CH 06

Chapter 6
Production
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.
CHAPTER 6 OUTLINE
6.1 The Technology of Production

6.2 Production with One Variable Input (Labor)
6.3 Production with Two Variable Inputs
6.4 Returns to Scale
Production
6.1
The theory of the firm describes how a firm makes costminimizing production decisions and how the firms cost
varies with its output.
The Production Decisions of a Firm

The production decisions of firms are analogous to the
purchasing decisions of consumers, and can be
understood in three steps:
1. Production Technology
2. Cost Constraints
3. Input Choices
6.1
THE TECHNOLOGY OF PRODUCTION
factors of production Inputs into the production

process (e.g., labor, capital, and materials).
The Production
Function
q F ( K , L)
The production function shows the highest output that a

firm can produce for every specified combination of
inputs.
Please note:
1) Inputs and outputs are flows (i.e. over a period of time) .
2) Production function q=F(K,L) applies to a given technology.
3) Production functions describe what is technically feasible
when the firm operates efficiently.
The Short Run versus the

Long Run
short run Period of time in which quantities of one or
more production factors cannot be changed.
fixed input
Production factor that cannot be varied.
long run Amount of time needed to make all

production inputs variable.
Practice Questions
Use the following two statements to answer this question:
I. Production functions describe what is technically feasible
when the firm operates efficiently.
II. The production function shows the least cost method of
producing a given level of output.
A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.
For many firms, capital is the production input that is typically

fixed in the short run. Which of the following firms would face
the longest time required to adjust its capital inputs?
A) Firm that makes DVD players.
B) Computer chip fabricator
C) Flat-screen TV manufacturer
D) Nuclear power plant
6.2
PRODUCTION WITH ONE VARIABLE INPUT

(LABOR)
TABLE
6.1
AMOUNT
OF LABOR
(L)
PRODUCTION WITH ONE VARIABLE INPUT

AMOUNT
TOTAL
OF CAPITAL
OUTPUT (q)
(K)
AVERAGE
PRODUCT
(q/L)
MARGINAL PRODUCT
(q/L)
10
10
10
10
10
10
30
15
20
10
60
20
30
10
80
20
20
10
95
19
15
10
108
18
13
10
112
16
10
112
14
10
108
12
10
10
100
10
average product
marginal product
Output per unit of a particular input.

Additional output produced as an input is increased by
one unit.
Average product of labor (APL) = Output/labor input = q/L
Marginal product of labor (MPL) = Change in output / change in labor input
= q/L
The total product curve in (a) shows

the output produced for different
amounts of labor input.
PRODUCTION WITH ONE

VARIABLE INPUT (Labour)
(a)
The average and marginal products in

(b) can be obtained (using the data in
Table 6.1) from the total product
curve.
At point A in (a), the MPL is 20 because the
line that is tangent to the total product curve has a slope
of 20.
At point B in (a) the APL is 20, which is the slope of the
line from the origin to B.
The APL at point C in (a) is given by the slope of the line
0C.
(b)
Key
Points
Production With One

Variable Input (Labour)
1. Total product TP reaches maximum

(at point D) when MPL=0.
2.
When MPL> APL, APL is increasing (i.e. APL

slopes upward).
When MPL< APL, APL is decreasing (i.e.
APL slopes downward).
3.
At point E, when MPL=APL , APL reaches its

maximum.
4.
APL is the slope of the line drawn from the

origin to the point on TP curve.
MPL at a point is the slope of TP curve at that
point.
The 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.
Effect of Technological Improvement
Labor productivity (output per

unit of labor) can increase if
there are improvements in
technology, even though any
given production process
exhibits diminishing returns to
labor.
As we move from point A on
curve O1 to B on curve O2 to C
on curve O3 over time, labor
productivity increases.
Notes for diminishing marginal returns:

1.
2.
3.
4.
Dont confuse it with possible changes in labor quality.

