Lecture 1
Technology = a process that uses inputs to produce an output, a firm chooses between technologies
to maximize their profit; with a fixed amount of output, they aim to minimize the cost of production.
For now, technologies are specific combinations of inputs
Isocost lines: combinations of inputs that give the same cost
Iso= every point represents the same costs. On this line, the production costs are always the same.
The higher the isocost line is, the higher the costs of production are -> so you’re looking for the
lowest isocost line possible.
The relative price of one input to the price of another input is the absolute slope of the isocost curve.
Isoquant curve: ‘quant’: quantity of output
All input combinations that yield a given level of output ( = minimum required quantity of inputs).
It represents the production function which shows the maximum amount the firm can produce given
a particular combination of inputs.
-> In a graph, you have different curves representing a quantity of output. With these you can
compare how you should increase a input in order to produce more output (another curve).
MRTS (Marginal Rate of Technical Substitution): amount by which capital can be reduced for every
one unit increase in labor, so to keep the output constant. It is reflected in the absolute value of the
slope of the isoquant curve. MRTS diminishes in absolute value as you move down the isoquant
curve.
Technological differences are reflected in different slopes of the curves.
change∈capital
MRTS=
change∈labor
The MRTS is the derivative (afgeleide) from the isoquant line.
A firm’s Optimization problem; to maximize the firm’s profit, you calculate MRTS = isoquant curve
(they are tangent) and the slopes of the MRTS and isoquant curve are qual
change∈capital w ( price of labor)
MRTS= =
change∈labor r ( price of capital)
Average product: outcome divided by input (average output per unit of input)
Marginal product: extra outcome when input is increased by 1 (change in output per unit change in
input) -> change in output divided by change in input
Diminishing marginal product: concave production function (the more input is increased, the less
growth there is in output).
Technology = a process that uses inputs to produce an output, a firm chooses between technologies
to maximize their profit; with a fixed amount of output, they aim to minimize the cost of production.
For now, technologies are specific combinations of inputs
Isocost lines: combinations of inputs that give the same cost
Iso= every point represents the same costs. On this line, the production costs are always the same.
The higher the isocost line is, the higher the costs of production are -> so you’re looking for the
lowest isocost line possible.
The relative price of one input to the price of another input is the absolute slope of the isocost curve.
Isoquant curve: ‘quant’: quantity of output
All input combinations that yield a given level of output ( = minimum required quantity of inputs).
It represents the production function which shows the maximum amount the firm can produce given
a particular combination of inputs.
-> In a graph, you have different curves representing a quantity of output. With these you can
compare how you should increase a input in order to produce more output (another curve).
MRTS (Marginal Rate of Technical Substitution): amount by which capital can be reduced for every
one unit increase in labor, so to keep the output constant. It is reflected in the absolute value of the
slope of the isoquant curve. MRTS diminishes in absolute value as you move down the isoquant
curve.
Technological differences are reflected in different slopes of the curves.
change∈capital
MRTS=
change∈labor
The MRTS is the derivative (afgeleide) from the isoquant line.
A firm’s Optimization problem; to maximize the firm’s profit, you calculate MRTS = isoquant curve
(they are tangent) and the slopes of the MRTS and isoquant curve are qual
change∈capital w ( price of labor)
MRTS= =
change∈labor r ( price of capital)
Average product: outcome divided by input (average output per unit of input)
Marginal product: extra outcome when input is increased by 1 (change in output per unit change in
input) -> change in output divided by change in input
Diminishing marginal product: concave production function (the more input is increased, the less
growth there is in output).
