-Fixed Factor
-Fixed Input Prices
-Fixed Technology
Grahpically: Short-run-average-cost
Long Run:
-All factors vary
-Price of inputs can be fixed, or can vary
-Technology is fixed
Graphically: Long -run-average-cost-curve (or shifts in the long-run-average-cost curve for the case of changes in factor prices)
THE VERY LONG RUN:
-Technology can vary
-Price of inputs can vary
Graphically: Shown by shifts in the long run average cost curve (generally, downward shifts)
3 types of changes in technology:
-Change in process (for an example, robotic assembly lines instead of human assembly lines. Bull dozers and forklifts instead of pickaxes and brute strength)
-Improved inputs (aluminum bikes instead of iron bikes)
-New Products (Ipods instead of portable walkmen)
Usually, a change in technology changes the productive process, and therefore, would change the production function (the functional relationship between inputs and outputs). Remember, productivity is output per input.
There are 2 theories about technological innovation. The second one is more correct.
Old Theory: Technological Changes were seen as exogenous, or independent variables unaffected by changes in the economy (think crazy old scientists sitting around in the their labs and coming up with new technologies "just because they want to").
New Theory: Technology Changes are endogenous, or dependent on the economy. A production-side want to innovate away from costly inputs often drives firms to finance new technological changes. It is a FEEDBACK MECHANISM (for instance, many oil producers are now looking into unconventional drilling methods which use water pressure to release the oil from rocks. This turns land which was previously unproductive and cheap into a great asset, and helps companies move away from pricier traditional drilling sites) .
GENERALLY, TECHNOLOGICAL CHANGES SHIFT THE DEMAND CURVE DOWNWARD!
So... in the very long run, firms can both substitute away from costly inputs, or innovate away from them.
OKAY! Isoquants and Isocosts! These are very similar to indifference curves and budget lines from chapter six!
Isocost Lines:
The isocost line reflects two things
-The total cost of inputs
-The factor prices of inputs
Each isocost line shows all possible combinations of factors available for a given cost (sort of like a budget line, except with inputs, not products)
For an example, an isocost line could show the amount of cooks and ingredients a restaurant can utilize for a set cost.
The formula: Total Cost = (Px X Qx) + (Py X Qy)
The slope: -Px/Py (I'm doing this by axes so not to confuse people, because technically, you could graph labour or capitol on either axis).
As your total costs increase, the isocost line moves out from the origin. Changes in input factor prices will cause the isocost line to tilt.
Isoquant Lines
Each isoquant line shows all possible combinations of the factors of production that yield a given level of output. (Sort of like an indifference curve, except with productive output held constant instead of total utility)
In other words, total product is constant: the /\TP = 0
The formula: /\x*MPx + /\y*MPy = 0
The slope: -MPx/MPy
Finding the conditions for cost minimization is a little bit different for Isoquant and Isocost lines. Instead of finding the optimal quantity level for a given budget (like we do for indifference curves), we figure out which level of production we need to meet (for example, how many teddy bears we want to produce in a day). We first draw the Isoquant line which corresponds to that level of production (so we would draw the isoquant line showing the combination of inputs needs to produce 100 bears in a day). After that, whichever isocost line is JUST tangent to the desired isoquant line will represent the minimum cost for that level of output, and the point of tangency will show the exact quantity of inputs required to achieve this minimum cost.
If an isocost line is not quite touching the isoquant line, then expenditure is not high enough to meet those production goals. Meanwhile, if an isocost line bisects the isoquant line, that production goal can be met, but efficiency is not being maximized, as that same level of production could be facilitated with a less-costly combination of inputs.
At the point of tangency, the slope of the isoquant line = the slope of the isocost line!
MPx/MPy = Px/Py
which is the same condition for marginal productivity maximization! (again, this parallels indifference curves in a BIG way)
REMEMBER, EFFICIENCY IS IMPORTANT!
SO... if you were to study efficiently, you should know that anything after this point will NOT be on the big, evil Gateman-style midterm this Friday!
It's hard to believe it's already November...
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