4

(Production and Cost of Production)

2
(Traditional Approach)

(Production function)
(Input - Output
Approach) (TP) (AP)
(MP)
(Isoquant Isocost Approach)
(Input - Input Approach)

(production function)



EC 311

213

(Production Function)

(Production Function)

(Total (Physical) Product : TPP
TP Q)

Q = (Total (Physical) Product : TP TPP)

X1, X2 , X3, . . . , Xn = X1, X2 , X3, . . . , Xn

(Production Function) Q (
)

X1, X2 , X3, . . . , Xn

Q = f (X1, X2 , X3, . . . , Xn)

214

EC 311


2

(Short-run)


2 (Fixed inputs)
(Variable inputs)
(Fixed inputs)





(Variable inputs)

(Long-run)

(Q) 2 X1 X2

(production function)

Q

EC 311

f (X1 , X2)

215


X2
(fixed input) Q
X1 X2
X20
Q

f (X1 , X20)

Q X1

Q X1
X20 4 1

4 1

4 1 Q
X1 X20
X20

X2(1) > X2(2) > X2(3)

216

EC 311

 X20 X1

2


(Total (Physical) Product: TPP TP)

Q = f (X, F)
Q = (TP)
X =
F =

(Average (Physical) Product: AP APP)

1
APX =

TP Q
=
X
X

(Marginal (Physical) Product: MP

MPP) 1

MPX =

TP Q
=
X
X

X X
(MP) (partial derivative)
EC 311

217

 TP Q X
MPX =

Q
X

2 (K)
(L)

(production function)
(K) (L)
(Q)
Q = f (L , K)

4 - 1

(L) ()
250
1
1
2
2
3
4
4
6
5
16
6
29
7
44
8
50
9
55
10
52

218

500
3
6
16
29
43
55
58
60
59
56

750
6
16
29
44
55
60
62
62
61
59

(K) ()
1,000 1,250 1,500 1,750 2,000
10
16
16
16
13
24
29
29
44
44
44
55
55
55
50
55
58
60
60
55
60
61
62
62
60
62
63
63
63
62
63
64
64
64
64
63
64
65
65
65
63
64
65
66
66
62
64
65
66
67
EC 311


750

(production function)

Q = (L ,

K)

= f (L)

4 1 (TP: Q)
(AP)(MP)

4 2

(L)
0
1
2
3
4
5
6
7
8
9
10

EC 311

Q
Q
TP=Q
APL = L
MPL = L
0
6
16
29
44
55
60
62
62
61
59

6
10
13
15
11
3
2
0
-1
-2

6
8
9.67
11
11
10
8.86
7.75
6.78
5.9

219

 (Law of Diminishing
Marginal Returns)

( )
( )
(MP)

4 8
4 1 TP, AP MP
4 2 ()
( 750 )
8

220

EC 311

 4 1

Stage I

Stage II

Slope TP = 0

Stage III

Inflection Point

Total Product
B

A
3 4

Slope MP = 0
Slope AP = 0

Average Product
3 4

Marginal Product
EC 311

221

 4 1 TP TP
2 TP (TP is increased at increasing
rate) MP
(Increasing Returns) 4 2
1 5 TP (TP is
increased at decreasing rate) MP
(Diminishing
Returns) (Law of Diminishing
Returns)
4 2
5 8
TP MP
(Negative Returns) 4 2
9

TP , MP AP
TP MP TP MP
Slope TP = TP = MP
L

MP TP MP
TP
AP MP AP
4
AP MP AP AP
AP MP 4
222

EC 311

 MP AP 4 AP MP
AP Slope origin
TP
MP Slope
TP

AP MP
d Q
( )
dL L

Slope AP =
=

dQ Q

dL
L
L

MP AP
L

Slope AP > 0

MP > AP

Slope AP = 0 MP = AP

Slope AP < 0 MP < AP

(Stages of Production)

3
1 (Stage I) AP
AP

MP AP AP
AP = MP 1 2
EC 311

223

 2 (Stage II) AP
TP
MP
(MP) AP
MP
3 (Stage III) TP
MP


2 (Stage II)
1 (Stage I)

(MP>AP)
(MP)
(AP)

MP




(MP)
(AP)

(Stage II) MP AP
MP TP
(MP)
AP

224

EC 311

 TP

TP
(Stage II)

(Marginal Revenue Product: MRP)
(Marginal Factor Cost: MFC)

L K
L = L K = K L L 1 L 1
= t L t > 0 L LK1 > KL K
K 1 K 1 = t K t > 0
L K

dQ

Q
L

dL+

Q
K

L1
K1

L
K

dK

d L d K
dQ

Q
L

L ( t 1) +

Q
K

K(t 1)

