Supply-Side Chapter

  • Technology: A process by which inputs are converted to an output
  • Instead of consumption bundles, suppliers handle input bundles, where xi denotes the amount used of input i
    • Like consupmtion bundles, input bundles can be written as vectors of input levels: (x1, x2, …, xi)
  • Production functions states the maximum amount of output possible from an input bundle
    • Production functions can take on one or many parameters to define the level of output
    • Note that any value BELOW the production function is also attainable; you can output less than the maximum, but never more
  • Production plans are tuples that include an input bundle and an output level
    • Production plans take on the following form: (x1, x2, …, xn, y)
  • Technology Sets define the collection of all feasible production plans
A technology set, T, is defined as the following:T={(x1,x2,...,y)∣y≤f(x1,...,xn),x1≥0,...,xn≥0,y≥0}where f is the production function.\text{A technology set, T, is defined as the following:}\\ T = \{(x_1, x_2, ..., y) | y \leq f(x_1, ..., x_n), x_1 \geq 0, ..., x_n \geq 0, y \geq 0\} \\ \text{where f is the production function.}
  • Production plans which lie on the production function are called technically efficient plans, as they maximize the output according to a given input bundle
    • Plans below the production function are technically inefficient plans