .

Whe n

AP is ma x imiz e d.

MP < AP,

MP = AP,

To pr ove this , ma x imiz e AP by ﬁr s t o r de r c o nditio n:

=

=

q (L ) = 0 L

q

∂L

∂q 1

∂L L

L 2

= 0

∂q

q

=

∂L

L

=

MP = AP.

Example (C ha ir P r o duc tio n.). No te tha t he r e AP L a nd MP L a r e no t c o n­ tinuo us , s o the c o nditio n fo r ma x imiz ing AP L we de r ive d a b ove do e s no t a pply.

Numb e r o f Wo r ke r s Numb e r o f C ha ir s P r o duc e d
AP L
MP L
0
0
N/
A
N/ A
1
2
2
2
2
8
4
6
3
9
3
1

Ta ble 1 : Re la tio n b e twe e n C ha ir P r o duc tio n a nd L a b o r .

2 Long Run Production Function

T wo va r ia ble inputs in lo ng r un (s e e Fig ur e 3 ).

Isoquants. C ur ve s s how ing a ll p o s s ible c o mbina tio ns o f inputs tha t y ield the s a me o utput (s e e Fig ur e 4).

Marginal Rate of Technical Substitution (MRTS). Slo p e o f I s o q ua nts .

MRTS = dK dL

How ma ny units o f K c a n b e r e duc e d to ke e p Q c o ns ta nt w he n we inc r e a s e L by o ne unit. L ike MRS , we a ls o have

MRTS =

MP L

.

MP k

2 Long Run Production Function

4

Q

k

10
9
8
7
k=3
6
5
k=2
4
k=1
3
2
1
0 0
1
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Fig ur e 3 : L o ng Run P r o duc tio n Func tio n.
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4.5
4
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3
2.5
2
1.5
1
0.5
0 0
0.5
1
1.5
2
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4.5
5
L

Fig ur e 4 : K v s L , I s o q ua nt C ur ve .

3 Returns to Scale

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Proof. Sinc e K is a func tio n o f L o n the is o q ua nt c ur ve ,

q (K (L ),L ) = 0

 =⇒ ∂q dK ∂q = 0 ∂L dL + ∂L =⇒ dK MP L − dL = MP K .
Perfect Substitutes (Inputs). (s e e Fig ur e 5)
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1
0 0
1
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k

Fig ur e 5 : I s o q ua nt C ur ve , Pe r fe c t Subs titute s .

Perfect Complements (Inputs). (s e e Fig ur e 6)

3 Returns to Scale

Marginal Product of Capital.

MP K =

∂q (K,L ) K

Ma r g ina l P r o duc t o f L a b o r

K constant , L ↑ → q ?

3 Returns to Scale

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2
1
0 0
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Fig ur e 6 : I s o q ua nt C ur ve , Pe r fe c t C o mple me nts .

Ma r g ina l P r o duc t o f C a pita l

L constant , K ↑ → q ?

Wha t ha pp e ns to q w he n b o th inputs a r e inc r e a s e d?

K , L ↑ → q ?

I nc r e a s ing Re tur ns to Sc a le .

A pr o duc tio n func tio n is s a id to have inc r e a s ing r e tur ns to sc a le if

o r

Q (2 K, 2 L ) > 2 Q (K,L ),

Q (aK,aL ) = 2 Q (K,L ), a < 2 .

O ne big ﬁr m is mo r e e ﬃc ie nt tha n ma ny s ma ll ﬁr ms .

I s o q ua nts g e t c lo s e r a s we move away fr o m the o r ig in (s e e Fig ur e 7 ).

3 Returns to Scale

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10
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8
Q=3
7
6
5
Q=2
4
3
2
Q=1
1
0 0
2
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L
Fig ur e 7 : I s o q ua nt C ur ve s , I nc r e a s ing Re tur ns to Sc a le .
k