EC 311

d Q = tV Q Q

= Q (t V 1)

Q (t V 1)

Q
L

L ( t 1) +

Q ( t V 1)
L

Q
L

(t 1) +

(
Q
K

V > 1)
K(t 1)

Q K ( t 1)
K
L

225

Q
K

V
L Q ( t 1)
K L( t 1)

MPK

L
K

1)
( t 1)

( APL (t

Q
)
L

MPL)

1 MPL > APL MPK

MPK

( t V 1)
( t 1)

MP L

>

AP L

1
1
MPL APL
1

dQ

= tQ Q

Q (t 1)

Q
L

L ( t 1) +

Q
L

L +

Q
L

Q
L

Q (t 1)

Q
K

MPK

=
=

L Q
(
K L

L
(
K

Q
K

Q
K

K(t 1)

Q K
K L

Q
)
L

APL MPL)

1 MPL > APL MPK

226

EC 311

Q
K

L Q ( t V 1)
(
K L( t 1)

=
=

MPK

L
K

Q
)
L

( APL ((tt 11) ) MPL)

V

V < 1 MPL > APL 1

MPK 1
2 2
( t V 1)
( t 1)

<

MP L
AP L

MPK

(Elasticity of Production: EQ)

1



(EQ)

EQ

L
EC 311

227

% Q
% L

EQ =

Q (Total Product: TP)

L
E

Q L
.
L Q

Q
L
Q
L

MPL
APL

> 1
E
Q

E = 0
Q

E < 0 ()
Q

4 2

228

EC 311

 4 3
L
0
1
2
3
4
5
6
7
8
9
10

MPL
6
10
13
15
11
5
2
0
-1
-2

APL
6
8
9.67
11
11
10
8.86
7.75
6.78
5.90

EQ = MP/AP
1.0
1.25
1.34
1.36
1.0
0.50
0.23
0.0
-0.15
-0.32

MP AP
1 AP AP = MP
1 AP < MP MP ()
1 (0 < EQ < 1)
MP TP ()
TP MP

EC 311

229

 4 4

(Stage)
I
I II
(boundary)
II
II III
III

()
05
5
58
8
8 10

AP , MP>AP, EQ > 1
AP , MP=AP, EQ = 1
AP , MP > 0, MP < AP
0 < EQ < 1
TP , MP = 0, EQ = 0
MP < 0, EQ < 0

1 (EQ > 1)

EQ > 1



(EQ < 0)
MP
1

(EQ = 0)

230

EC 311


1 ( 0 < EQ < 1)

Q = 7KL + K 2 L 2 L 3
K 3
(1) (TP) (AP) (AP)
(2) L
L
(3) L

K = 3 (TP)
Q

21 L + 9 L 2 L 3
(AP) L
APL

= 21 + 9 L L 2
(AP) L
MPL

= 21 + 18 L 3 L 2

TP , Slope TP = 0 L TP

Slope TP
EC 311

dQ
dL

= 21 + 18 L 3 L 2 = 0

231

(7 L)(3 + 3 L)
L

1, 7

L TP 7
AP = MP AP AP , Slope
AP = 0
Slope AP =
L

= 9 2L

d AP
dL

4.5

L AP

= 4.5

MP , Slope MP = 0
Slope MP =

d MP
dL

= 18 6 L

3 7

I II
L 4.5 II III
L 7


EQ

MPL
APL

MPL
APL

21 + 18 L 2 L2
21 + 9 L L2

L EQ

232

EC 311

Q = f (L , K)

2 3 2

2
(Production Isoquant Curve) Isoquant Curve
(Isoquant Curve)
2


(Input Input Approach)
4 1 2

EC 311

233

 4 5

=6

=29

()
()

(
()
)
1
750
2
1,500
2
500
2
1,250
4
250
3
750
4
500
6
250

=55


()

(
)
3
1,750
3
1,500
3
1,250
4
2,000
4
1,000
5
750
6
500
8
250

=62


()

(
)
5
1,750
5
1,500
6
2,000
6
1,000
7
750
8
750
10
1,000

4 5
4 2

234

EC 311

 4 2
()
2,000
1,750
1,500
1,250
1,000
750
500
250
0

C
1

Q = 62
B
Q = 6 Q = 29
4 5 6 7

Q = 55
8

10
()

4 2 (Isoquant Curve)
2

55
Slope
Slope 4
2,000
55 4 1,000
2,000
Slope

slope (Ridge Lines)

EC 311

235

 (Ridge Lines)
(Ridge Lines)

