Chapter 19 Economics PDF

Chapter 19 [19.1 Inputs and Outputs] Inputs to production are called factors of production. Factors of production are often classified into broad categories such as land, labor, capital, and raw materials. It is pretty apparent what labor, land, and raw materials mean, but capital may be a new c...

Chapter 19 [19.1 Inputs and Outputs] Inputs to production are called factors of production. Factors of production are often classified into broad categories such as land, labor, capital, and raw materials. It is pretty apparent what labor, land, and raw materials mean, but capital may be a new concept. Capital goods are those inputs to production that are themselves produced goods. Basically, capital goods are machines of one sort or another: tractors, buildings, computers, or whatever. Sometimes capital is used to describe the money used to start up or maintain a business. We will always use the term financial capital for this concept and use the term capital goods, or physical capital, for produced factors of production. We will usually want to think of inputs and outputs as being measured in flow units: a certain amount of labor per week and a certain number of machine hours per week will produce a certain amount of output a week. We won\'t find it necessary to use the classifications given above very often. Most of what we want to describe about technology can be done without reference to the kind of inputs and outputs involved- just with the amounts of inputs and outputs. 19.2 Nature imposes technological constraints on firms: only certain combinations of inputs are feasible ways to produce a given amount of output, and the firm must limit itself to technologically feasible production plans. The easiest way to describe feasible production plans is to list them. That is, we can list all combinations of inputs and outputs that are technologically feasible. The set of all combinations of inputs and outputs that comprise a technologically feasible way to produce is called a production set Suppose, for example, that we have only one input, measured by x, and one output, measured by y. Then a production set might have the shape indicated in Figure 19.1. To say that some point (x, y) is in the production set is just to say that it is technologically possible to produce yamount of output if you have x amount of input. The production set shows the possible technological choices facing a firm. As long as the inputs to the firm are costly it makes sense to limit we to examining the maximum possible output for a given level of input. This is the boundary of the production set depicted in Figure 19.1. The function describing the boundary of this set is known as the production function. It measures the maximum possible output that you can get from a given amount of input. Of course, the concept of a production function applies equally well if there are several inputs. If, for example, we consider the case of two inputs, the production function f(x,,x,) would measure the maximum amount of output ythat we could get if we had x, units of factor 1 and x, units of factor 2. In the two-input case there is a convenient way to depict production relations known as the isoquant. An isoquant is the set of all possible combinations of inputs 1 and 2 that are just sufficient to produce a given amount of output. Isoquants are like indifference curves. As we\'ve seen earlier, an indifference curve depicts the different consumption bundles that are just sufficient to produce a certain level of utility. But there is one important difference between indifference curves and isoquants. Isoquants are labeled with the amount of output they can produce, not with a utility level. Thus, the labeling of isoquants is fixed by the technology and doesn\'t have the kind of arbitrary nature that the utility labeling has.