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L14. Technology. Technology. Producers: have a technology A technology - a process converting inputs to an output Typical Inputs: labor, physical and human capital, land, R&D, marketing capital To make our life simpler: only two inputs capital ( ) and labor ( )

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slide1

L14

Technology

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

capital ( ) and labor ( )

  • Technology given by production function
3 classic examples
3 Classic Examples

Cobb-Douglass

Fixed Proportions

Perfect Substitutes

3 classic examples1
3 Classic Examples

Cobb-Douglass

Fixed Proportions

Perfect Substitutes

marginal product
Marginal Product
  • MPK andMPL
  • Economic Interpretation of MPK – how much product goes up if K increases by 1
  • MPL analogous but for L
  • Geometric Interpretation
mpk increasing constant decreasing
MPK Increasing, Constant, Decreasing?

Cobb-Douglass

More generally

mpk increasing constant decreasing1
MPK Increasing, Constant, Decreasing?

Fixed Proportions

Perfect Substitutes

technical rate of substitution
Technical Rate of Substitution
  • TRS: slope of isoquant
  • Interpretation:
  • Formula:
what s new
What’s new?
  • Long run and Short run ( fixed)
  • Monotone transformation? Nooooo!
  • Constant Returns to Scale (CRS)
  • Increasing (IRS), Decreasing (DRS)