Slope
Upper Ridge Line Lower Ridge Line
4 3

4 3 (Ridge Lines)
K
K5
K4

T
mQ3= S
mQ2=

mQ1=
K1

Upper Ridge Line

Lower Ridge Line
mQ3= 0
M

mQ2= 0
mQ 1 = 0
0

L1

L4

Q3
N Q2
Q1

L5

Upper Ridge Line slope

( ( ) K
MPK (f K) = 0

236

EC 311

 Lower Ridge Line slope

0 () L
MPL (f L) = 0

Slope

Slope

4 4 Slope
(K)
6
G

5
4

K = 2

B
L=1

1
0

Q2 = 75
6

)L(

EC 311

237

 (Marginal Rate of Technical

Substitution MRTS)
L (MRTSL.K)
K L K 1

MRTSL.K

K
L

4 4 A B
Q = 29 A B
A 3
750 B 4
500 750
500 3 4
29

MRTSL.K =
MRTSL.K

K 2 K1
L2 L1

K
L

Slope

(MP)
MPL =

Q
L

L =

MPK =
Q
MPL

Q
K

K =

Q
K

L K MRTSL.K

238

EC 311

MRTSL.K

Q
MPK
Q
MPL

MPL
MPK

(Continuous variables)

Slope

Slope

dK
dL

slope
MRTSL.K =

MPL
dK
=
dL MK K

(Partial derivative)
MPL
MPK

=
=

Q
L
Q
K

Q = f (L, K)
Total differential

EC 311

239

dQ =

dK

dL +

dQ
= 0
=
Slope
L K ( K
L)
(Marginal Rate of technical
substitution : MRTS)
Slope = MRTS L.K =

Upper Ridge Line MPK = 0

MRTS L.K =

Lower Ridge Line MPL = 0

MRTS L.K =

Upper Ridge Line

slope Lower Ridge Line
slope

240

EC 311

(Isocost Line)
(Isocost Line)
2

2 L K
PL PK
(C)
L K
4 6

EC 311

PL . L + PK . K

241

 4 5 (Isocost Line)

K
L L = 0 K
L C
PK

L K
K = 0 L
K C
PL

L K

(slope)
Slope Isocost =

C
PK
K

=
C
L
PL

()

PL
PK

Slope (price
ratio of inputs)

242

EC 311


(Determining the Optimal Combination of Inputs)

2
1.
(minimum total cost subject to a given constraint of output)
2.
(maximum output subject to a given total cost constraint)

1.
(Maximum Output with Cost Constraint)

EC 311

243

 4 6
K
C = PL . L + PK . K
A = PC

K1

H
E
G

L1

C
PL

Q1
Q0
=B

Q2
L

4 6
C
L K
AB F , E G
C F
G Q0 E
Q1 L K F G
E H
E

244

EC 311

 Slope Slope

MRTS L.K

MPL
P
dK
=
= L
MPK
dL
PK

MPL
MPK
MPL
PL

PL
PK

MPK
PK

C = PL . L + PK. . K

(Maximization of output
subject to cost constraint)

f (L, K)

PL . L + PK. . K

Lagrangian multiplier method

Z

f (L . K) + ( C PL . L PK. . K)

(First order condition) partial

derivatives Z L , K
Z
L

EC 311

f (L, K )
L

PL

0 .

. . . . . ( 4 - 1)

245

Z
K

f (L, K )
K
C

PK

PL . L PK.. K

..... (4-2)

. . . . ( 4 3)

(4 1) (4 2)
f

fK

PK
f

MRTSLK

fK
f

MRTS L.K

fK

. . . . (4 4)

PK

(4 3) (4 4) L
K

fK

dQ
dC

PK

total differential
dC

=
fL

PL =
dC

246

dQ
dC

PL. d L + PK. . d K
PK =

=
dQ
=

fK

d C

[f L. d L + f K . d K]

[L

f L. d L + f K. . d K

]
[f L d L + f K d K ]

f dL+ f

dK

. . . (4 5)

EC 311

 (Second - order condition)

Bordered Hessian Determinant

= 2 f LK. PL.PK. fLL. .PK2 f KK. .PL2 > 0 . . . (4 6)

Q = 10 L1/2 K1/2
32 L 4
K 4
L K

Lagrangian Multiplier Method
= 10 L1/2 K1/2 + (32 4 L 4 K)

Z

EC 311

Z
L

= 5 L 1/2 K1/2 4

Z
K

5 L1/2 K 1/2 4

. . . (4 8)

32 4 L 4 K

. . . (4 9)

. . . (4 7)

