Production

Production
- creation of goods and services from inputs
or resources
- involves services as well as making the
goods people buy
a schedule/engineering relation showing the maximum
amount of output that can be produced from any
specified set of inputs, given the existing technology.

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

Q= f(K,L) feasible means of
converting raw inputs
( maximum amount of output that can be produced with K units into an output
of capital and L units of labor )

Production Function
Technical Efficiency
 Production of the maximum level of output that
can be obtained from a given combination of
inputs.

Economic Efficiency
 Production of a given amount of output at the
lowest possible cost
Short Run vs
Long Run Decisions
CLASSIFICATION OF INPUTS
Fixed Input
Variable Input
Fixed Input
 inputsa manager cannot
adjust in the short run
 aninput for which the
level of usage cannot
readily be changed
Variable Input
 inputs a manager can adjust
to alter production
 an input for which the level
of usage may be changed
quite readily.
• period of time in which the level of usage of
one or more of the inputs is fixed Q = f(L, K)
• time frame in which there are fixed factors
of production, limiting choices in making Q = f(L)
input decisions.

Short run
 • horizon over which the manager can adjust
all factors of production
• period of time in which all inputs are
variable

Long run
 production in which a given level of output
can be produced with more than one
combination of inputs

Variable Proportions
Production
Measures of
Productivity
Total Product
 maximum level of output that can be produced
with a given amount of inputs
Average Product
 measure of the output produced per unit of
input
Marginal Product
 the change in total output attributable to the
last unit of an input
Amount of Amount of Labor Total Product Average Product Marginal Product
Capital of Labor of Labor
2 0 0 0 0
2 1 57 57 57
2 2 118 59 61
2 3 177 59 59
2 4 228 57 51
2 5 270 54 42
2 6 300 50 30
2 7 322 46 22
2 8 336 42 18
2 9 342 38 8
2 10 340 34 -2
Law of Diminishing Marginal Returns
 States that
the marginal
product of an
additional
unit of an
input will at
some point be
lower than
the marginal
product of the
previous unit
Number of Workers Number of Pizza Marginal Product
(Input) (Output)
0 0 0
1 5 5
2 15 10
3 20 5
4 22 2
5 22 0
6 18 -4
Increasing Marginal Returns
 range
of input usage over which marginal
product increases
Decreasing Marginal Returns
 range
of input usage over which marginal
product declines
Negative Marginal Returns
 range
of input usage over which marginal
product is negative
The Role of the
Manager in the
Production Process
1. Produce on the
Production Function
 Themaximum
possible output
that can be
produced with
given inputs
2. Use the Right Level
of Inputs

 The firm operates at the

right point on the
production function
 Thismeans hiring the
correct number of servers in
order to maximize profits
 The value of the output produced by the
last unit of that input

VMPL = P X MPL

Value Marginal Product

Production
 Thank you!

Sources
Baye, M. & Prince, .Managerial Economics and Business Strategy. Mc Graw
Hill. 2017. Print
Thomas, C . & Maurice, S. Managerial Economics. Mc Graw Hill .1999.Print