factors of production - inputs that firm uses to produce
- mainly divided into labor, materials, capital
- capital - not just money, but also equipment, buildings, machinery
production function - shows highest output for combo of inputs
- Q = F(K,L)
- K = capital, L = labor (materials left out of function for simplicity)
- multiple combinations of K, L can produce any given Q
- function will change w/ technology changes (allowing production to occure more efficiently)
- possible for firm to produce less than maximum efficiency, but function assumes that firm produces as much as possible
- inputs, outputs measured as flow variables (changing w/ time)
isoquant - like indifference curve, shows all input combos for a given output
- certain amount of capital can replace labor, and vice versa
- isoquant map - several isoquants combined on a single graph, like an indifference map
- input flexibility - ability to choose different combinations, depending on their situation
short run vs long run - not based on a set amount of time
- different for each firm and situation
- short run - firm can only change a few of its inputs
- firm can increase labor (add hours), buy more materials
- machinery, other tools cannot be changed as quickly
- always a fixed input (unchangeable) in place
- long run - firm can change all inputs
- more time >> more flexibility
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