L 14 Producers Technology u Producers have a

L 14 Producers

Technology u Producers: have a technology u A technology - a process converting inputs to an output u Typical Inputs: labor, physical and human capital, land, R&D, marketing capital u To make our life simpler: only two inputs capital ( ) and labor ( ) u Technology given by production function

Production function: Geometry L z K

Production function: Geometry L z K

Production function: Geometry L z K

Production function: Geometry y 5 L 3 z K

Production function: Geometry f(K, L) y 5 L 3 z K

3 Classic Examples Cobb-Douglass Fixed Proportions Perfect Substitutes

Marginal Product u MPK and MPL u Economic Interpretation of MPK – how much product goes up if K increases by 1 u MPL analogous but for L u Geometric Interpretation

MPK Increasing, Constant, Decreasing? Cobb-Douglass Fixed Proportions Perfect Substitutes

What’s new? u Monotone transformation! Nooooo! u Long run and Short run ( fixed) u Constant Returns to Scale (CRS) u Increasing (IRS), Decreasing (DRS)

CRS: Geometry L 2 z z K

Marginal Product and Returns to Scale

Profit Maximization (Short run) u Objective of the firm u Here: maximization of Profit u Short Run u Secret of happiness?

Profit Maximization (Short run) u Objective of the firm u Here: maximization of Profit u Short Run u Secret of happiness?

Profit Maximization (Short run)