46 Chapter Highlights
Chapter 19
Technology
Here we start our discussion of firm behavior. This chapter discusses the
concepts that economists use to describe technologies. Almost all of the material
here is quite straightforward, especially given all of the exposure that the students
have had to indifference curves, utility functions, etc.
Since students are by now quite familiar with Cobb-Douglas utility functions,
you should be sure to emphasize that monotonic transformations are no longer
warranted, since now the value of the production function represents some real,
physical amount of output. Of course, you could choose to measure the output
in different units, in which case the parameters of the production function would
change. But given the units of measurement, we don’t have any choice about
how to measure production.
The new ideas are the ideas of the short and long runs, and the idea of returns
to scale. These ideas will show up several times in the next few chapters, so the
initial discussion is rather brief. In the workbook we give several examples of
technologies and ask about their return-to-scale properties. It’s a good idea to
work one or two examples to show the students what is going on.
Technology
A. Need a way to describe the technological constraints facing a firm
1. what patterns of inputs and outputs are feasible?
B. Inputs
1. factors of production
Chapter 19 47
C. Describing technological constraints
1. production set — combinations of inputs and outputs that are feasible
patterns of production
D. Examples of isoquants
1. fixed proportions — one man, one shovel
E. Well-behaved technologies
F. Marginal product
1. MP1is how much extra output you get from increasing the input of good
1
G. Technical rate of substitution
1. like the marginal rate of substitution
2. given by the ratio of marginal products
3.
H. Diminishing marginal product
1. more and more of a single input produces more output, but at a decreasing
I. Diminishing technical rate of substitution
1. equivalent to convexity
J. Long run and short run
K. Returns to scale