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Econ 206(A) Tutorial 4 Theory of the Firm: Production.

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1 Econ 206(A) Tutorial 4 Theory of the Firm: Production

2 The Production Function Q is output, 2 factors of production (inputs) – Capital (K) and Labour (L). So: Q = f (K, L) All other things equal, the higher K or L, the higher Q (i.e. more input equals more output).

3 An Isoquant Curve Capital, K Labour, L 0 Q = 200 K1K1K1K1 L1L1L1L1 L2L2L2L2 K2K2K2K2 Isoquant An isoquant shows every combination of capital and labour that can produce a given level of output.

4 Isoquants Capital, K Labour, L 0 Q = 300 Q = 200 K L1L1L1L1 L2L2L2L2

5 Seminar Topic 1 1.Could isoquants ever cross?

6 Marginal Productivity Capital, K Labour, L 0 Q = 220 Q = Here the marginal productivity of labour is 20 (as we move from A to B). A B

7 Diminishing Returns to Labour Capital, K Labour, L 0 Q = 300 Q = 200 K L1L1L1L1 L2L2L2L2 Q = 400 L3L3L3L3 Where L 3 -L 2 > L 2 -L 1

8 Economies of Scale Economies of scale: If a firm doubles its inputs its outputs increase by more than double. Diseconomies of scale: If a firm doubles its inputs its outputs increase by less than double.

9 Seminar Topic 2 Draw an isoquant and identify increasing returns to scale and decreasing returns to scale?

10 Economies of Scale Capital, K Labour, L 0 Q = 230 Q =

11 Diseconomies of Scale Capital, K Labour, L 0 Q = 180 Q =

12 Economies of Scope Economies of scope: Where it is cheaper for a firm to produce 2 or more goods/services than for these goods/services to be produced by two separate firms. Examples: Multi-product retailers, large multi- product brands (for instance Yamaha), office supplies (Hewlett Packard sells printers, copiers, paper, toners etc).

13 Seminar Topic 3 Discuss the economies of scale and scope within this university?

14 Production Choice and Isocost How does a firm choose how much to produce? Prices If labour costs equals wages (w) and capital costs equal interest rates (r), an isocost line gives the relative cost of each input (r/w)

15 An Isocost Curve Capital, K Labour, L 0 K1K1K1K1 L1L1L1L1 L2L2L2L2 K2K2K2K2 Isocost curve = r / w

16 The Efficient Point of Production Capital, K Labour, L 0 Q K* L* E Isocost curve = r/w Isoquant


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