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Economic efficiency — profitable improvement
in overall resource efficiency
Isocost curve — defines the cost and budgetary
limits of production
Isoquant — represents what can be produced;
also known as product indifference curve
Isoquant-isocost model — illustrates more
dynamically how different plant sizes and
resource combinations determine different levels
of resource efficiency and plant capacity
Marginal product — product due to the
additional or last unit of the variable resource
input
•Marginal rate of substitution — defined as how much of one
resource is given up in order to use an additional unit of the
other, given a fixed capacity
•Production — basically means act of manufacturing a
product
•Productivity — the efficiency and therefore the power of
inputs to produce
•Resource mix or combination — defined as how much of
one resource is used per unit of the other
•Return to Scale — measure how output changes relatively
to resource inputs in the long run and indicate how overall
resource efficiency changes with the plant size.
•Production Function-Plant size and the efficiency of its
resources. Resources are fixed in the short-run, which is
generally described as a period when conditions have not
changed yet.
The law of diminishing marginal returns
states that adding a factor of production
results in smaller increases in output. After
some optimal level of capacity
utilization, the addition of any larger
amounts of a factor of production will
inevitably yield decreased per-unit
incremental returns.
The Isoquant-Isocost Model - This model
illustrates more dynamically how different
plants sizes and resource combinations
determine different levels of resource
efficiency and plant capacity. As a dynamic
tool of analysis, it also factors in the cost and
budgetary limits of production.
The Isoquant - Theoretically, there are infinite
combinations of resource inputs which
determine the same plant capacity (maximum
output) In a two-variable resource system,
these combinations form the product
indifference curve or isoquant.
FIGURE 39
The Isoquant and Diminishing Returns -
The Law of Diminishing Returns influences
the behavior of the marginal rate of
substitutions (MRS) as the latter shapes
the isoquant.
Hierarchy of Isoquants - A hierarchy of
isoquants is an array of isoquants which
corresponds to different levels of
resource inputs and plant capacity.
Theoretically, there are infinite
combinations of production resources
that a given budget can buy.
Marginal rate of substitution (MRS) is
defined as how much of one resource
should be given up in order to buy an
additional unit of the other, given a fixed
budget. The MRS of capital (K) to labor
(L) in the example is computed as
follows:
Resource mix/combination- is defined as
how much of one resource is used per
unit of the other.
Relative-price changes - are not
monetary phenomenon.
Relative Efficiency- often this concept is
used where the comparison is made
between a given procedure and a
notional "best possible" procedure.
Productivity is commonly defined as a
ratio between the output volume and
the volume of inputs.
Average productivity is measured by
taking the total output and dividing the
quantity by the number of workers.
Marginal productivity or marginal
product refers to the extra output, return,
or profit yielded per unit by advantages
from production inputs.
Returns to scale refers to the rate by
which output changes if all inputs are
changed by the same factor.
Productivity — the efficiency and
therefore the power of inputs to produce
Return to Scale are measured as follows:
Output can be increased by increasing all
factors in the same proportion. Generally, laws
of returns to scale refer to an increase in output
due to increase in all factors in the same
proportion. Such an increase is called return to
scale.
Barry's was experiencing what it was
overwhelming customer purchases. In one
week the served 250 clients. To capitalize
on this market, Barry hired 2 additional
barbers which gave him a total of 10
barbers. In this case the barbers were the
input of resource, increased by 25%. As a
result, the experienced average weekly
sales of 320 for next five weeks, an increase
in output of 28%, increasing returns to scale.
If the barbershop had made 225 sales after
the increase in input, it would have
experienced decreasing returns to scale.
