Wednesday, June 17, 2015

Firm Technology

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Firm is a technical unit in which commodities are produced and entrepreneur transforms inputs into outputs, subject to technical rules specified by his production function.
Any goods or services which contributes to the production of an output is called input.
Resources such as people, raw materials, energy, information, or finance that are put into a system (such as an economy, manufacturing plant, computer system) to obtain a desired output.  
There are 2 types of input.
i) Fixed
ii) Variable

FIXED INPUT: An input in the production of goods and services that does not change in the short run. A fixed input should be compared with a variable input, an input that DOES change in the short run. Fixed and variable inputs are most important for the analysis of short-run production by a firm. The best example of a fixed input is the factory, building, equipment, or other capital used in production.

VARIABLE INPUT: An input whose quantity can be changed in the time period under consideration. This should be immediately compared and contrasted with fixed input. The most common example of a variable input is labor. A variable input provides the extra inputs that a firm needs to expand short-run production.

Fixed cost is not absolute fixed. At certain time or after reaching certain size, a fixed cost may become variable.

The product we get using the input is known as output.
The short-run relation between a variable input and output is of particular interest because it reveals the law of diminishing marginal returns. This law indicates that additional quantities of a variable input, when added to a fixed input, have decreasing marginal products, or marginal returns.


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