1. Behind The Supply Curve: Production Function I
1. Production - short run
Productive efficiency
The Law of diminishing marginal returns
2. Production - long run
isoquants & isocosts
least cost method of production

2. Background Firms seek to maximise profit ()
 = R - C
How do firms produce output and minimise costs (C)?
What is production?
“…production is simply the process of transforming inputs and outputs.”
inputs = capital (K) and labour (L)

3. A production function Functional relationship Productive efficiency
Q = f(K, L , T)
T changes over time
At a point in time T is fixed
Productive efficiency
“A method of production is efficient if, for a given level of factor inputs, it is impossible to obtain a higher level of output, given the existing state of technology.”

4. The short run Period of time over which one factor is fixed
Capital - machines, factory, etc.
Total and Marginal Physical Product
“…marginal product is the additional output produced by an additional unit of labour
MPP = TPP / L
See Figure

5. Wheat production per year from a particular farm
TPP
Tonnes of wheat produced per year
fig
Number of farm workers

6. 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)
fig
MPP

7. Law of Diminishing Returns
Definition
“…as units of one input are added (with all other inputs held constant), a point will be reached where the resulting additions to output will begin to decrease; that is marginal product will decline.”
On figure - between 2 and 3 workers

8. 2. The Long Run All factors are variable Decisions Choice of technique
Scale
Location
Technique
Choice of technique
Isoquants
Isocosts

9. Isoquants An isoquant Construction, slope and maps
“…is a contour line which joins together the different combinations of two factors of production that are just physically able to produce a given quantity of a good.”
Construction, slope and maps

10. An isoquant Units of K 40 20 10 6 4 Units of L 5 12 20 30 50
Units of capital (K)
fig
Units of labour (L)

11. Diminishing marginal rate of factor substitution
MRS = 2
MRS = DK / DL
DK = 2 h
DL = 1
Units of capital (K)
isoquant
fig
Units of labour (L)

12. An isoquant map Units of capital (K) I5 I4 I3 I2 I1
fig
Units of labour (L)

13. Isocosts Actual output also depends on costs isocosts
join combinations of K & L - same cost
assuming constant factor prices
Construction, slope & map

14. An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000
Units of capital (K)
TC = £
fig
Units of labour (L)

15. Finding the least-cost method of production
Assumptions
PK = £20 000
W = £10 000
TC = £
Units of capital (K)
TC = £
TC = £
TC = £
fig
Units of labour (L)

16. Finding the least-cost method of production
Units of capital (K)
TPP1
fig
Units of labour (L)

17. Least cost method of production
Tangency between isoquant and isocost
Where:
Slope of isoquant = slope of isocost
Successive points of tangency - scale expansion path