Factor–Factor & Production Economics Lecture Notes

Vocabulary flashcards covering key terms from lecture notes on factor–factor relationships, isoquants, cost functions, economies of scale, and related production economics concepts.

Factor–Factor Relationship

Analysis of how different inputs can be combined or substituted to produce a given output at least-cost.

Optimum Input Combination

The specific mix of inputs that minimizes production cost for a fixed level of output.

Cost Minimization

Managerial objective of producing a desired output with the lowest possible total cost.

Producer’s Production Function

Mathematical expression Y = f(X1, X2…Xn) that links output to quantities of multiple inputs.

Input Substitution

Replacing one factor (X1) with another (X2) while keeping output constant.

Isoquant

Curve showing all input combinations that yield the same level of output.

Iso-product Curve

Another name for an isoquant; highlights equal physical product along the curve.

Isoquant Map

Family of isoquants representing several output levels on one graph.

Isoquant Properties

Features of isoquants: negative slope, cannot intersect, convex to origin, and higher isoquants denote higher output.

Negative Slope of Isoquant

Indicates that increasing one input requires reducing the other to keep output unchanged.

Convex Isoquant

Isoquant bowed toward origin, reflecting diminishing MRTS as one moves down the curve.

Higher Isoquant

An isoquant located farther from the origin, representing a larger quantity of output.

Isoquant Non-Intersection

Rule that two isoquants cannot cross because each represents a unique output level.

Marginal Rate of Technical Substitution (MRTS)

Slope of an isoquant; the amount of one input that can be given up for an extra unit of another input without changing output.

Diminishing MRTS

Phenomenon where MRTS decreases as more of one input replaces another along an isoquant.

Isocost Line

Line showing all combinations of two inputs purchasable for a given total outlay.

Input Price

Monetary cost per unit of a production factor, used to draw isocosts.

Tangency Point

Point where an isoquant touches an isocost line, giving the least-cost input combination for that output.

Least-Cost Combination

Input mix at the isoquant–isocost tangency, delivering a chosen output with minimum spending.

Complementary Inputs

Factors that must be used in fixed proportions; one cannot substitute for the other.

Fixed Proportion Combination

Production situation where inputs are combined in constant ratios at all output levels.

Constant Rate of Substitution

Case where isoquants are straight lines and one input replaces the other at a fixed ratio.

Varying Rate of Substitution

Situation where the rate at which one input replaces another changes as their quantities change.

Increasing Rate of Substitution

Condition where more and more of input X1 is required to replace each unit of X2 as X2 rises.

Decreasing Rate of Substitution

Condition where less of input X1 is needed to replace each unit of X2 as X2 increases.

Marginal Value Product (MVP)

Extra revenue earned by using one more unit of an input; calculated as MPP × product price when price is constant.

Marginal Input Cost (MIC)

Additional cost incurred from employing one more unit of an input; equals input price when price is constant.

Total Value Product (TVP)

Total revenue derived from output; equal to TPP × output price.

Profit-Maximizing Input Level

Quantity of an input where MVP equals MIC, yielding maximum profit.

Marginal Revenue (MR)

Additional revenue from selling one more unit of output; ΔTR/ΔQ.

Marginal Cost (MC)

Additional cost of producing one more unit of output; ΔTIC/ΔQ.

Profit-Maximizing Output Level

Production level where MR equals MC, ensuring highest possible profit.

Equal-Marginal Principle

Rule that resources should be allocated so that marginal returns per unit of cost are equal across uses.

Product–Product Relationship

Study of how a firm allocates resources among alternative outputs (e.g., crops, livestock).

Iso-revenue Line

Line showing all combinations of two products that yield the same total revenue at given prices.

Marginal Rate of Substitution (Consumer)

Amount of one good a consumer is willing to give up for another while maintaining the same utility.

Economies of Scale

Cost advantages achieved when output expansion lowers average cost per unit.

Internal Economies of Scale

Cost savings arising from actions within the firm, such as patented technology or bulk buying.

External Economies of Scale

Cost reductions for all firms in an industry due to external factors like favorable policies.

Purchasing Economies

Lower average input costs gained by buying materials in bulk quantities.

Managerial Economies

Cost savings from improved organizational structure and specialized management.

Technological Economies

Lower unit costs due to superior production technology (e.g., 3D printing).

Returns to Scale

Long-run concept describing how output changes when all inputs change proportionately.

Increasing Returns to Scale

Output rises by a larger percentage than inputs; associated with economies of scale.

Constant Returns to Scale

Output changes in the same proportion as all inputs.

Decreasing Returns to Scale

Output increases by a smaller percentage than the proportional rise in all inputs.

Cost Function

Mathematical relationship showing total cost as a function of output level and input prices using the most efficient technique.

Explicit Cost

Out-of-pocket expenditure recorded in accounts, such as wages, rent, or utilities.

Implicit Cost

Opportunity cost of using owner-supplied resources, not recorded in accounting books.

Opportunity Cost

Value of the best alternative foregone when a resource is used for a particular purpose.

Variable Cost

Cost that changes directly with the level of output (e.g., raw materials).

Fixed Cost

Expense that remains constant regardless of output level in the short run (e.g., lease payments).

Total Cost

Sum of total fixed and total variable costs at a given output level.

Promotion Cost

Expenditure incurred to market or advertise products and services.

Logistics Cost

Expenses related to transportation, warehousing, and handling of materials during production and distribution.

Long-Run Average Cost (LRAC)

Average cost per unit when all inputs are variable and the firm operates at optimal scale.

Marginal Physical Product (MPP)

Extra output produced by employing one additional unit of an input.

Total Physical Product (TPP)

Total quantity of output produced with given amounts of inputs.

Output Price

Market price at which each unit of product is sold; often assumed constant in MVP calculations.

Budget Constraint (Inputs)

Financial limit that determines which input combinations are affordable, depicted by an isocost.

Substitution Possibility

Extent to which one input can replace another without affecting output level.

Scale of Operation

Overall size of the production process; variable in long-run analyses of costs and returns.

Production Surface

Three-dimensional representation showing output as a function of two variable inputs.

Complementarity

Relationship where inputs must be used together in fixed ratios to be productive.

Isoquant Slope

Numerical value of MRTS; rate at which inputs trade-off along an isoquant.

Total Input Cost (TIC)

Overall expenditure on all inputs used, equal to Σ (input quantity × input price).

Total Revenue (TR)

Income from sales, calculated as output quantity multiplied by output price.

Marginal Rate of Product Transformation (MRPT)

Rate at which one product must decrease for the other to increase along a production-possibility frontier.

Input Level

Quantity of a specific factor employed in the production process.

Resource Allocation

Process of distributing limited inputs among competing activities or outputs to achieve objectives.