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Pekan-5 PIE (IEI2C2) Bahan Kuliah
Pekan-5 PIE (IEI2C2) Bahan Kuliah
Lecture Note #5
FIRMS AND PRODUCTION
IEI2C2 - PENGANTAR ILMU EKONOMI TEL U – FAK. REKAYASA INDUSTRI
Course Content
In this section, we examine five main topics:
▪ The Ownership and Management of Firms Production
▪ Returns to Scale
Categories :
1. the private sector,
2. the public sector,
3. the nonprofit sector
Inputs of Production
Capital (K), Labor (L), and Material (M)
Capital (K ). Long-lived inputs such as land, buildings (factories, stores),
and equipment (machines, trucks)
Labor (L). Human services such as those provided by managers, skilled
workers (architects, economists, engineers, plumbers), and less-skilled
workers (custodians, construction laborers, assembly-line workers)
Materials (M). Raw goods (oil, water, wheat) and processed products
(aluminum, plastic, paper, steel)
Average product of labor (APL) is the ratio of output, q, to the number of workers,
L, used to produce that output :
Hsieh (1995) estimated such a production function for a U.S. electronics firm:
4 20 28 35 40 45 49
5 22 32 39 45 50 55
6 24 35 42 49 55 60
QX = 50 QX = 100 QX = 150
K L K L K L
A 1 8 2 10 3 10
B 2 5 3 6 4 7
C 3 3 4 4 5 5
D 5 2 6 3 7 4
E 8 1 10 2 10 3
L TC / P PL K
(a) if the inputs are perfect (b if the inputs cannot be (c) Typical isoquants lie between the
substitutes, each isoquant is a substituted at all, the isoquants extreem cases of straight lines and
straight line are right angles (the dashed lines right angles. Along a curved isoquant,
show that the isoquants would the ability to substitute one input
be right angles if we included another varies
inefficient production.
Firms and Production 23 of 36
IEI2C2 - PENGANTAR ILMU EKONOMI TEL U – FAK. REKAYASA INDUSTRI
→ MRTS tells us how many units of K the firm can replace with an extra
unit of L (q constant)
▪ Thus,
▪ Constant elasticity :
Return to Scale
Constant Return to Scale
How much does output change if a firm increases all its inputs
proportionately?
In the long run, the companies do not only face the situation to choose
the combination of inputs which can give a certain output. Sometimes, the
companies need to be expanded, and increase the L and K.
When the inputs are increased by a certain percentage, and it results in
the same percentage of increase in output, the production function
exhibits constant return to scale, → Doubling inputs, doubles output →
f(2L, 2K) = 2 f(L,K) = 2q
If a company uses x1 pounds of Idaho potatoes and y1 Maine potatoes to
produce q1 = x1 + y1 pounds of potato salad.
When it double both inputs, x2 = 2 x1 Idaho and y2 = 2 y1 Maine potatoes,
then q2 = x2 + y2 = 2 x1 + 2 y1 = 2 q1
Return to Scale
Return to Scale
Return to Scale
Varying Returns to Scale
Even if all firms are producing efficiently (an assumption we make in this chapter),
firms may not be equally productive.
Relative productivity of a firm is the firm’s output as a percentage of the output that
the most productive firm in the industry could have produced with the same inputs.
Relative productivity depends upon:
1. Management skill/organization
2. Technical innovation
3. Union-mandated work rules
4. Workplace discrimination
5. Government regulations or other industry restrictions
6. Degree of competition in the market
References
Perloff, Jeffrey M., 2012, Microeconomics. 6th edition. Boston: Pearson
Karl E. Case, Ray C. Fair & Sharon M. Oster, Principle of Economics, 9ty edition, Prentice-Hall