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Micro Economic Theory

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Is input and k is the amount of capital that is input, ten the assumption which will be made is that labor can be varied within the short time period that is under consideration, hwever the machinery or capital remains fixed, ten the production plans will be (y, -, -) and the short term possibilities set can be written as: Aproduction plan will be considered technologically efficient if there is no way to produce any more of the output with the same inputs or to produce the same amount output by using less inputs (Guoqiang, 2006).

Aset of a technologically efficient production plans can be described through the use of a transformation function T which I able to identify the maximal vectors of net outputs just as the production function is able to pick out the maximal scalar output as a function of the inputs. Tus the production function is a unique relationship between the inputs and the outputs. Wile TP is the total product output over a particular period of time, te AP or average product defined as the total product divided by the quantity of labor that is sued, wile the MP or marginal product of labor is the change in the total product divided by the amount of labor that is used.

Wen curves are drawn for the average or marginal product, ten the average product at any point on the total product curve will be equal to the slope of a straight line that is drawn from that point to that point on the TP curve. Te marginal product between two points the TP curve is equal to the slope of the TP curve between two points.

Hwever, i the production of most goods, i is not only one or two variables that will have to be considered. I many cases, sveral different variables/inputs are used. Te law of diminishing returns states that as more and more units of variable inputs are added together with fixed input variables, ten there will come a point where the level of return for each unit of the variable unit that is added will keep terefore the marginal product keeps on decreasing (Salvatore 2006).

Tis will therefore be a case of decreasing returns to scale, were the output is likely to keep decreasing as the scale of production is increased through the addition of more input variables, bcause as the scale of the production increases, te problem of managing the firm and of coordinating the various divisions and operations of the firm becomes difficult. Were the question arises of an innovative product being. ..

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