This second Learning Path on production will draw on the basics we saw in Production I and add several extra factors to our analysis. We will basically introduce three new parameters to our possibilities: we will add a time frame and see how this shapes our choices, we will introduce the ability to produce more than one good or service, and we will also take a first look at prices, production costs and competition as a whole market dynamic.

Under perfect competition, prices are determined by market forces. If the price of a specific type of bog standard, hexagonal, 15mm screw, for example, is  0.01€, there is nothing stopping you from trying to sell it at ten times the price, but you probably won’t last very long. You’re better off deciding whether you can make a profit selling at that price before you start producing at all. In terms of labour and capital, we suppose they are interchangeable, as we saw when we looked at the MRTS. Depending on the going price of labour (wages) and capital (machinery and interest rates), you will choose one or the other or a combination of both: whatever is most productive per euro spent.

All we can now do is set our level of production. We know that marginal productivity drops with each added unit of labour (or capital), under the law of diminishing returns. When, therefore, should we stop? We could try cramming our screw factory with workers until they begin getting in each others’ way and start having negative productivity (the equivalent of getting them to work 20 hour days until they are tired enough to start doing more harm than good), but not only is this not health and safety compliant, it is also much too late. The simple answer is that we stop when it is not worth hiring any more workers. This idea of ‘worth’ will depend on various factors, and is the subject of our analysis in this second LP.

So, let’s define these factors and get started. We will begin by looking at the concept of

• Static period analysis, introducing one of the main factors we will have to juggle.

This will lead us onto our first scenario, the short run, where we will look at:

• Production functions and
• Production analysis in the Short Run

In the next section we will cover the long run, with:

• Analysis in the Long Run and
• Returns to scale

Before an entry on

• Production analysis in the Very Long Run

In the final section of this LP, we will introduce another factor, multi-product analysis, in two entries on:

• Production possibility frontier and
• Multi-product function.

In this first LP on production, we will examine the decisions that lead to optimal levels of production. This is crucial, as it mirrors the same decisions that we saw consumers making: assigning our limited (and expensive!) resources in the best way possible in order to maintain optimal levels of production. This will ultimately lead us to the same dual problem: whether to minimise costs assuming an optimal, fixed level of production, or whether to hedge our bets and maximise production whilst fixing a budget for costs.

In order to do this, we will begin by looking at the basics, production and costs, with an entry on:

• Isoquants, or graphical representations of our production possibilities, and relate this to the
• MRTS, which shows the trade off between our inputs, and put all this together in our summary of the
• economic region of production, which represents our rational possibilities. We will then go on to examine
• production functions and their characteristics and finish this first section with
• isocosts, which closely relate to the concept of isoquants.

In the second half of this LP, we will go on to cover the problem of production duality, beginning with an entry on:

• Production maximisation, and then looking at the flip side of the coin with
• cost minimisation, before putting it together in
• production duality.

This Learning Path is a bit more of a mixed bag than the previous one, finishing off our consumer choice problem, looking at the some useful implications of this in demand theory before moving on to other types of demand theories.

We first pick up where we left off in our previous LP and turn the tables on our consumer choice problem in:

Consumption duality II:

Cost minimisation, the mirror image of utility maximisation,

Consumption duality, looking at both problems together before going on to…

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In this Learning Path, the first one about microeconomics, we will look at consumer behaviour from a theoretical perspective, trying to solve the basic problem we all face every day: how to get as much of what we want or need without blowing our budget.

Since the main tools needed in order to understand consumer theory are quite a few, we present them in two LPs. The contents of this first half are:

The basics:

Preferences, which govern what we choose, and then move onto

Goods, which we blow our budget on, before putting it all together in

Utility and budget:

Utility functions, which show how much satisfaction we derive from what we consume.

Then, the relationship between the utility different goods provide us through the marginal rate of substitution, before moving on to

Indifference curves, the graphical representation of the utility we assign to the different goods.

We must also introduce the second side of our problem: our budget constraint.

Consumption duality I:

Finally, we’ll put it all together and look for a solution to our utility maximisation problem.