Dont confuse it with negative return.
Any given production process exhibits diminishing marginal returns.
Key reason: fixed inputs (e.g., fixed capital)
EXAMPLE 6.2 MALTHUS AND THE FOOD CRISIS

The law of diminishing marginal
returns was central to the thinking
of political economist Thomas
Malthus (17661834).
Malthus predicted that as both the
marginal and average productivity
of labor fell and there were more
mouths to feed, mass hunger and
starvation would result.
Malthus was wrong (although he
was right about the diminishing
marginal returns to labor).
Over the past century,
technological improvements have
dramatically altered food
production in most countries
(including developing countries,
such as India). As a result, the
average product of labor and total
food output have increased.
Hunger remains a severe problem
in some areas, in part because of
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall
TABLE
6.2
INDEX OF WORLD
FOOD PRODUCTION
PER CAPITA
YEAR
INDEX
1948-52
100
1961
115
1965
119
1970
124
1975
125
1980
127
1985
134
1990
135
1995
135
2000
144
2005
151
2009
155
Microeconomics Pindyck/Rubinfeld, 7e.
Genetically Modified Food
EXAMPLE
6.2
MALTHUS AND THE FOOD CRISIS
Figure 6.4
CEREAL YIELDS AND THE WORLD PRICE OF FOOD
Cereal yields have increased. The average world price of food

increased temporarily in the early 1970s but has declined since.
labor productivity
Average product of labor for

an entire industry or for the economy as a whole.
Productivity and the Standard of Living
stock of capital
Total amount of capital available for use in production.

technological change
Development of new technologies allowing factors of

production to be used more effectively.
Practice Questions
The slope of the total product curve is the
A) average product.
B) slope of a line from the origin to the point.
C) marginal product.
D) marginal rate of technical substitution.
When the average product is decreasing,

marginal product
A) equals average product.
B) is increasing.
C) exceeds average product.
D) is decreasing.
E) is less than average product.
Practice Questions
The law of diminishing returns applies to
A) the short run only.
B) the long run only.
C) both the short and the long run.
D) neither the short nor the long run.
E) all inputs, with no reference to the time period.
In a certain textile firm, labor is the only short term

variable input. The manager notices that the marginal
product of labor is the same for each unit of labor, which
implies that
A) the average product of labor is always greater that the marginal product of
labor
B) the average product of labor is always equal to the marginal product of labor
C) the average product of labor is always less than the marginal product of labor
D) as more labor is used, the average product of labor falls
E) there is no unambiguous relationship between labor's marginal and average
products.
Practice Questions
Marginal product crosses the horizontal axis (is
equal to zero) at the point where
A) average product is maximized.
B) total product is maximized.
C) diminishing returns set in.
D) output per worker reaches a maximum.
E) All of the above are true.
Assume that average product for six workers is

fifteen. If the marginal product of the seventh
worker is eighteen,
A) marginal product is rising.
B) marginal product is falling.
C) average product is rising.
D) average product is falling.
6.3
PRODUCTION WITH TWO VARIABLE INPUTS

PRODUCTION WITH TWO VARIABLE
INPUTS
LABOR INPUT
CAPITAL
INPUT
20
40
55
65
75
40
60
75
85
90
55
75
90
100
105
65
85
100
110
115
75
90
105
115
120
isoquant 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.
A set of isoquants, or
isoquant map, describes the
firms production function.
Output increases as we move
from isoquant q1 (at which 55
units per year are produced
at points such as A and D),
to isoquant q2 (75 units per
year at points such as B) and
to isoquant q3 (90 units per
year at points such as C and
E).
Production With Two

Variable
Inputs Pindyck/Rubinfeld, 7e.
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall
Microeconomics
Diminishing Marginal
Returns
Holding the amount of capital
fixed at a particular levelsay 3,
we can see that each additional
unit of labor generates less and
less additional output.
Because adding one factor while
holding the other factor constant
eventually leads to lower and
lower incremental output, the
isoquant must become steeper
as more capital is added in place
of labor and flatter when labor is
added in place of capital.
Substitution Among Inputs

marginal rate of technical substitution (MRTS)
Amount by which the quantity of one input can be reduced when one extra unit
of another input is used, so that output remains constant.

