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**SHORT-RUN THEORY OF PRODUCTION**

Profits and the aims of the firm Long-run and short-run production: fixed and variable factors The law of diminishing returns The short-run production function: total physical product (TPP) average physical product (APP) marginal physical product (MPP) the graphical relationship between TPP, APP and MPP 2

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**Wheat production per year from a particular farm (tonnes)**

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**Wheat production per year from a particular farm**

Number of workers 1 2 3 4 5 6 7 8 TPP 3 10 24 36 40 42 Tonnes of wheat produced per year Number of farm workers

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**Wheat production per year from a particular farm**

TPP Tonnes of wheat produced per year Number of farm workers

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**Wheat production per year from a particular farm**

TPP Diminishing returns set in here Tonnes of wheat produced per year b a Number of farm workers

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**Wheat production per year from a particular farm**

TPP Maximum output Tonnes of wheat produced per year b a Number of farm workers

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**Wheat production per year from a particular farm**

TPP Tonnes of wheat per year DTPP = 7 Number of farm workers (L) DL = 1 MPP = DTPP / DL = 7 Tonnes of wheat per year Number of farm workers (L)

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**Wheat production per year from a particular farm**

TPP Tonnes of wheat per year Number of farm workers (L) Tonnes of wheat per year Number of farm workers (L) MPP

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**Wheat production per year from a particular farm**

TPP Tonnes of wheat per year Number of farm workers (L) APP = TPP / L Tonnes of wheat per year APP Number of farm workers (L) MPP

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**Wheat production per year from a particular farm**

TPP Tonnes of wheat per year b Diminishing returns set in here Number of farm workers (L) b Tonnes of wheat per year APP Number of farm workers (L) MPP

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**Wheat production per year from a particular farm**

TPP Maximum output Tonnes of wheat per year b Number of farm workers (L) b Tonnes of wheat per year APP d Number of farm workers (L) MPP

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**Wheat production per year from a particular farm**

Slope = TPP / L = APP TPP Tonnes of wheat per year b Number of farm workers (L) b c Tonnes of wheat per year APP d Number of farm workers (L) MPP

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**LONG-RUN THEORY OF PRODUCTION**

All factors variable in long run The scale of production: constant returns to scale increasing returns to scale decreasing returns to scale 4

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**LONG-RUN THEORY OF PRODUCTION**

Economies of scale specialisation & division of labour indivisibilities container principle greater efficiency of large machines by-products multi-stage production organisational & administrative economies financial economies economies of scope 5

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**LONG-RUN THEORY OF PRODUCTION**

Diseconomies of scale External economies and diseconomies of scale Optimum combination of factors MPPa/Pa = MPPb/Pb ... = MPPn/Pn 6

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**ISOQUANT- ISOCOST ANALYSIS**

Isoquants their shape diminishing marginal rate of substitution isoquants and returns to scale isoquants and marginal returns Isocosts slope and position of the isocost shifts in the isocost 7

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**An isoquant a Units of K 40 20 10 6 4 Units of L 5 12 20 30 50**

Point on diagram a b c d e Units of capital (K) Units of labour (L)

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**An isoquant a Units of K 40 20 10 6 4 Units of L 5 12 20 30 50**

Point on diagram a b c d e Units of capital (K) b Units of labour (L)

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**An isoquant a Units of K 40 20 10 6 4 Units of L 5 12 20 30 50**

Point on diagram a b c d e Units of capital (K) b c d e Units of labour (L)

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**Diminishing marginal rate of factor substitution**

MRS = 2 MRS = DK / DL DK = 2 h DL = 1 Units of capital (K) isoquant Units of labour (L)

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**Diminishing marginal rate of factor substitution**

MRS = 2 MRS = DK / DL DK = 2 h DL = 1 Units of capital (K) j MRS = 1 DK = 1 k DL = 1 isoquant Units of labour (L)

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An isoquant map Units of capital (K) I1 Units of labour (L)

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An isoquant map Units of capital (K) I2 I1 Units of labour (L)

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An isoquant map Units of capital (K) I3 I2 I1 Units of labour (L)

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An isoquant map Units of capital (K) I4 I3 I2 I1 Units of labour (L)

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**An isoquant map Units of capital (K) I5 I4 I3 I2 I1**

Units of labour (L)

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**An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000**

Units of capital (K) TC = £ Units of labour (L)

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**An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000**

Units of capital (K) b TC = £ Units of labour (L)

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**An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000**

Units of capital (K) b c TC = £ Units of labour (L)

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**An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000**

Units of capital (K) b c TC = £ d Units of labour (L)

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**ISOQUANT- ISOCOST ANALYSIS**

Least-cost combination of factors for a given output point of tangency comparison with marginal productivity approach Highest output for a given cost of production 8

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**Finding the least-cost method of production**

Assumptions PK = £20 000 W = £10 000 TC = £ Units of capital (K) TC = £ TC = £ TC = £ Units of labour (L)

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**Finding the least-cost method of production**

Units of capital (K) TPP1 Units of labour (L)

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**Finding the least-cost method of production**

Units of capital (K) TC = £ r TPP1 Units of labour (L)

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**Finding the least-cost method of production**

Units of capital (K) TC = £ r t TPP1 Units of labour (L)

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**Finding the maximum output for a given total cost**

Units of capital (K) TPP5 TPP4 TPP3 TPP2 TPP1 O Units of labour (L)

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**Finding the maximum output for a given total cost**

Units of capital (K) Isocost TPP5 TPP4 TPP3 TPP2 TPP1 O Units of labour (L)

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**Finding the maximum output for a given total cost**

Units of capital (K) TPP5 TPP4 v TPP3 TPP2 TPP1 O Units of labour (L)

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**Finding the maximum output for a given total cost**

Units of capital (K) u TPP5 TPP4 v TPP3 TPP2 TPP1 O Units of labour (L)

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**Finding the maximum output for a given total cost**

Units of capital (K) t u TPP5 TPP4 v TPP3 TPP2 TPP1 O Units of labour (L)

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**Finding the maximum output for a given total cost**

Units of capital (K) t K1 u TPP5 TPP4 v TPP3 TPP2 TPP1 O L1 Units of labour (L)

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Production Theory and Estimation

Production Theory and Estimation

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