247

 (4 7) (4 8)
5 L1 / 2 K1 / 2
4

5 L1 / 2 K 1 / 2
4

=
K

. . . (4 10)

(4 10) (4 9)
32 4 L 4 L
L

32
8

= 4

= 4
L K

Q = 10 (4)1/2 (4)1/2 = 40

L = 4 K = 4
(Qmax) = 40

2.
(Least Cost Combination of Inputs for a Given Output)

248

EC 311

 4 7
K
A2 = C 2
PK

A 1 = C1
A

PK
=C
PK

K1

E
G

L1

C
PL

=B

= f (L, K)

C1= B C 2
1 P
L
PL

= B2

4 7
Q ( Q

L K) F , E G
F G
C2 E
C1 C
Q L K
E
E E Slope
Slope

EC 311

249

Slope = Slope
MRTS L.K

MPL
MPK

dK
dL

PL
PK

MPL
PL

MPK
PK

. . . . (4 11)

. . . . (4 12)
Q = f (L , K)

(Minimization of cost
for a given level of output)

Min C

PL . L + PK. . K
=

Subject to output constraint :

f (L, K)

Lagrangian multiplier method

V = = P L . L + PK . K + {

f(L , K)}

(First order condition)

partial derivatives V L , K
V
L

250

PL

f ( L, K )
L

0 .

. . . (4 13)
EC 311

V
K

f (L, K )
K

PK
Q

f (L, K)

. . . . (4 14)

. . . . (4 15)

(4 13) (4 14)
P

f ( L, K )
L
f (L ,K )
L
f (L ,K )
K

f ( L, K )
K
PL
P

PL
PK

MRTS L. K

fL
fK

fL
fK

f
f

PL
PK

=
L

. . . (4 16)

PL
PK

. . . . (4 17)

(4 15) (4 16) L , K

(Second - order condition)
Bordered Hessian Determinant

= 2 fLK fK fL + fKK fL2 + fLL fK2 < 0 . . . (4 18)

EC 311

fL =

fK =

PK

251

f PL PK +

2
LK

1
fKK

PL2 +

1
f LL PK2

<

= 2 fLK PL PK fKK PL2 f LL PK2 > 0

. . . (4 19)

Q = 10 L1/2 K1/2
40
L 4 K 4 L
K

Lagrangian Multiplier Method
= 4 L + 4 K + (40 10 L1/2 K1/2)

252

= 4 5 L 1/2 L1/2

. . . (4 20)

= 4 5 L1/2 K 1/2

. . . (4 21)
EC 311

40 10 L1/2 K1/2

. . . (4 22)

(4 20) (4 21)
4
1 / 2

5L

5 L K 1/ 2

1/ 2

1/ 2

. . . (4 23)

(4 23) (4 22)
40 10 L1/2 L1/2

L K
C = 4 (4) + 4 (4) = 32

40 L = 4 K = 4
(Cmin) = 32

(Factor Substitution)

EC 311

253

 4 8

E1 4 8
L OL1 K E1L1
L PL1 PL2 K (PK)
(C) AB AD
E1 E3 L
O L3 K L3 E3

L L L1L3
(Total Effect) (Output
Effect) (Substitution Effect)
(Output Effect)

254

EC 311


4 8 K L

Q3 Q1 L
( Q1)
C1

( GH) AD
Q1 GH
(Substitution Effect)
L
K
L K

4 8
Total Effect
L1L3

=
=

Substitution effect + Output effect

L1L2 + L2L3

(Elasticity of Substitution: )

(Elasticity of Substitution)

EC 311

255

 (Elasticity of Substitution)
L K
K L ( % ( KL ) )

L K (% MRTS L.K )
=

Percentage change in K / L
Percentage change in MRTS L .K
K

L
K
L
MRTS

L .K

MRTS

L
MRTS L.K

K
d
L
d MRTS L .K

MRTS

L .K

K
L

MTRS

L .K

K
L

Q
=
f (L, K)
MPL =

Q
L

QL = f L (L , K)

MPK =

Q
K

QK = f K (L , K)

MRTSL.K =

256

L .K

Q
d L

Q
L
Q
K

Q
Q

EC 311

K
d
L
Q
d L
Q
K

QK
K
L

K
d
L
K
L
Q
d L
Q
K
Q

K
d ln
L
Q
d ln L
Q
K

MRTS L.K =

QL
QK

PL
PK
P

2
2
L

EC 311

257

 L K


L K
L K

(Elasticity of Substitution :
)
K
L (K L ratio) L
K

=

K L

P P
L

L
K
L
P
L
P
K
P

PK

PL
K

L . PK
K
P
L

L
P
K

= 0

258

EC 311

 0 < < 1

= 1

> 1



=

Q1 L K L
K L K PL PK
Q1 P1

EC 311

L =

PL . L
P1 Q 1

K =

PK . K
P1 Q 1

259

 R = K L

.K

P .L
L

dR

K
L
PL
PK

L
PL
P
K

K
d
L
K
d
L
K
L

P
L

PK

PL

PK

PL

PK

K
L
< 1 L
K K L


L K
> 1 L
K L

K L

260

EC 311

 = 1

(Return to Scale)

1.