MRTS = Change in capital input/change in labor input

= (for a fixed level of q)
DIMINISHING MRTS
Additional output from increased use of labor =
Reduction in output from decreased use of capital =
Because we are keeping output constant by moving along an
isoquant, the total
change in output must be zero. Thus,

Now, by rearranging terms we see that

(6.
2)
MARGINAL RATE OF
TECHNICAL SUBSTITUTION
Like indifference curves,

isoquants are downward
sloping and convex.
The slope of the isoquant at

any point measures the
marginal rate of technical
substitutionthe ability of the
firm to replace capital with
labor while maintaining the
same level of output.
On isoquant q2, the MRTS

falls from 2 to 1 to 2/3 to 1/3.
Summary
Production function q=F(L,K)

q=MPLL+MPKK
Along an isoquant, so q=0
q=0=MPLL+MPKK
Rewrite the above equation:
MPL/MPK= -K/ L=MRTSL,K
MRTSL,K= MPL/MPK
Production FunctionsTwo Special Cases

Case 1: Isoquants When Inputs Are Perfect Substitutes
When the isoquants are

straight lines, the MRTS is
constant. Thus the rate at
which capital and labor can be
substituted for each other is
the same no matter what level
of inputs is being used.
Points A, B, and C represent
three different capital-labor
combinations that generate the
same output q3.
q (L, K) =aL+bK
Rewrite: k=q/b-(a/b)L
MPL=a, MPK=b
MRTS L,K = MPL/MPK =a/b
Slope=-a/b
Case 2: Isoquants When Inputs Are Perfect Complements

fixed-proportions production function (also called a Leonitief production function)
Production function with L-shaped isoquants, so that only one combination of labor
and capital can be used to produce each level of output. It describes situations in
which methods of production are limited.
e.g. q (L, K) =min(AL, BK)
When the isoquants are Lshaped, only one combination of
labor and capital can be used to
produce a given output (as at
point A on isoquant q1, point B on
isoquant q2, and point C on
isoquant q3).
Adding more labor alone does not
increase output, nor does adding
more capital alone.
Corner
lies on
K=(a/b)L
Practice Questions
The rate at which one input can be reduced per
additional unit of the other input, while holding output
constant, is measured by the
A) marginal rate of substitution.
B) marginal rate of technical substitution.
C) slope of the isocost curve.
D) average product of the input.
A firm uses two factors of production. Irrespective of

how much of each factor is used, both factors always
have positive marginal products which imply that
A) isoquants are relevant only in the long run
B) isoquants have negative slope
C) isoquants are convex
D) isoquants can become vertical or horizontal
E) none of the above
Practice Questions
A production function in which the inputs are
perfectly substitutable would have isoquants that are
A) convex to the origin.
B) L-shaped.
C) linear.
D) concave to the origin.
A firm's marginal product of labor is 4 and its

marginal product of capital is 5. If the firm adds one
unit of labor, but does not want its output quantity to
change, the firm should
A) use five fewer units of capital.
B) use 0.8 fewer units of capital.
C) use 1.25 fewer units of capital.
D) add 1.25 units of capital.
6.4
RETURNS TO SCALE
returns to scale Rate at which output increases

as inputs are increased proportionately.
increasing returns to scale Situation in which
output more than doubles when all inputs are
doubled.
constant returns to scale Situation in which
output doubles when all inputs are doubled.
decreasing returns to scale Situation in which
output less than doubles when all inputs are
doubled.
Key
Notes
Production function: q=F(L,K)

