Production function Q = f ( K,L,N,E,T,P,…. ) Q = Output = Total product produced K = Capital L = Labor N = Natural resources E = Entrepreneurship T = Technology.

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Presentation transcript:

Production function Q = f ( K,L,N,E,T,P,…. ) Q = Output = Total product produced K = Capital L = Labor N = Natural resources E = Entrepreneurship T = Technology P = Power

Cobb Douglas production function Q = A K α L 1 – α Production function relates inputs to outputs

Law of diminishing marginal returns Definition: “ When increasing amounts of a variable factor are used with a given amount of a fixed factor, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit.” TPP = f ( L n, L b ) L n = Land ( fixed ) L b = Labor ( variable )

Wheat production per year from a particular farm Quantity of variable factor: number of workers employed ( Lb ) Total physical product: output of wheat in tones per year ( TPP) a b d

b TPP a d No of farm workers TPP a b d Graphical illustration 13579

Relationship between MPP & APP If the marginal physical product equals the average physical product, the average physical product will not change. If the marginal physical product is above the average physical product, the average physical product will rise. If the marginal physical product is below the average physical product the average physical product will fall.

Cricketer scores following number of runs in five successive innings: Innings Runs Total Average

Wheat production per year from a particular farm Number of workers ( Lb ) TPP APP =TPP/Lb MPP = ∆TPP / ∆Lb

O O TPP LbLb LbLb APP MPP c TPP APP MPP c b b 36 ∆TPP = 7 ∆Lb=1 g h d d