(Constant Returns to Scale)
2 2

2.
(Increasing Returns to Scale)
3.
(Decreasing Returns to Scale)
4 1

1.5

4 500 29
1.5
6 750
60
60

2 .07
29

EC 311

261

 1.5 1.5 2.07

(Increasing Returns to Scale)


1.5 6 500
55 (1.5 6)
= 9 (1.5 500) = 750 4 1
61

61 55
1.10

1.5
1.5 1.10
(Decreasing Returns to Scale)

=
f (L , K)
L K

L K
k

k (k 0)

k

Q*

= hQ

= f ( k L, k K)

h Q

h = k

262

EC 311

h < k

h > k

Q = f ( X , Y, Z)

Q

2 X + 3 Y + 1.5 Z

2
X, Y Z X =
1, Y = 2 Z = 2
Q1 = 2 (1) + 3 (2) + 1.5 (2) = 11
2 (k = 2)
X = 2 ,
Y = 4 Z = 4
Q2

= 2 (2) + 3 (4) + 1.5 (4) = 22

k = 2

h =

22
= 2
11

h = k = 2
(Constant Returns to Scale)

(Homogeneous Production Function)

EC 311

263

 (Homogeneous Production Function)

(Homogeneous Function)

Q = f (L , K)
k
k

(Homogeneous Production Function)

(Homogeneous Production Function)

k
k

Q* = f (k L, k K) =

kn f (L,K)

h Q = Q* = kn Q

(Homogeneous
Production Function)
k
(degree of homogeneity )

Q*
= kn Q (Degree of homogeneity)

264

EC 311

 n n (Degree of
homogeneity)

n (homogeneous of degree n) n
n = 1 h = k

homogeneous of
degree 1

( Constant Returns to
Scale)
n > 1 h > k

homogeneous of
degree greater than 1

(Increasing Returns to Scale)
n < 1 h < k

homogeneous of
degree less than 1

(Decreasing
Returns to Scale)

= 10 X Y 2 X2 Y2

k
Q

h Q = 10 ( k X ) ( k Y ) 2 ( k X )2 ( k Y )2
= 10 k2 X Y 2 k2 X2 k2 Y2

hQ

k2 (10 X Y 2 X2 Y2 )

= k2 Q
EC 311

265

k

Homogeneous Production Function k 2
h =
k2

2 (Homogeneous of
degree 2)

(Increasing
Returns to Scale) k
k2
2

= f (X , Y) = 0.6 X + 0.2 Y

hQ

hQ

0.6 ( k X ) + 0.2 ( k Y )

k ( 0.6 X + 0.2 Y )

k f (X , Y)

(degree of homogeneity : n) 1

h=k

Homogeneous of degree 1 Linearly
homogeneous (Constant Returns to Scale)

266

EC 311


4
4

15

= a M1 6 M2 8 M3 12 M4 34

b M1 M2 M3 M4

c M1 4 M2 5 M3 6 M4 3

Q =

4 M1 + 5 M2 + 3 M3 + 6 M4

(Decreasing Returns to Scale)
(Increasing Returns to Scale) (Constant
Returns to Scale)
:

15

h Q = a (k M1) 6 (k M2) 8 (k M3) 12 (k M4) 34

= k0.68 a M1 6 M2 8 M3 12 M4 34 = k0.68 Q
1

15

k < 1 Decreasing Returns to Scale

:

hQ

b(k M1) (k M2) (k M3)(k M4)

k4 b M1 M2 M3 M4 = k4 Q

k > 1 Increasing Returns to Scale

EC 311

267

hQ

c (k M1) 4 (k M2) 5 (k M3) 6 (k M4) 3

k0.95 c M1 4 M2 5 M3 6 M4 3

k0.95 Q

k < 1 Decreasing Returns to Scale

:

hQ

4 (k M1) + 5 (k M2) + 3 (k M3) + 6 (k M4)

k (4 M1 + 5 M2 + 3 M3 + 6 M4)

kQ

k = 1 Constant Returns to Scale

Eulers Theorem
Eulers theorem f (X)
n v
n

v f(X )

i =1

f
.X
X i i

(Production Function)
Q

f (K , L)

v
v .Q

268

Q
Q
. K +
. L
K
L

EC 311

v.

