KEY TERMS AND CONCEPTS

Average product of capital (APk) – the total product per unit of capital usage. It is
the total product of capital divided by the total amount of capital employed by
the firm.
Average product of labor (APl) – the total product per unit of labor usage. It is the
total product of labor divided by the total amount of labor employed by the firm.
Cobb-Douglas production function - most widely used functional form to
approximate the relationship between the production of a good or service and a
set of productive inputs. The Cobb-Douglas production function is given by the
expression Q = AKL

Coefficient of output elasticity – the percentage change in the output of a good

or service given a percentage change in all productive inputs.

Constant returns to scale (CRTS) – the case in which the output of a good or a
service increases in the same proportion as the proportion increase in all factors
of production. Since all inputs are variable , CRTS is a long run production
concept.

Decreasing returns to scale (DRTS) – the case in which the output of a good or a
service increases less than proportionally to a proportional increase in all factors
of production used to produce that good or service.

Factor of production – typically classified as land , labor , capital and

entrepreneurial ability.
Increasing returns to scale (IRTS) – the case in which the output of a good or a
service increases more than proportionally to a proportional increase in all factors
of production used to produce that good or service.
Isoquant – a curve that defines the different combinations of capital and labor ( or
any other input combination in n-dimensional space) necessary to produce a
given level of output.

Law of diminishing marginal product – as increasing amounts of a variable input

are combined with one or more fixed inputs, at some point the marginal product
of the variable input will begin to decline.
Long run in production – in the long run , all factors of production are variable.
Marginal product of capital (MPk) – the incremental change in output associated
with an incremental change in the amount of capital usage.
Marginal product of labor (MPl) – the incremental change in output associated
with an incremental change in the amount of labor usage.
Marginal rate of technical substitution (MRTSkl) - the marginal rate of technical
substitution is the rate at which capital (labor) must be substituted for
labor(capital) to maintain a given level of output.
Production function – a mathematical expression that relates the maximum
amount of a good or service that can be produced with a set of factors of
production.
Q=AKL - the cobb-douglas production function , which asserts that the output of
a good or a service as a multiplicative function of capital (K) and labor (L).
Short run in production – that period of time during which at least one factor of
production is constant.
Stage I of production – assuming that output is a function of variable labor and
fixed capital , this is the range of labor usage in which the average product of
labor is increasing.
Stage II of production – assuming that output is a function of variable and fixed
capital , this is the range of output in which the average product of labor is
declining and the marginal product of labor is positive.
Stage III of production – assuming that output is a function of variable labor and
fixed capital , this is the range of production in which the marginal product of
labor is negative.
Total product of capital – assuming that output is a function of variable capital
and fixed labor, this is the total output of a firm for a given level of labor input.
Total product of labor – assuming that output is a function of variable labor and
fixed capital , this is the total output of a firm for a given level of labor input.