Chapter 6: Production0C CHHA AP PT TE ER R 6 6 P PR RO OD DUUC CT TI IO ONNT TE EA AC CHHI INNG G NNO OT TE ES SChapter 6 is the first of the three chapters that present the basic theory of supply. It may be beneficial to first review, or summarize, the derivation of demand and present an overview of the theory of competitive supply. The review can be beneficial given the similarities between the theory of demand and the theory of supply. Students often find that the theory of supply is easier to understand because it is less abstract, and the concepts are more familiar. This in turn can improve the students understanding of the theory of demand when they go back and review it again.In this chapter it is important to take the time to carefully go through the definitions, as this will be the foundation for what is done in the next two chapters. While the concept of a production function is not difficult, the mathematical and graphical representation can sometimes be confusing. It helps to take the time to do as many examples as you have time for. When describing and graphing the production function with output on the vertical axis and one input on the horizontal axis, point out that the production function is the equation for the boundary of the production set, and hence defines the highest level of output for any given level of inputs. Technical efficiency is assumed throughout the discussion of the theory of supply. At any time you can introduce a discussion of the importance of improving productivity and the concept of learning by doing. Examples 1 and 2 in the text are also good for discussion.Graphing the production function leads naturally to a discussion of marginal product and diminishing returns. Emphasize that diminishing returns exist because some factors are fixed by definition, and that diminishing returns does not mean negative returns. If you have not discussed marginal utility, now is the time to make sure that the student knows the difference between average and marginal. An example that captures students attention is the relationship between average and marginal test scores. If their latest mid-term grade is greater than their average grade to date, this will increase their average.Isoquants are defined and discussed in section 6.3 of the chapter. Rely on the students understanding of indifference curves when discussing isoquants, and point out that as with indifference curves, isoquants are a two-dimensional representation of a three-dimensional production function. Key concepts in this section of the chapter are the marginal rate of technical substitution and returns to scale. Do as many concrete examples as you have time for to help explain these two important concepts. Examples 6.3 and 6.4 help to give concrete meaning to MRTS and returns to scale. Section 6.4 discusses returns to scale.Q QUUE ES ST TI IO ONNS S F FO OR R R RE EV VI IE EWW1.1. WhatWhat is is a a productionproduction function?function? HowHow doesdoes a a long-runlong-run productionproduction functionfunction differdiffer fromfrom a a short-runshort-run productionproduction function?function?A production function represents how inputs are transformed into outputs by a firm. We focus on the firm with one output and aggregate all inputs or factors of production into one of several categories, such as labor, capital, and materials. In the short run, one or more factors of production cannot be changed. As time goes by, the firm has the opportunity to change the levels of all inputs. In the long-run production function, all inputs are variable.2.2. WhyWhy is is thethe mightmight thethe marginalmarginal productproduct ofof laborlabor likelylikely toto initiallyinitially increaseincrease initiallyinitially inin thethe shortshort runrun asas moremore ofof thethe variablevariable inputinput is is hired?hired?The marginal product of labor is likely to can initially increase initially becauseif there are gains to specialization, such t when there are hat with more more workers, each worker is able to specialize on one an aspect of the production process in which he or she is particularly skilled. For example, think of the typical fast food restaurant. If there is only one worker, he will need to prepare the burgers, fries, Chapter 6: Production1and sodas, as well as take the orders. Only so many customers can be served in an hour. With two or three workers, each is able to specialize and the marginal product (number of customers served per hour) is likely to increase as we move from one to two to three workers. Eventually, there will be enough workers and there will be no more gains from specialization. At this point, the marginal product will diminish.3.3. WhyWhy dodoeses productionproduction firmsfirms eventuallyeventually experienceexperience diminishingdiminishing marginalmarginal returnsreturn