Q K
+
.
K Q

Q L
.
L Q

Q.K + Q.L

Q.K = K
Q.L = L

(Return to Scale)
(Isoquant)
1. (Constant Return to Scale)

2

.
.

4 9

EC 311

269

 4 9 AB = BC
= CD 100, 200, 300 400

2. (Increasing Return to Scale)

2

4 10

4 10

4 10
AB = BC = CD = ..... 100
220 350 490
2

4 11

270

EC 311

 4 11

4 11 AB
> BC > CD 100 200
300 400

3. (Decreasing Return to Scale)

2

4 12

4 - 12

EC 311

271

 4 - 12 AB = BC
= CD 100 190 270
330
2

4 13

4 13

4 13 AB <
BC < CD

(Expansion Path)

(Expansion Path)

272

EC 311

 Non
4 14

homogeneous Production Function

K
C

PK

Expansion Path

PK
C

PK

E3
E2
E1

L1 L2 L3

Q3 = f (L , K)
Q2 = f (L , K)
Q1 = f (L , K)
C
P

Non - homogeneous production function

4 - 14
Slope MRTSL.K
L K
Slope

Isocline Isocline
Slope

EC 311

273

AL2K2 BL3K3

(first order condition)

MP

MPK

MPL

MPK

. . . . . (4 23)

PK

PL . L + PK . K

. . . . . . . (4 24)

Q
L

2ALK2 3BL2K3

Q
K

2AL2 K 3BL3K2

2ALK 2 3BL2 K 3

2AL K 3BL K
2

C
PK .L

K
PK .L

PK
P

PK

implicit function
(Expansion Path)
g (L, K)

implicit function L K

g (L , K)

274

. . . . , (4 25)

EC 311


(first - order
conditions) (constrained maxima
and minima)

(Expansion Path)

(TC)

4 15 LTC Expansion Path

C

K
C

PK
C

LTC

Expansion Path

PK
C

PK

E3
E2
E1

EC 311

L1 L2 L3

Q3 = f (L , K)
Q2 = f (L , K)
Q1 = f (L , K)
C

PL

C3
C2
C1
0

Q1

Q2 Q3

275

 4 15 E1
Q1 C1
E2 E3
(C) (Q) (LTC)
(LTC)
(Q)

Cobb - Douglas

b0 Lb1 Kb2

PL . L + PK. K

f (Q)

Lagrangian Multiplier Method

Z

Q + (C PL . L PK. K)

b0 Lb1 Kb2 + (C PL . L PK. K)

First Order Condition Partial derivative

Z L , K

276

EC 311

Z
L

b0 b1 Lb1 - 1 Kb2 PL

Z
L

Q
PL . L

b2

.
. . . . (4 26)

b0 b2 Lb1 Kb2 - 1 PK =

b1

= 0

Q
PK . K

0
. . . . (4 27)

= C PL . L PK. K =

. . . . . (4 28)

(4 26) (4 27)
b

Q
L

PL

K =

Q
K

PK
b

b1

). (

PK

) .L

. . . . . (4 29)

L =

b0

b1

Q

b 0

1
b1 + b 2

P
L

P
K

b2

. L b1 + b2

b P
2 L
b1 PK

b2

b1 + b 2

. . . .. . (4 30)

L (4 29)

EC 311

277

Q

b 0

1
b1 + b 2

b P
2 L
b1 PK

b
1
b +b
1 2

. . . . . . (4 31)

(4 30) (4 31) (4 28)

C =

Q

b 0

1
b1 + b 2

[P ]
L

b1
b1 + b 2

[P ]
K

b2

b1 + b 2

b2

b1

b2

b1
b1 + b 2

b1 + b 2 b

+ 2
b

.. . (4 32)

(1) (Q)
(2)

(b0)
(3) 2 b1 b2
(4) b1 + b2
(5) PL PK

C (Q)

(Cost Function)

278

EC 311

 (Scale Elasticity)

TP MP
MP (TP) (increased by increasing
rate) MP
(increased by decreasing rate)
(Elasticity of Production : E Q )

2

(Scale elasticity)
(Scale elasticity)

1

%
%

EC 311

(Scale elasticity)

279

%Q
%k

Q
Q
k
k

Q k
.
k Q

Q
k
Q
k

Q
k
Q
k

Q
k

Q
k

> 1

= 1

< 1

(Linear
Limitational Factors)
X n

280

EC 311

a1, a2 , ..... an 1, 2, ....., n

X 1

(coefficients of production)
X 1, 2,
....., n X 1
a1 , a2 , . . ., an
A1, A2 , . . . , An 1, 2, ....., n
X X
A1 X X = a1X
A2 X X = a2 X

An X X = an X
X 2 A1 A2


A1 : A2

a1 : a2
A1 A2
X
2

EC 311

281

 4 16

4 16 A2
A1 OR
X
origin slope a1 : a2 OR

2
A1 A2 OR T
A2 TS
A2 SV A1
OV X A2 TS
A1
OW X

282

EC 311


(Isoquant Curve)

(Constant Returns)
(Isoquant Curve)
(constant
returns)

(production function)

1.

