The FirmBasics MICROECONOMICS.pptVIP

The Firm: Basics MICROECONOMICS Principles and Analysis Frank Cowell Overview... The basics of production... Some of the elements needed for an analysis of the firm Technical efficiency Returns to scale Convexity Substitutability Marginal products This is in the context of a single-output firm... ...and assuming a competitive environment. First we need the building blocks of a model... Notation Feasible production Technical efficiency The function ? Overview... The input requirement set The input requirement set Case 1: Z smooth, strictly convex Case 2: Z Convex (but not strictly) Case 3: Z smooth but not convex Case 4: Z convex but not smooth Summary: 4 possibilities for Z Overview... Isoquants Isoquant, input ratio, MRTS MRTS and elasticity of substitution Responsiveness of inputs to MRTS is elasticity of substitution Elasticity of substitution Homothetic contours Contours of a homogeneous function Overview... Lets rebuild from the isoquants The isoquants form a contour map. If we looked at the “parent” diagram, what would we see? Consider returns to scale of the production function. Examine effect of varying all inputs together: Focus on the expansion path. q plotted against proportionate increases in z. Take three standard cases: Increasing Returns to Scale Decreasing Returns to Scale Constant Returns to Scale Lets do this for 2 inputs, one output… Case 1: IRTS Case 2: DRTS Case 3: CRTS Relationship to isoquants Overview... Marginal products CRTS production function again MP for the CRTS function Relationship between q and z1 Key concepts Technical efficiency Returns to scale Convexity MRTS Marginal product What next? Introduce the market Optimisation problem of the firm Method of solution Solution concepts. z2 q 0 Now take a vertical “slice” z1 The resulting path for z2 = constant Let’s look at its shape z1 q f(z) The feasible set A section of the production function Technically efficient points Input 1 is essential:If z1= 0 then q = 0 Slope of tan