Microeconomics Chapter 19: Technology and Production

Vocabulary practice flashcards covering inputs, isoquants, technologies, marginal products, technical rates of substitution, and returns to scale from Chapter 19.

Factors of Production

Inputs used in the production process, including land, labor, capital, and raw materials.

Capital Goods

Produced factors of production, such as tractors, buildings, and computers, that are themselves goods created by prior production.

Financial Capital

The money required to start up and maintain a business.

Physical Capital

Produced factors of production used as physical inputs to create outputs.

Feasible Production Plans

Lists of all combinations of inputs and outputs that are technologically possible to achieve.

Production Set

The set of all combinations of inputs and outputs comprising a technologically feasible way to produce.

Production Function

A mathematical relationship, such as $y = f(x)$ or $f(x_1, x_2)$, measuring the maximum possible output attainable from a given set of inputs.

Isoquant

A curve showing all possible combinations of input 1 and input 2 that are just sufficient to produce a specific constant amount of output.

Fixed Proportions Technology

A production technology where inputs must be used in rigid combinations, represented by the production function $f(x_1, x_2) = \min\{x_1, x_2\}$.

Perfect Substitutes Technology

A production technology where inputs can be substituted for one another at a constant rate, represented by the production function $f(x_1, x_2) = x_1 + x_2$.

Cobb-Douglas Production Function

A functional form of technology represented by $f(x_1, x_2) = A x_1^a x_2^b$, where $A$ reflects the scale of production, and parameters $a$ and $b$ represent output responsiveness to inputs.

Free Disposal

The property of monotonic technology assuming that if a firm can costlessly dispose of an input, having extra input cannot decrease total output.

Convexity of Technology

The property stating that if $(x_1, x_2)$ and $(z_1, z_2)$ are two ways to produce $y$ units of output, a weighted average of these two plans can produce at least $y$ units of output.

Marginal Product (MP)

The physical, observable rate of extra output produced per unit of additional input when holding all other inputs constant, given by $\frac{\Delta y}{\Delta x_1} = \frac{f(x_1 + \Delta x_1, x_2) - f(x_1, x_2)}{\Delta x_1}$.

Technical Rate of Substitution (TRS)

The slope of an isoquant, measuring the rate at which factor 2 must be adjusted when factor 1 changes to maintain constant output: $\text{TRS}(x_1, x_2) = \frac{\Delta x_2}{\Delta x_1} = -\frac{\text{MP}_1(x_1, x_2)}{\text{MP}_2(x_1, x_2)}$.

Law of Diminishing Marginal Product

The principle stating that as more of a single factor of production is added while keeping all other inputs fixed, the marginal product of that factor will diminish.

Diminishing Technical Rate of Substitution

The property that as the amount of factor 1 increases and factor 2 is adjusted to remain on the same isoquant, the slope of the isoquant (TRS) declines in absolute value.

Short Run

A production horizon in which at least one factor of production is fixed or predetermined.

Long Run

A production horizon in which all factors of production can be varied.

Constant Returns to Scale

A property of production technology where scaling all inputs by a factor $t$ results in output scaling by the exact same factor: $f(t x_1, t x_2) = t f(x_1, x_2)$.

Increasing Returns to Scale

A property of production technology where scaling all inputs by a factor $t$ yields more than $t$ times the original output: $f(t x_1, t x_2) > t f(x_1, x_2)$.

Decreasing Returns to Scale

A property of production technology where scaling all inputs by a factor $t$ yields less than $t$ times the original output: $f(t x_1, t x_2) < t f(x_1, x_2)$.