2.
process process

(Process)
Process
origin Process ray

EC 311

283

 4 17 (Kinked Isoquant)
Contour line Isoproduct Line

4 17 Process ray OF, OG OH Process

L K OR , RR'
R'R" Process ray OF
Process OF (Constant returns to scale)

R Process ray OF L K
100 R Process ray OF
L K 2 R
2 R 200
R 100
K L S Process ray OG
T Process ray OH Process ray
Process
Contour line
Isoproduct Curve Kinked Isoquant ()

284

EC 311

Process
(Isocost Curve)
2

4 18 Kinked
Isoquant

4 18 (Isocost curve) AB
Kinked Isoquant
Isocost S Process OG K
L OK1 OL1
200
L
K AB AB1
EC 311

285

Process Process OG
S S 300
100% 100%
200 L
K PK1 C2
(C2 < C1) DE
AB1 Kinked Isoquant Q2 200
S L K OL1 K1

(Expansion Path)

Homogeneous Production Function Degree One

Homogeneous Production Function Degree 1

(origin) 4 19 Slope
slope

286

EC 311


4 19

Homogeneous Production Function

4 19 L K
P

PK

Homogeneous production function

(optimal expansion path) OA Slope

PK

Isocline

K L
L K PL1 PK1

OA
OB Slope

PL

PK

EC 311

287

1
L K

(constant return to scale)

4 7 L K
1
1

L () K ()
P1
2
6
P2
3
4.5
P3
4
4
P5
5
3.7
P6
7
3.3
P7
8
3.1
P8
9
3.0

L 20 K
20
1

288

EC 311

 4 8 1
---------------------------------------------------------------------------------------------------------- 1
L K 1

(PL . L)
(PK . K)
C = PL . L + PK . K
----------------------------------------------------------------------------------------------------------P1
40
120
160
P2
60
90
150
P3
80
80
160
P4
100
74
174
P5
120
70
190
P6
140
66
206
P7
160
62
222
P8
180
60
240
---------------------------------------------------------------------------------------------------------- 4 8
1 P2 150

P2
(Expansion Path)


(LTC)
(LTC) (LAC)
EC 311

289

 (LMC) LTC
( LMC slope LTC )

4 9 P2
--------------------------------------------------------------------------------------------------- (Q) (TC) (AC) (MC)
-------------------------------------------------------------------------------------------------0
0
5
750
150
150
10
1,500
150
150
15
2,250
150
150
20
3,000
150
150

4 20 Expansion Path LTC

290

EC 311

(Isoquant curve)
2

2 X Y
2 2 L K

2 Edgeworth box
diagram

4 20

Contract Curve
of Production

4 20 L K OL
OK X Y
X1, X2, X3, .... Y1, Y2, Y3 .....
EC 311

291

 X Y A X
X2 Y Y3 L
OB K OL X X2
L BL K KC
Y Y3 A MRTSL.K
X MRTSL.K Y
2

4 20
L K A
E2 X Y Y3
Y4 A E3 Y
X X2 X3

E2 E3 MRTSL.K 2
[ MRTSL.K ] X = [ MRTSL.K ] Y

(Pareto Optimality)

X Y
E2 S
Y Y4 X

X Y T

(Contract Curve of Production)

292

EC 311

Leon Walras

Arrow
Debreu

.. 1951 Wassily Leontieff

(
)
1. (
) (interdependence)

( )
.


