L14

1
L14

• Producers

2
Technology

• Producers have a technology
• A technology - a process converting inputs to an
  output
• Typical Inputs labor, physical and human
  capital, land, RD, marketing capital
• To make our life simpler only two inputs
• capital ( ) and labor ( )
• Technology given by production function

3
Production function Geometry
L
K
4
Production function Geometry
L
K
5
Production function Geometry
L
K
6
Production function Geometry
y
5
L
3
K
7
Production function Geometry
f(K,L)
y
5
L
3
K
8
3 Classic Examples
Cobb-Douglass
Fixed Proportions
Perfect Substitutes
9
Marginal Product

• MPK and MPL
• Economic Interpretation of MPK how much product
  goes up if K increases by 1
• MPL analogous but for L
• Geometric Interpretation

10
MPK Increasing, Constant, Decreasing?
Cobb-Douglass
Fixed Proportions
Perfect Substitutes
11
Whats new?

• Monotone transformation! Nooooo!
• Long run and Short run ( fixed)
• Constant Returns to Scale (CRS)
• Increasing (IRS), Decreasing (DRS)

12
CRS Geometry
L
K
13
Marginal Product and Returns to Scale
14
Profit Maximization (Short run)

• Objective of the firm
• Here maximization of Profit
• Short Run
• Secret of happiness?

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Profit Maximization (Short run)

• Objective of the firm
• Here maximization of Profit
• Short Run
• Secret of happiness?

16
Profit Maximization (Short run)