Multiple each input by , (>1)
If F(L, K)> q
increasing returns to scale (I.R.S)
If F(L, K)= q
constant returns to scale (C.R.S.)
If F(L, K)< q
decreasing returns to scale (D.R.S)
Describing Returns to Scale
When a firms production process exhibits

constant returns to scale as shown by a
movement along line 0A in part (a), the
isoquants are equally spaced as output
increases proportionally.
However, when there are increasing

returns to scale as shown in (b), the
isoquants move closer together as
inputs are increased along the line.
Practice Question
1. Please find out whether the following production
functions exhibit IRS, CRS, or DRS.
a) q=3LK2
b) q=3L+2K
c) q= 10L1/2K1/2
d) q= (2L+2K)1/2
e) q= 4L1/2+4K
2. Fill in the gaps in the table below.

Quantity of
Total
Marginal Product
Average Product
Variable Input
Output
of Variable Input
of Variable Input
225
225
225
600
375
300
675
300
225
1140
5
6
225
225
Summary:
Isoquants can be convex, linear, or L-shaped. Each of these shapes
tell you about the nature of the production function and the MRTS.
Convex isoquants
Indicate that some units of one input can be substituted for a unit of the
other input while maintaining output at the same level.
In this case, the MRTS is diminishing as we move down along the
isoquant. This tells us that it becomes more and more difficult to
substitute one input for the other while keeping output unchanged.
Linear isoquants
Imply that the slope, or the MRTS, is constant.
This means that the same number of units of one input can always be
exchanged for a unit of the other input holding output constant. The
inputs are perfect substitutes in this case.
L-shaped isoquants
Imply that the inputs are perfect complements, and the firm is
producing under a fixed proportions type of technology.
In this case the firm cannot give up one input in exchange for the other
and still maintain the same level of output. For example, the firm may
require exactly 4 units of capital for each unit of labor, in which case one
input cannot be substituted for the other.

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Chapter 6

6.1 The Technology of Production

The Production Decisions of a Firm

THE TECHNOLOGY OF PRODUCTION

factors of production Inputs into the production

The production function shows the highest output that a

The Short Run versus the

Production factor that cannot be varied.

long run Amount of time needed to make all

For many firms, capital is the production input that is typically

PRODUCTION WITH ONE VARIABLE INPUT

PRODUCTION WITH ONE VARIABLE INPUT

Output per unit of a particular input.

The total product curve in (a) shows

PRODUCTION WITH ONE

The average and marginal products in

Production With One

1. Total product TP reaches maximum

When MPL> APL, APL is increasing (i.e. APL

At point E, when MPL=APL , APL reaches its

APL is the slope of the line drawn from the

The Law of Diminishing Marginal

Principle that as the use of an input increases with other inputs

Labor productivity (output per

Notes for diminishing marginal returns:

Dont confuse it with possible changes in labor quality.

EXAMPLE 6.2 MALTHUS AND THE FOOD CRISIS

Microeconomics Pindyck/Rubinfeld, 7e.

Genetically Modified Food

MALTHUS AND THE FOOD CRISIS

Cereal yields have increased. The average world price of food

Average product of labor for

Total amount of capital available for use in production.

Development of new technologies allowing factors of

When the average product is decreasing,

In a certain textile firm, labor is the only short term

Assume that average product for six workers is

PRODUCTION WITH TWO VARIABLE INPUTS

Production With Two

Substitution Among Inputs

MRTS = Change in capital input/change in labor input

Like indifference curves,

The slope of the isoquant at

On isoquant q2, the MRTS

Production function q=F(L,K)

Production FunctionsTwo Special Cases

When the isoquants are

Case 2: Isoquants When Inputs Are Perfect Complements

A firm uses two factors of production. Irrespective of

A firm's marginal product of labor is 4 and its

returns to scale Rate at which output increases

Production function: q=F(L,K)

increasing returns to scale (I.R.S)

constant returns to scale (C.R.S.)

decreasing returns to scale (D.R.S)

Describing Returns to Scale

When a firms production process exhibits

However, when there are increasing

2. Fill in the gaps in the table below.

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