高级微观经济学 (黄有光) Topic5-Production.doc

Advanced Microeconomics Topic 5: Production Cost Primary Readings: DL – Chapter 2 JR – Chapter 5 In this lecture, we will present a general framework of production technology. We will focus on what choices could be made; and the issue of what choices would be made will be deferred to the next lecture when we look into the firm’s behaviour. The first part will describe production possibilities in physical terms; while the second part will recast this description into a cost function framework. The treatment in this lecture is a bit abstract and quite general. You are required to understand the relevance of this abstract framework in terms of particular technological processes. 5.1 Production Possibility Sets There are many ways to describe the technology of a firm, such as, production functions, graphs, or systems of inequalities. But in mathematical term, these representations can all be expressed as a set. The firm uses and produces a total of m commodities. A particular production plan is y in Rm: yi 0 implies that a net amount yi of i-th commodity is produced; yj 0 implies that a net amount –yj of j-th commodity is used; y is called a netput vector. Production possibility set of a firm is a subset Y ( Rm. A firm may select any vector y ( Y as its production plan. Properties of Production Possibility Set Closed: If the limit of any converging sequence of vectors in Y is in Y. Convex: Convex combinations of its elements remain to be inside. Free disposal: If y ( Y implies that y’ ( Y for all y’ ( y. Meaning that: commodities (inputs or outputs) can be thrown away. Input Requirement Set: V(q) = {z: (-z, q) ( Y } Isoquant: Q(q) = {z: (-z, q) ( Y , (-z, q’) ( Y ( q’ ( q, q’ ( q} The isoquant Q(q) is usually the boundary closest to the origin of V(q). Proposition: If Y is convex, so is V(q). We normally do not require that the production possibility set is convex. If so, it will rule out start-up costs and other sorts of returns to sc