This action might not be possible to undo. Are you sure you want to continue?

of time of a firm X, Y,Z = Required inputs to produce Q Output over the same period Depends on state of technology ± when technology improves, new produiction function comes In short run, few inputs (at least one) are fixed, while others can be changed (are variable) In the long run, all inputs are variable

TYPES OF PRODUCTION FUNCTION 1. Multiple Linear Production Function Q = a + b1x1 + b2x2 + ....+bnxn Q = Output, x1....xn are inputs b1...bn regression coefficients 2. Cobb-Douglas Production Function Q = A L^ k^ Q = Output, L = Quantity of Labour, K = Quantity of capital, & = parameters

3. Constant Elasticity of Substitution (CES) Production Function Q = A[ K^-p + (1- ) L^-p]^1/p = Distribution parameter, p = substitution parameter

distinction between fixed and variable factor disappears.g. At least one factor does not vary with output. In long run. SHORT RUN ± Period of time in which at least one factor is fixed i. e. raw material etc. vehicles VARIABLE INPUTS ± Factors inputs whopse quantities varies with the amount of output being produced. because all factors are variable . LONG RUN ± Period of time in which all factors are variable. e. building.e.g ± machinery.FIXED INPUT ± Factor inputs whose quantity does not vary with the amount of output being produced.labour. .

and is below AP when AP is calling . reach a maximum and then decline .MP exceeds AP when AP is rising. equals AP when AP is maximum.AVERAGE PRODUCT = Total product / Amount of variable factor to produce that ouput AP = TP/L MARGINAL PRODUCT = additon to total product due to use of opne addtional unit of variable factor MP = TP(N) ± TP(N-1) .both AP & MP initially rise.AP may decline to zero and MP may become negative .

the supplier must decide how much of each input to use: Land Labor Capital In particular. the supplier must examine the relation between input and output. .Introduction When producing an economic product.

by inceasing the quanitity of variable factor -In a given state of technology and keeping other factors constant.Eventually. Therefore. addtional units of a variable input will yield increasing returns per unit of the variable factor up to a point . a point is reached beyond which further additions of the variable factor will yield diminishing returns per unit of input. MP increases over a range of input up to a point. after which it decreases and evenutally becomes negative .The Law of Variable Proportions Law of variable proportions explains the behaviour of production as the proportion between fixed and variable inputs are changed.

Production Schedule Using Varying Amounts of Labor Number of Workers 0 1 2 3 4 5 6 7 8 9 10 Total Product (In Units) 0 14 42 75 112 150 180 203 216 207 190 Marginal Product (In Units) 0 14 28 33 37 38 30 23 13 -9 -17 Stage I (Increasing Returns) Stage II (Diminishing Returns) Stage III (Negative Returns) .

Pr 250 t t U V r Am t f r 200 (I U t ) t 150 Series1 Pr T t 100 50 0 1 2 3 4 V r I 5 t (N m 6 r 7 f W rk r ) 8 9 10 .

.Conclusions While adding units of an input (labor). This means that every additional unit increases productivity as well as total output. the marginal product goes through three stages: Stage I (Increasing returns): marginal product increases throughout. This is shown on the graph by an increasing slope.

. Stage III (negative returns): marginal product is negative throughout. cont. a waste of money and resources. This means that each additional unit actually decreases total output. though total output still increases. This is shown on the graph by a decreasing positive slope. Stage II (diminishing returns): marginal product decreases throughout. This is shown on the graph by a negative slope. This means that every additional unit decreases productivity.Conclusions.

Conclusions. . cont. Stage II is ideal. The greatest output is at the end of Stage II. The greatest productivity is at the end of Stage I. Therefore. because there is a balance between productivity and total output.

Summary The Law of Variable Proportions states that while varying only one input. output will go through three stages: Increasing returns Diminishing returns (ideal) Negative returns .

Determining the maximum quantity of output that can be produced for the geiven -quantities of inputs - .L) K = CAPITAL.SHORT RUN PRODUCTION FUNCTION (with two variable factors) Q = f(K. L = LABOUR TWO AIMS: Determining the minimum amount of variable factors need to produce a given -Quantity of output -.

