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Microeconomics: Production and Costs - What is meant by a) a production function; b) economies of scale; c) diminishing marginal returns? Can b) and c) both be present?
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Microeconomics: Production and Costs What is meant by a) a production function; b) economies of scale; c) diminishing marginal returns? Can b) and c) both be present? a) A production function describes the maximum output possible given a particular combination of inputs (and the existing technical knowledge). The production function of two inputs x1 and x2 is written as f(x1, x2). The production function of one input (x) can be shown graphically as below: b) 'Economies of scale' are present when long-run average costs decrease as output rises. Economies of scale mean that increasing inputs by a factor t will yield an increase in the output of more than t times the original output: f(tx1, tx2)> t f(x1, x2) [for all that t>1] They occur for three main reasons: * the dispersion of the cost of indivisibilities and fixed costs within the production process amongst a greater number of units of output. * the opportunity for specialisation...
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