Principles of Microeconomics Lecture 13 – technology part 2
Marginal products describe the change in output level as a single input level changes.
Returns-to-scale describes how the output level changes as all input levels change in direct proportion (e.g.
all input levels doubled, or halved).
If, for any input bundle (x1,…,xn),
o
o then the technology described by the production function f exhibits constant returns-to-scale. E.g. (k
= 2) doubling all input levels doubles the output level.
If, for any input bundle (x1,…,xn),
o
o then the technology exhibits diminishing returns-to-scale.
If, for any input bundle (x1,…,xn),
o
o then the technology exhibits increasing returns-to-scale.
A single technology can ‘locally’ exhibit different returns-to-scale.
A marginal product is the rate-of-change of output as one input level increases, holding all other input levels
fixed.
Marginal product diminishes because the other input levels are fixed, so the increasing input’s units have
each less and less of other inputs with which to work.
When all input levels are increased proportionately, there need be no diminution of marginal products since
each input will always have the same amount of other inputs with which to work. Input productivities need
not fall and so returns-to-scale can be constant or increasing.
Technical Rate-of-Substitution is the rate at which input 2 must be given up as input 1 increases so as to
keep the output level constant. It is the slope of the isoquant
The long-run is the circumstance in which a firm is unrestricted in its choice of all input levels.
A short-run is a circumstance in which a firm is restricted in some way in its choice of at least one input level.
Marginal products describe the change in output level as a single input level changes.
Returns-to-scale describes how the output level changes as all input levels change in direct proportion (e.g.
all input levels doubled, or halved).
If, for any input bundle (x1,…,xn),
o
o then the technology described by the production function f exhibits constant returns-to-scale. E.g. (k
= 2) doubling all input levels doubles the output level.
If, for any input bundle (x1,…,xn),
o
o then the technology exhibits diminishing returns-to-scale.
If, for any input bundle (x1,…,xn),
o
o then the technology exhibits increasing returns-to-scale.
A single technology can ‘locally’ exhibit different returns-to-scale.
A marginal product is the rate-of-change of output as one input level increases, holding all other input levels
fixed.
Marginal product diminishes because the other input levels are fixed, so the increasing input’s units have
each less and less of other inputs with which to work.
When all input levels are increased proportionately, there need be no diminution of marginal products since
each input will always have the same amount of other inputs with which to work. Input productivities need
not fall and so returns-to-scale can be constant or increasing.
Technical Rate-of-Substitution is the rate at which input 2 must be given up as input 1 increases so as to
keep the output level constant. It is the slope of the isoquant
The long-run is the circumstance in which a firm is unrestricted in its choice of all input levels.
A short-run is a circumstance in which a firm is restricted in some way in its choice of at least one input level.
