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S3 Production Function Module 3

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S3 Production Function Module 3

Uploaded by

musthafacv333
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MANAGERIAL ECONOMICS

MODULE 3
Production Function
• Dealing with the problem ‘how to produce’ and ‘creating utility’.
• Transformation of physical input to outputs that’s the utilities can be created in
goods.
• The time perspective (Long run and short run)
• Production function expresses the technological relation between input and output.
• Factors of production:-
• Land - rent
• Labour - wage
• Capital - interest
• Organisation - profit
Production function with single variable
• The term production function refers to the physical relation between a firm's inputs
of resources and the outputs of the goods and services per unit of time leaving
price aside.
• Production function with single firm refers that producing a particular output with
a particular input.
𝑸=𝒇 𝑳
• Here, the production function refers that output depends upon the each labour
unit.
The law of variable proportion
• Considering short run as a time lag
• It is supposed that one factor input is variable, while the inputs of other factors of
production remain constant.
• The law of variable proportion expresses the behaviour of production.
• The variable input will change through in non-proportional way.
• Thera are three stages in law of variable proportion –
• 1: TP increasing at increasing rate
• 2: TP increasing at decreasing rate
• 3: TP Decreasing
Assumptions of law of variable proportion
• The state of technology is given.
• The different factors of production can be employed in varying proportion.
• One of the factors is variable (labour).
• All other factors are fixed (capital and land).
• All units of variable factor are identical (*labour).
• The units of variable factor labour are increased one by one.
• Total physical product (TPP)
TPP of a factor means the physical quantities of total of commodity.
• Average physical product (APP):-
The average physical product of the variable factor (labour) is the ratio
of total physical product to the input of labour employed, when the input
of capital given.
The ratio can be computed by dividing the total physical product (Q) by
the units of labour employed (L).

𝑸
𝑨𝑷𝑷𝑳 =
𝑳
• Marginal physical product (APP):-
The marginal physical product of the variable factor (labour) is the addition
made to the total physical product through the employment of an additional
or marginal unit of labour, the quantities of other factors are remaining
constant.

𝑴𝑷𝑷 𝒐𝒇 𝒏𝒕𝒉 𝒘𝒐𝒓𝒌𝒆𝒓 = 𝑻𝑷𝑷 𝒐𝒇 𝒏 𝒘𝒐𝒓𝒌𝒆𝒓 − 𝑻𝑷𝑷 𝒐𝒇 𝒏 − 𝟏 𝒘𝒐𝒓𝒌𝒆𝒓𝒔


𝝏𝑸
𝑴𝑷𝑳 =
𝝏𝑳
Unit of labour TP AP MP Stage
1 8 8 8
2 20 10 12 Stage 1
3 39 13 19 Increasing
average returns
4 52 13 13
5 60 12 8
6 66 11 6 Stage 2
7 70 10 4 decreasing
average returns

8 72 9 2
9 72 8 0
10 70 7 -2 Stage 3
Negative MP
Two variable factor input
• The production function involving two factor inputs.
• Here we are taking labour and capital.
• Both this inputs are variable.
• This production function mainly based on isoquant or equal product curve.
𝑸 = 𝒇 𝑳, 𝑲
Isoquant or equal product curve
• An isoquant curve is a concave line plotted on a graph, showing all of the various
combinations of two inputs that result in the same amount of output.
• Most typically, an isoquant shows combinations of capital and labor and the
technological trade-off between the two.
• The isoquant curve assists companies and businesses in making adjustments to their
manufacturing operations, to produce the most goods at the most minimal cost.
• The isoquant curve demonstrates the principle of the marginal rate of technical
substitution, which shows the rate at which you can substitute one input for another,
without changing the level of resulting output.
Isoquant curve for normal inputs of labour
and capital

Combinatio Labour Capital Output


ns
A 5 9 100

B 10 6 100

C 15 4 100

D 20 3 100
The properties of an isoquant curve

• An isoquant curve slopes downward, or is negatively sloped and convex to origin.


• Isoquant curves cannot be tangent or intersect one another.
• Isoquant curves in the upper portions of the chart yield higher outputs.
• An isoquant curve should not touch the x or y axis on the graph
Iso-cost line
• Iso-cost line is the locus of combination of factors the firm can purchase with a
given monitory cost or outlay
• An iso-cost line is a curve which shows various combinations of inputs that cost the
same total amount , for the two production inputs labour and capital, with fixed
unit costs of the inputs, the iso-cost curve is a straight line
C= (r)K+(w)L
RETURNS TO SCALE

• Increasing returns to scale


• Decreasing returns to scale
• Constant returns to scale
Measuring production functions
• Linear production:
• Perfect substitute on inputs
• 𝑸 = 𝒂𝑳 + 𝒃𝑲 + 𝒄
• Fixed proportion: fixed-proportions production allows no input substitution.
Output can only be produced with a fixed proportion of inputs. Simple examples
include a taxi and its driver or a construction crane and its operator.
• The Cobb-Douglas function:
𝑸 = 𝑨𝑳𝜶 + 𝑲𝜷
DIFFERENT TYPES OF COST

• Explicit cost and implicit cost


• Fixed cost
• Variable cost
• Total cost
• Average cost
• Marginal cost
BREAK EVEN ANALYSIS

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