L) 0L + 3K = 10Q 1L + 2K = 10Q 2L + 1K = 10Q 5L + 0K = 10Q .Represents a production function with two variable inputs - Shows a given amount of output produced by various combinations of two variable inputs Shows all those combinations of two variable inputs which yield a given quantity of product e.g Q = f (K.ISOQUANT .

ISOQUANT MAP OUTPUT = 10 K 3 2 1 0 L 0 1 2 5 K 5 4 3 2 OUTPUT = 20 L 1 2 4 10 K 8 7 6 5 OUTPUT = 30 L 2 4 8 20 .

E. truck and driver .Substitutability of factors PERFECT COMPLEMENTS Two factors are prefect compliments if the increased use of one factor will require a corresponding increase in the other variable.

PERFECT SUBSTITUTES One factor can be easily replaced with the other In reality. substitutability of capital decreases - There is DMINISHING MARGINAL SUBSTITUTABILITY .As K increases.As L increases. substitutability of labour decreases -. most of factors are not perfect complements of perfect substitutes .

Given by slope of isoquant -Shows how many extra units of K must be employed to replace one last unit of L.PROPERTIES OF ISOQUANTS - An isoquant must be negatively sloped .An isoquant must be convex to the origin: because factors are not perfect substitutes . it shows that to replace one unit of capital. you need two units of labour.Substitutability of one factor for another -. if output has to be maintained - MRTS (L for K) = change in K / change in L MRTS shows relative productivity of two factors -If MRTS =1/2. -Therefore productivity of capital is twice as that of labour - .Two isoquants cannot intersect each other - - MARGINAL RATE OF SUBSTITUTION: -.

ISOCOS LINE An isocost denotes all combinations of inputs K & L which can be purchsed from the form¶s given budget funds C = P(L)*L + P(K)*K .

P(L) P(K) .

within its limited budget -It will produce where the isocost line is tangent to the isoquant - Slope of Isoquant = Slope of Isocost MRTS = P(L)/P(K) or MP(L)/MP(K) = P(L)/P(K) or MP(L)/P(L) = MP(K)/P(K) .Firm will try to produce maximum output.

RE RNS O SC LE .

5 L0.5 L0.Cobb-Douglas Production Function Suppose that hamburgers are produced according to the Cobb-Douglas function q = 10K 0.5 KL = 25 q = 100 = 10K 0.5 L0.5 KL = 100 The isoquants are rectangular hyperbolas .5 Since a+b=1 constant returns to scale The isoquant map can be derived q = 50 = 10K 0.

5 K 0.Cobb-Douglas Production Function The MRTS can easily be calculated f L 5 L 0.5 0.5 K MRTS ( L for K ) ! ! 0.5 ! f K 5L K L The MRTS declines as L rises and K falls The MRTS depends only on the ratio of K and L .

Sign up to vote on this title

UsefulNot useful- 10 MetE15 - Other Factors in Engineering Economic Analysis
- https://www.scribd.com/doc/244527333/Handbook-of-Mechanical-Design-by-George-F-nordenholt ansprob4
- International Trade
- Monopoly (1)
- Economics Notes
- 10766_2000-2004
- Text
- ECN 302-602 (4), The Simple Keynesian Model
- The Law of Variable Proportions
- man's hours
- Equilibrium - Buffer Stocks (Oct 05)
- Pike Tty
- sem_eco_dev
- belong Run Prod Function
- HARROD
- BCG Experience Curve I the Concept 1973
- Common Property
- 6
- Terms of TRade Presentation1
- Consumer Behaviour Ras Culuz
- Presentation 1
- Cost Indices
- Examen IBE Macro 2012
- Trade Cycles (Gr i)
- Uniglobe Output Gap Definition
- Recession vs Depression
- ES_2_2014-01-28
- Macro Eco
- Trade Cycles (Modified)
- Monetary Policy
- Production Function