Outline of presentation (9/23/2010) Production Factors of production Production function Production graph – shifts Characteristics of production function Types of production function Isoquants Some terms Derivation of TP, AP and MP Stages of production

Production Production: transformation of inputs Output Factors Labour Land Capital Management Technology

Factors of production Land: not created by human, includes forests, air, water, sunlight etc Labour: uses capital on land to produce wealth If material is not produced: service. Capital: increases labour’s capacity to produce wealth + service

Production function Q = f(l,k,n,t,rm,t..) Where, Q = output l=labour K=capital n=land t=technology rm=raw material t= time In quadratic form : X = a + b 2 + c 3 If a =2, b=3 and c=4 At a point of time X = 75 If new values are 4,5,and 6 Then X n = 245 Returns to scale = 245 – 75 = 175

Production function Production function: relationship between an organization's inputs and its outputs. It indicates, in mathematical or graphical form, what outputs can be obtained from various amounts and combinations of factor inputs. In particular it shows the maximum possible amount of output that can be produced per unit of time with all combinations of factor inputs, given current factor endowments and the state of available technology.

Shifts in production function If a firm is operating (inefficiently) at a profit maximizing level in stage one, it might, in the long run, choose to reduce its scale of operations (by selling capital equipment). By reducing the amount of fixed capital inputs, the production function will shift down and to the left. The beginning of stage 2 shifts from B1 to B2. The (unchanged) profit maximizing output level will now be in stage 2 and the firm will be operating more efficiently.

Characteristics of Production function 1.Relationship between quantities of input and output 2.Monetary aspect is crucial in production decisions but not included in the function 3.Defined by technical knowledge and subjected to change 4.Changes with time

Types of production function Short term: single variable production function where capital remains unchanged Long term: 2 or >2 variables production function and all factors of production are variables Return to scale Increasing – inputs 10% output >10% Constant – input = output Decreasing – 10% input =8% output

Isoquants Unit of labourUnit of capitalUnit of production

Isoquants

Isoquant curve continued Combination of labour and capital gives same unit of production, the graphical representation is isoquant curve. Characteristics 1.–ve slope falling from left to right 2.Never intersect 3.Convex to origin 4.Perfect substitution is only theoretical 5.Less curvature = greater substitutability

Some terms Total product TP refers to the production obtained by using a particular number of units of a variable input. Marginal product Additional unit of input causing increase in production Average production = total production / no of units of variable production

Derivation of TP, AP and MP LabourAverage Product (kg) Marginal Product (Kg) Total Product (mushroom in Kg)

Derivation of TP, AP and MP

Stages of production function

MPP and APP From the origin to point A, the firm is experiencing increasing returns to variable inputs. As additional inputs are employed, output increases at an increasing rate. Both marginal physical product (MPP) and average physical product (APP) is rising. Point A, defines the point of diminishing marginal returns, with declining MPP curve. From point A to point C, the firm is experiencing positive but decreasing returns to variable inputs. As additional inputs are employed, output increases but at a decreasing rate. Point B is the point of diminishing average returns, as shown by the declining slope of the average physical product curve (APP) beyond point Y. Point B is just tangent to the steepest ray from the origin hence the average physical product is at a maximum. Beyond point B, mathematical necessity requires that the marginal curve must be below the average curve

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