Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Chapter 9 Production

Slide 2Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-1 A Production Worker

Slide 3Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-2 The Production Function The production function transforms inputs like land, labour, capital, and manage-ment into output. The box in the diagram embodies the existing state of technological knowledge. Because knowledge has been accumulating over time, we get more output from a given combination of inputs today than we would have gotten in the past.

Slide 4Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 9-1 The Production Function Q = 2KL The entries in the table represent output, measured in meals per week, and are calculated using the formula Q = 2KL.

Slide 5Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-3 A Specific Short- Run Production Function Panel a shows the production function, Q = 2KL, with K fixed at K 0 = 1. Panel b shows how the short-run production function shifts when K is increased to K 1 = 3.

Slide 6Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-4 Another Short-Run Production Function The curvilinear shape shown here is common to many short-run production functions. Output initially grows at an increasing rate as labour increases. Beyond L = 4, output grows at a diminishing rate with increases in labour.

Slide 7Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-5 The Effect of Technological Progress in Food Production F 1 is the production function for food in the year t 1. F 2 is the corresponding function for t 2. Technological progress in food production causes F 2 to lie above F 1. Even though “diminishing returns” applies to both F 1 and F 2, food production grows more rapidly than labour inputs between t 1 and t 2.

Slide 8Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-6 The Marginal Product of a Variable Input At any point, the marginal product of labour, MP L, is the slope of the total pro-duct curve at that point (top panel). For the production function shown in the top panel, the marginal product curve (bottom panel) initially increases as labour increases. Beyond L = 4, however, the marginal product of labour decreases as labour increases. For L > 8 the total product curve declines with L, which means that the marginal product of labour is negative in that region.

Slide 9Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-7 Total, Marginal, and Average Product Curves The average product at any point on the total product curve is the slope of the ray from the origin to that point. For the total product curve shown in the top panel, AP L rises until L = 6, then declines. At L = 6, MP L = AP L. For any L AP L, and for any L > 6, MP L < AP L.

Slide 10Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 9-2 Average Product, Total Product, and Marginal Product (Kg/Day) for Two Fishing Areas The average catch per boat is constant at 100 kg per boat for boats sent to the east end of the lake. The average catch per boat is a declining function of the number of boats sent to the west end.

Slide 11Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-8 Part of an Isoquant Map for the Production Function Q = 2KL An isoquant is the set of all (L, K) pairs that yield a given level of output. For example, each (L, K) pair on the curve labelled Q = 32 yields 32 units of output. The isoquant map describes the properties of a production process in much the same way as an indifference map describes a consumer’s preferences.

Slide 12Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-9 The Marginal Rate of Technical Substitution The MRTS is the rate at which one input can be exchanged for another without altering total output. The MRTS at any point is the absolute value of the slope of the isoquant that passes through that point. If  K units of capital are removed at point A, and  L units of L are added, output will remain the same at Q 0 units.

Slide 13Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-10 Isoquant Maps for Perfect Substitutes and Perfect Complements In panel a, we get the same number of trips from a given total quantity of gasoline, no matter how we mix the two brands. Esso and Shell are perfect substitutes in the production of automobile trips. In panel b, word processors and typists are perfect complements in the process of typing letters.

Slide 14Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-11 Prefabricated Versus On-Site Construction The angular cuts and standard shapes characteristic of roof framing are more conducive to economies of scale than are the rectangular cuts and idiosyncratic layouts of wall framing. This difference helps explain why wall framing is generally built at the construction site while roof framing is more often prefabricated.

Slide 15Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 9-12 Return to Scale Shown on the Isoquant Map In the region from A to C, this production function has increasing returns to scale. Proportional increases in input yield more than proportional increases in output. In the region from C to F, there are constant returns to scale. Inputs and output grow by the same proportion in this region. In the region northeast of F, there are decreasing returns to scale. Proportional increases in both inputs yield less than proportional increases in output.

Slide 16Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 4

Slide 17Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 5

Slide 18Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 10

Slide 19Copyright © 2004 McGraw-Hill Ryerson Limited ANSWER 9-1

Slide 20Copyright © 2004 McGraw-Hill Ryerson Limited ANSWER 9-4