EC4004 Lecture 9
Production
Dr Stephen Kinsella

Last Time

Game Theory

{Players, Strategies, Payoffs}
Nash Eqm,
Subgame Perf . Eqm
Backward Induction
Prisoner’s Dilemma
Matching Pennies
Battle of Sexes

Production.

?

Production
Function

production function, a mathematical
relationship between inputs and outputs.

Combine Capital

Combine Capital

Combine Capital

Combine Capital and
Labour

Combine Capital and
Labour to produce
output

q :output of a particular good during a period,
K: capital used
L: labour input
M: raw materials

Marginal
Products

Diminishing
Marginal
Product

Relationship between Output and Labour Inputs
Holding Other Inputs Constant
Output Total
per week Output
(a) Total output L* Labor input
MPL per week
L*
(b) Marginal product Labor input per week

Isoquant Maps

Capital
per week
KA
A
KB
B q = 10
Labour
0 LA LB per week

Capital
per week
KA
A
q = 30
q = 20
KB
B q = 10
Labour
0 LA LB per week

Rate of Technical
Substitution

The RTS and Marginal
Products

Demo

Remember:
Diminishing Marginal Utility,
Indifference Curves,
Marginal Rate of Substitution

Constant Returns to Scale

A
Capital
per week
4
q = 40
3
q = 30
2
q = 20
1
q = 10
0 1 2 3 4 Labor
per week
(a) Constant Returns to Scale

Decreasing Returns to
Scale

A Capital A
Capital
per week per week
4 4
q = 40
3 3 q = 30
q = 30
2 2
q = 20 q = 20
1 1
q = 10 q = 10
Labor Labor
0 1 2 3 4 per week 0 1 2 3 4 per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale

Increasing Returns to
Scale

Capital
per week
A
K2 q2
K1 q1
K0 q0
Labor
0 L0 L1 L2 per week

Technical Change
Capital
per week
K1
K0
A
q0
q’0
Labor
0 L1 L0 per week

Next Time
Costs
Do 7.1, 7.2, 7.7
Read Chapter 8

EC4004 Lecture 9
Production
Dr Stephen Kinsella