1. Chapter 9 Production

2. Chapter Outline The Production Function Production In The Short Run Production In The Long Run Returns To Scale 9-2

3. Figure 9.2: The Production Function 9-3 Production function: the relationship that describes how inputs like capital and labor are transformed into output. Mathematically, Q = F (K, L) K = Capital L = Labor Evolving state of technology

4. The Production Function – time Long run: the shortest period of time required to alter the amounts of all inputs used in a production process. Q = F (K, L), L & K are variable Short run: the longest period of time during which at least one of the inputs used in a production process cannot be varied. Q = F (L), K is fixed but L is variable. Variable input: an input that can be varied in the short run {L} Fixed input: an input that cannot vary in the short run{K} 9-4

5. Figure 9.3: A Specific Short-Run Production Function 9-5 Short-run Production Function Three properties: 1.It passes through the origin 2.Initially the addition of variable inputs augments output an increasing rate 3.beyond some point additional units of the variable input give rise to smaller and smaller increments in output. Assume: K= K 0 = 1

6. Figure 9.4: Another Short-Run Production Function 9-6 Short-run Production Function Law of diminishing returns: if other inputs are fixed, the increase in output from an increase in the variable input must eventually decline.

7. Figure 9.5: The Effect of Technological Progress in Food Production 9-7 Increase in technological progress (1808) (2008)

8. Figure 9.6: The Marginal Product of a Variable Input 9-8 Short-run Production Function Total product curve: a curve showing the amount of output as a function of the amount of variable input (Q). Marginal product: change in total product due to a 1-unit change in the variable input: MP L = ∆TP L /∆L= ∆Q/∆L Average product: total output divided by the quantity of the variable input: AP L =TP L /L= Q/L

9. Worked Out Problem (after Slide 15)! Question: Suppose that at a firm's current level of production the marginal product of capital is equal to 10 units, while the marginal rate of technical substitution between capital and labor is 2. Given this, we know the marginal product of labor must be: Key: A. 5 B. 20 since MRTS K,L = MP L /MP K  2 = MP L /10  MP L =20 C. 10 D. It is not possible to say with the information given in the problem

10. Figure 9.7: Total, Marginal, and Average Product Curves 9-10

11. Relationship between Total, Marginal and Average Product Curves When the marginal product curve lies above the average product curve, the average product curve must be rising When the marginal product curve lies below the average product curve, the average product curve must be falling. The two curves intersect at the maximum value of the average product curve. 9-11

12. Worked Problem: Production Function Question: Sketch graph a standard short-run production function, and identify on it the points where the average product peaks, the marginal product peaks, the marginal product reaches zero, and the average and marginal product intersect. Key: Make sure the average product peaks at the output where the ray from the origin is tangent to the total product curve and where the marginal product passes through it. The marginal product must peak at the output where the inflection point is on the total product curve, and the marginal product reaches zero when the total product peaks. Peak of AP L (should be here)

13. 9-13 Isoquant- the set of all input combinations that yield a given level of output. Marginal rate of technical substitution (MRTS): the rate at which one input can be exchanged for another without altering the total level of output. Production In The Long Run

14. Worked Problem Question: A daily production function for calculators is Q = 12L 2 - L 3. Show all your work for the following questions. a) What is the marginal product equation for labor? b) What is the AP L function? Key: a) dQ/dL = MP L = 24L - 3L 2 b) Q/L= AP L = (12L 2 – L 3 )/L = 12L – L 2

15. Figure 9.8: Part of an Isoquant Map for the Production Function 9-15 Figure 9.8: Part of an Isoquant Map for the Production Function Figure 9.9: The Marginal Rate of Technical Substitution More is preferred to less Actual output ΔQ 0 =0 = Δ KMP K + ΔLMP L -ΔKMP K = ΔLMP L |ΔK/ΔL| = MP L /MP K =MRTS L,K is the slope.

16. Worked Out Problem Question: In the production function Q =10L 1/2 K 1/2, calculate the slope of the isoquant when the entrepreneur is producing efficiently with 9 laborers and 16 units of capital. (Hint: The slope of the isoquant = the ratio of the marginal product of labor to the marginal product of capital.) Key:

17. Figure 9.10: Isoquant Maps for Perfect Substitutes and Perfect Complements 9-17

18. Returns To Scale –Long Run Concept Returns to Scale--The relationship between scale and efficiency, ceteris paribus Increasing returns to scale: the property of a production process whereby a proportional increase in every input yields a more than proportional increase in output. Constant returns to scale: the property of a production process whereby a proportional increase in every input yields an equal proportional increase in output. Decreasing returns to scale: the property of a production process whereby a proportional increase in every input yields a less than proportional increase in output. 9-18

19. Figure 9.11: Returns to Scale Shown on the Isoquant Map 9-19

20. Figure A9.1: Effectiveness vs. Use: Lobs and Passing Shots 9-20 Define P = % of total points won in a tennis match. F(L) = % of points from lobs as a function of times lobbed (L) and G(L) = % of points from passing shots as a function of times in passing (L). P = LF(L) + (1- L)G(L) and from the Figure, F(L) = 90 – 80L and G(L) =30 +10L. Plugging these into the above P expression yields P = 30 + 70L = 90L 2 and ∂P/∂L = 70 – 180L=0 or L* =0.389– the value of L that maximizes points won. Note: plug L* into P= 30 + 70 (0.389) -90*(0.389) 2 = 43.62 (next slide)

21. Figure A9.2: The Optimal Proportion of Lobs 9-21

22. Figure A9.3: At the Optimizing Point, the Likelihood of Winning with a Lob is Much Greater than of Winning with a Passing Shot 9-22 Note that at L* =0.389, the likelihood of winning with lobs (58.9%) is greater than that of winning with passing shots (33.9%)

23. Figure A9.4: The Production Mountain 9-23 A geometric derivation of Isoquant. Start with a 3-dimensional graph (Q, L, and K) and fix output at Q0 and slice segments AB, CD and so forth and project them on a two-dimensional space L, and K. This action gives rise to an Isoquant Map (Production) similar to an IC map or Utility Curve map (Consumption)

24. Figure A9.5: The Isoquant Map Derived from the Production Mountain 9-24

25. Figure A9.6: Isoquant Map for the Cobb-Douglas Production Function: Q = K ½ L ½ 9-25 MP L = 1/2K 1/2 L -1/2 MP K =1/2K -1/2 L 1/2 MP L /MP K = K/L

26. Figure A9.7: Isoquant Map for the Leontief Production Function: Q = min (2K,3L) 9-26