(final demand)

4.
(fixed proportion)

(Production function)
(constant return to scale)
EC 311

293

 ( 10 %) ( 10 %)

4 10 1

(Input)
( R )
( X )
( C )

(Output) ()
( R )
( X )
( C )
0.2
0.2
0.2
0.4
0.1
0.1
0.2
0.0
0.1
0.2
0.7
0.5
1.0
1.0
1.0

4 10 (column)
1 0.2 0.4
0.2 3
(intermediate
inputs) (value added)

0.4 0.1
0.2
( )

100 30 40

294

EC 311

(1)

(2) (1)
2 3
(R)

( 0.2 x R )
( 0.2 x X) (
0.2 x C ) 100
R

0.2 R + 0.2 X + 0.2 C + 100

. . . . . .(4 33)

(X) (C)

X

0.4 R + 0.1 X + 0.2 C + 30

. . . . . . .(4 34)

0.2 R + 0.1 C + 40

. . . . . . .(4 40)

3 R , X C
(R)
178 (X) 131
(C) 84

(L)

0.2 R + 0.7 X + 0.5 C

R = 178 , X = 131 C = 84
( ) 169

EC 311

295

(Cost of Production)

(Short - run cost functions)

(Expansion path function)

Production function,

f(L, K)

Cost equation,

PLL + PKK + b

g (L,K)

Expansion path function, O

b =

296

EC 311

 3 implicit function

C

C(Q) + b

. . . . . . (4 41)

(1)
(2)

(3) (
) (TVC)

(4) (TFC)

(AC)
(AVC) (AFC) (MC)

EC 311

C (Q) + b
Q

AC

AVC

C (Q)
Q

AFC

b
Q

MC

d C (Q)
dQ

= C(Q)

297

 4 21
/unit

MC

TC = C(Q) + b
TVC = C(Q)

AC
AVC

TFC = b
0

AFC
Q

Q
= f (X)
(TVC)


TVC

Px . X

(AVC)

AVC

298

TVC
Q

EC 311

AVC

P .X

Q
X

AP

(Px) AP
AVC AP AVC AP
AVC
(MC)
1
1

MC

P .d X
X

dQ

dQ
dX

MP

MP MC
(Px) MP MC MP
MC MP MC
AP MP AP MP
AP AP MP AP AP
MP AP AP AVC
MC AVC AVC AVC
MC AVC (AP ) MC
AVC

(Long-run Cost function)

EC 311

299

k (Size of plant) k
(Continuously variable) k

(k)

Production function,

f(L, K, k)

Cost equation,

PLL + PKK + ( k)

Expansion path function, O

g(L, K,k)

( k ) > 0

k
3

(TC)
(k)

C

= C (Q , k) + ( k )

. . . . . .(4 42)

k = k0
(4 42) (4 41)

(LTC)

300

EC 311

 4 22

C ()

k(1)

k(2)

k(3)

LTC

U
T
S
0

4 22 k(1), k(2) k(3)

3


OR
k(1) RS RT RU
k(2) k(3)) k(1)
OR S
(LTC)
(LTC)


EC 311

301



implicit function
C = ( Q , k ) + ( k ) = G (C , Q , k)

. . . . .(4 43)

partial derivatives (4 43) k

Gk (C, Q, k) =

k
(4 43) (4 44) C

Q
C

= C(Q)

. . . . .(4 44)

(k)

(Long - run Average Cost: LAC)

302

EC 311

 4 23

AC
(/ unit )
SAC1

SAC2

SAC3 LAC

(Long - run Marginal Cost : LMC)

LMC

EC 311

LTC
Q

303

 4 24

AC , MC (/ unit )

LMC = SMC1

SMC2

SMC1

LAC = SAC1

SMC3 LMC

SAC1

SAC3

LAC

SAC2
LAC = SAC3
LACmin = SAC2 = LMC = SMC2

LMC = SMC1

Q1

Q2

Q3

C = 0.04Q3 0.9Q2 + (11 k) Q + 5k2 . . . . .(4 45)

304

EC 311

 k = 1

C = 0.04Q3 0.9Q2 + 10Q + 5

partial derivative
implicit function (4 45) k
Gk (C, Q, k)

Q + 10 k =
k

0
0.1 Q

k = 0.1 Q (4 45)

(Long - run cost function)
C

0.04 Q3 - 0.9 Q2 + (11 0.1 Q) Q + 5 (0.1 Q)2

0.04 Q3 0.95 Q2 + 11 Q

(Elasticity of Total Cost: EC)

(Returns to Scale)
(Elasticity of Total Cost or Cost Elasticity: EC)
(TC)
1

EC 311

305

% TC
% Q

EC =

TC
Q
Q
Q

TC Q
.
Q TC

=
TC
Q
TC
Q

MC
AC

MC AC

4 11 EC
(Returns to Scale)

% TC < %Q

EC < 1

% TC = %Q

EC = 1

% TC > % Q

EC > 1

EC < 1
(outputto-input ratio) (Increasing Returns to
Scale)

306

EC 311

 Ec = 1
(Constant Returns to Scale)
E > 1

(Decreasing Returns to Scale)

EC 311

307