Micr_eco productionz

Production:

Production

Production:

Production an activity that creates value

The Theory of Production:

The Theory of Production The theory of production deals with the relationship between the factors of production and the output of goods and services It is generally based on the short run, not the long run

Long versus Short:

Long versus Short Short Run: a period of production that allows producers to change only the amount of labor Long Run: a period of production long enough for producers to adjust the quantities of all their resources, including capital

Short run:

Short run time period so short that the amounts of some inputs can not be changed For example, the quantity of plant & heavy equipment can not be changed in a short time period.

Long run:

Long run time period long enough for all inputs to be changed

The Law of Variable Proportions:

The Law of Variable Proportions The Law of Variable Proportions states that in the short run, output will change as one input is varied while the others are held constant

The Production Function:

The Production Function The Law of Variable Production can be illustrated by using a production function The Production Function is a concept that describes the relationship between changes in output to different amounts of a single input while other inputs are held constant

Total Product:

Total Product Total Product: the total output produced by a firm As more workers are added, the total product rises Workers can specialize, and the firm is more productive

Total Product:

Total Product As even more workers are added, total product continues to rise, but at a slower rate Addition of even more workers may actually cause the total output to go down

Marginal Product:

Marginal Product Marginal Product: the extra output or change in total product caused by the addition of one more unit of variable input.

Marginal Product (MP) of the variable input X:

Marginal Product (MP) of the variable input X Discrete MP = Δ Q/ Δ X = Δ TP/ Δ X Change in output resulting from a one-unit change in the quantity of input Continuous MP = dQ/dX = dTP/dX Rate of change in total output as the usage of the variable input increases by very small amounts.

Graphical Interpretation of MP:

Graphical Interpretation of MP The continuous MP is the slope of the total product curve at a particular point. The discrete MP is the slope of the line segment connecting 2 points on the total product curve. Q = TP X

Average Product (AP):

Average Product (AP) AP = Q / X = TP / X Amount of product per unit of input Can be calculated for variable or fixed inputs

Inputs for Production:

Inputs for Production raw materials, labor, land, capital, & entrepreneurial or managerial talent. Capital includes tools, machinery, equipment, & physical facilities.

Production Function:

Production Function Q = f(X 1 ,X 2 ,X 3 ,X 4 ,…,X n ) where Q is the quantity of output that can be produced with amounts of inputs, X 1 ,X 2 ,X 3 ,X 4 ,…,X n .

Principle of Diminishing Marginal Returns:

Principle of Diminishing Marginal Returns As the amount of a variable input is increased and combined with a specified amount of fixed inputs, a point is eventually reached where the resulting increases in the quantity of output get smaller & smaller. In other words, as the amount of variable input increases, eventually the MP of the variable input falls.

Total Product, Marginal Product, & Average Product Curves:

Total Product, Marginal Product, & Average Product Curves Q = TP X MP AP X AP MP incr marg returns pt of dim marg returns Diminishing marginal returns set in when MP starts to fall (but is still positive). The TP curve gets flatter as the slope of TP falls.

Slide 19:

Q = TP X MP AP X AP MP pt of dim avg returns Diminishing average returns set in when AP starts to fall. (Remember that AP is the slope of the line from the origin to the point on the TP curve.)

Slide 20:

Q = TP X MP AP X AP MP marginal returns become negative dim total returns Diminishing total returns set in when the TP curve turns downward and MP becomes negative.

Isoquant:

Isoquant A curve showing all possible efficient combinations of input that are capable of producing a certain quantity of output. (Note: iso means same, so isoquant means same quantity)

Properties of Isoquants & Isoquant Maps:

22 Properties of Isoquants & Isoquant Maps Higher Isoquants (Isoquants to the Northeast) represent higher levels of output. Ubiquitous Downward Sloping Cannot Cross Become Less Steep Moving Down & Right (Bowed Toward the Origin)

Isoquant for 100 units of output:

Isoquant for 100 units of output 100 Quantity of capital used per unit of time Quantity of labor used per unit of time K 1 K 2 K 3 K 4 L 1 L 2 L 3 L 4 100 units of output can be produced in many different ways including L 1 units of labor & K 1 units of capital, L 2 units of labor & K 2 units of capital, L 3 units of labor & K 3 units of capital, & L 4 units of labor & K 4 units of capital.

Isoquants for different output levels:

Isoquants for different output levels 50 100 125 Quantity of capital used per unit of time Quantity of labor used per unit of time As you move in a northeasterly direction, the amount of output produced increases, along with the amount of inputs used.

Figure 7: Example Isoquant Map:

25 Figure 7: Example Isoquant Map Q=10 Q=20 Q=30

If you move out from the origin along a ray with constant slope, the input combinations have a constant capital-labor ratio.:

If you move out from the origin along a ray with constant slope, the input combinations have a constant capital-labor ratio. 50 100 125 Quantity of capital used per unit of time Quantity of labor used per unit of time 140 15 24 36 45 15 12 8 5 Each of the indicated points uses one-third as much capital as labor.

It is possible for an isoquant to have positively sloped sections.:

It is possible for an isoquant to have positively sloped sections. Quantity of capital used per unit of time Quantity of labor used per unit of time In these sections, you’re increasing the amounts of both inputs, but output is not increasing, because the marginal product of one the inputs is negative.

The lines connecting the points where the isoquants begin to slope upward are called ridge lines.:

The lines connecting the points where the isoquants begin to slope upward are called ridge lines. Quantity of capital used per unit of time Quantity of labor used per unit of time ridge lines

No profit-maximizing firm will operate at a point outside the ridge lines, since it can produce the same output with less of both outputs.:

No profit-maximizing firm will operate at a point outside the ridge lines, since it can produce the same output with less of both outputs. Quantity of labor used per unit of time Quantity of capital used per unit of time L 1 L 2 K 2 K 1 Notice, for example, that since points A & B are on the same isoquant, they produce the same amount of output. However, point B is a more expensive way to produce since it uses more capital & more labor. B A

Marginal rate of technical substitution (MRTS):

Marginal rate of technical substitution (MRTS) The slope of the isoquant The rate at which you can trade off inputs and still produce the same amount of output. For example, if you can decrease the amount of capital by 1 unit while increasing the amount of labor by 3 units, & still produce the same amount of output, the marginal rate of technical substitution is 1/3.

What is the MRTS or slope of the isoquant?:

What is the MRTS or slope of the isoquant? Q 2 Quantity of capital used per unit of time Quantity of labor used per unit of time K A K B L A L B A B Q 1 C Consider 2 points A & B on the same isoquant. Let’s divide the movement between A & B into 2 parts, from A to C, & from C to B. Moving from A to C, Δ Q = ( Δ Q/ Δ K) Δ K . Moving from C to B, Δ Q = ( Δ Q/ Δ L) Δ L . Moving from A to B, Δ Q = ( Δ Q/ Δ K) Δ K + ( Δ Q/ Δ L) Δ L = MP K Δ K + MP L Δ L . Since A & B are on the same isoquant, Δ Q = 0. So, MP K Δ K + MP L Δ L = 0 . MP K Δ K = - MP L Δ L . Δ K/ Δ L = - MP L /MP K slope of isoquant

Marginal Rate of Technical Substitution (MRTS) or slope of an isoquant:

Marginal Rate of Technical Substitution (MRTS) or slope of an isoquant Δ K/ Δ L = - MP L /MP K the negative of the ratio of the marginal products of the inputs, with the input on the horizontal axis in the numerator.

How does output respond to changes in scale in the long run?:

How does output respond to changes in scale in the long run? Three possibilities: 1. Constant returns to scale 2. Increasing returns to scale 3. Decreasing returns to scale

Constant returns to scale :

Constant returns to scale Doubling inputs results in double the output.

Increasing returns to scale :

Increasing returns to scale Doubling inputs results in more than double the output. One reason this may occur is that a firm may be able to use production techniques that it could not use in a smaller operation.

Decreasing returns to scale :

Decreasing returns to scale Doubling inputs results in less than double the output. One reason this may occur is the difficulty in coordinating large organizations (more paper work, red tape, etc.)

Graphs of Constant, Increasing, & Decreasing Returns to Scale:

Graphs of Constant, Increasing, & Decreasing Returns to Scale Constant Returns to Scale : isoquants for output levels 50, 100, 150, etc. are evenly spaced. Capital Labor 150 100 50 150 Capital Labor 50 100 150 Capital Labor 100 50 Increasing Returns to Scale : isoquants for output levels 50, 100, 150, etc. get closer & closer together. Decreasing Returns to Scale : isoquants for output levels 50, 100, 150, etc. become more widely spaced.