Theory of Production:

Long-run

Mojca Marc

Long-run production theory

Long run: all production inputs are variable.

A long-run production theory analyzes how to combine
variable production inputs in order to:
- produce the maximum possible total output with given
inputs or
- to produce a given total output with minimal amount of
inputs.

Which combinations of variable production inputs give the

same total output?
Long-run production function is graphically represented by a
curve of equal total output - an isoquant.

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 Isoquant – picture:

Elasticity of production function

Production function : Q = f (L, K)

Elasticity tells us by how much % will total output increase if

the quantity of all production inputs is increased in the same
proportion.

Elasticity of a production function is given by the production

function coefficient (e). This is called also the total output
elasticity.

0 < e < ∞ (if a larger quantity of production inputs is used, total

output always increases)

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 Elasticity of production function

TOTAL OUTPUT RETURNS INTERPRETATION

ELASTICITY TO SCALE
(COEFFICIENT)
e=1 constant If the quantity of production inputs is
increased by 1%, total output increases by
1% (i.e. proportional increase)
e>1 increasing If the quantity of production inputs is
increased by 1%, total output increases by
more than 1% (i.e. more than proportional
increase)
e<1 decreasing If the quantity of production inputs is
increased by 1%, total output increases
less than 1% (i.e. less than proportional
increase)

Elasticity of production function (e) is calculated:

e = eL + eK

eL = output elasticity of labor

(the % change in total output due to a 1 % change in the quantity of labor
used, with constant amount of capital)

eK = output elasticity of capital

(the % change in total output due to a 1 % change in the quantity of capital
used, with constant amount of labor)

The calculation of output elasticity of a particular input:

eL =

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The interpretation of output elasticity of a particular input:

VALUE eL INTERPRETATION

If the quantity of labor is increased by 1 % and capital is

eL = 0.2 hedl constant, total output will increase by 0.2 %.

If the quantity of capital is increased by 1 % and labor is

eK = 0.5 held constant, total output will increase by 0.5 %.

If the quantity of labor is increased by 1 % and capital is

eL = 1 held constant, total output will increase by 1 %.

Example:

Calculate the total output in the next year, if the quantity of inputs is
increased by 30 %. Assume that the company presently produces
4,500 units of output, employs 50 units of labor and 50 units of
capital. Marginal product of labor is 30 units and marginal product of
capital is 60 units.

If we wish to know the % increase of total output when the quantity

of inputs is increased by a certain %, we can use the following
equation:

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 Solution of the example:

Example:
A company increased its total output from 100 units to
120 units. Output elasticity of capital is 0.8 and output
elasticity of labor is 0.5.

a) Knowing that the company employed 20 % more labor,

calculate by how much did it increase the quantity of
capital?

b) Under which type of returns to scale is the comapny

operating?

c) How much is marginal product of labor, if average product

is 40 units?

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 Solution of the example:

Cobb-Douglas production function

One of most widely used types of production function

in economics is the Cobb-Douglas production
function:
Q = AKα Lβ

A … technology (constant)
α … eK
β … eL

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 Example:

A production function is given by the following equation:

Q = 0,8 K 0,5 L 0,3

a) Which type of returns of scale do we have in this case?

Interprete the production function coefficient of this
particular production function! (EXAM!! – you have to explain
the particluar number, not in general!)
b) By how much total output is increased if the amount of labor
is increased by 30 % and capital is held constant?
c) How much is average product of capital if marginal product of
capital is 200 units?

Solution of the example: