Econ 2020 Lecture 2 Firms and Production (II) – Key Terms (Vocabulary)

Vocabulary flashcards covering core terms and concepts from the lecture notes on production, isoquants, short-run vs long-run, and different production functions.

Firm

An organization that converts inputs (labor, materials, capital) into outputs (goods/services) to sell.

Transaction costs

Costs of conducting a trade (search, bargaining, enforcement) that give rise to the existence of firms.

Production set

The collection of all feasible production plans (q, z1, z2) achievable with a firm’s technology.

Feasible production plan

A plan (q, z1, z2) that can be produced given the current technology.

Output-maximizing production plan

A feasible plan that yields the maximum output q for the given inputs.

Inputs-minimized production plan

A feasible plan that uses the minimum inputs to achieve a given output q.

Technically efficient production plan

A plan that is both output-maximizing and inputs-minimizing.

Profit-maximized production plan

A plan that yields the highest profit given output prices and input costs.

Cost-minimized production plan

A plan that minimizes costs for a given output level.

Production function

The relationship between input quantities and the maximum output achievable with current technology: q = f(z1, z2).

Fixed-proportions (Leontief) production function

q = min{a z1, b z2}; no substitution between inputs.

Variable-proportions production function

Inputs can be substituted; example q = A z1^α z2^β.

Short run

A time period during which at least one input (typically capital) is fixed.

Long run

A time period during which all inputs can be varied; no fixed inputs.

Fixed input

An input that cannot be varied in the short run (e.g., capital K*).

Variable input

An input that can be varied in the short run (e.g., labor L).

Total product of labor (TPL)

Output as a function of labor with capital fixed: q = f(L, K*).

Marginal product of labor (MPL)

The additional output from one more unit of labor: MPL = ∂q/∂L.

Average product of labor (APL)

Output per unit of labor: APL = q / L.

Isoquant

Curve showing all input combinations that yield a fixed output q: f(L, K) = q.

Marginal rate of technical substitution (MRTS)

Rate at which one input can be substituted for another along an isoquant; MRTS_K,L = - dK/dL = MPL/MPK.

Perfect substitutes

Production with linear isoquants; inputs can replace each other perfectly: q = α z1 + β z2.

Cobb-Douglas production function

q = A L^β K^α; allows substitution; CRS if α + β = 1; IRS if α + β > 1; DRS if α + β < 1.

Returns to scale (CRS/IRS/DRS)

How output changes when all inputs are scaled: CRS f(xL,xK)=x f(L,K); IRS f(xL,xK)>x f(L,K); DRS f(xL,xK)<x f(L,K).

Law of Diminishing Marginal Returns

If an input is increased while others are fixed, marginal output eventually decreases.

Isocost vs Isoquant (conceptual)

Isoquant shows fixed output; returns to scale and MRTS describe trade-offs along isoquants; isocost is not defined in these notes.

Fixed vs Variable inputs in short run (summary)

Short run: at least one input (often capital) is fixed; long run: all inputs are variable.