CHAPTRE: 5

Producer behavior
theory
1. Production function
2. Short-term production function
3. Long-term production function

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1. Factors of production are productive
resources that firms use to manufacture
goods and services.
 Example: labor, land, capital
equipment…
2. The firm’s output is the amount of goods
and services produced by the firm.

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3. Production transforms a set of inputs
into a set of outputs
4. Technology determines the quantity of
output that is feasible to attain for a given
set of inputs.

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5. The production function tells us the
maximum possible output that can be
attained by the firm for any given
quantity of inputs.

Q = F(L,K,T,M,…)

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6. A technically efficient firm is attaining the
maximum possible output from its inputs
(using whatever technology is appropriate)
7. The firm’s production set is the set of all
feasible points, including:
 The production function (efficient point)
 The inefficient points below the production
function

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Q Example: The Production Function and
Technical Efficiency

C
•

L 7
Q Example: The Production Function and
Technical Efficiency

D
•
C
•

L 8
Q Example: The Production Function and
Technical Efficiency

Production Function
Q = f(L)
D
•
C
•

L 9
Q Example: The Production Function and
Technical Efficiency

Production Function
Q = f(L)
D
•
C
• •B
•A
L 10
Q Example: The Production Function and
Technical Efficiency

Production Function
Q = f(L)
D
•
C
• •B
•A Production Set

L 11
Notes:
 The variables in the production function are
flows (amount of input per unit of time), not
stocks (the absolute quantity of the input).
 Capital refers to physical capital (goods that
are themselves produced goods) and not
financial capital (money required to start or
maintain production).

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 Utility Function Production Function
1. Satisfaction from Output from inputs
purchases

2. Derived from Derived from

preferences technologies

3. Ordinal Cardinal

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 Utility Function Production Function
4. Marginal Utility Marginal Product

5. Indifference Curves Isoquants

6. Marginal Rate of Marginal Rate of

Substitution Technical Substitution

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Definition: An isoquant is a representation of all
the combinations of inputs (labor and capital)
that allow that firm to produce a given quantity
of output.

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K
Example: Isoquants

Slope=dK/dL Q = 10

0 L
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K
Example: Isoquants

All combinations of (L,K) along the

isoquant produce 20 units of output.

Q = 20

Slope=dK/dL Q = 10

0 L
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Example: Suppose Q = K0.5L0.5

 For Q = 20 => 20 = K0.5L0.5

=> 400 = KL
=> K = 400/L

 For Q = Q0 => K = (Q0)2 /L

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TASK . FINDING ALGEBRAIC IMPACTS FOR ISOCQUANTS
The production process at a certain enterprise is described by the
production function:
Q = 2L2 / 3 * K1 / 3
Find the algebraic expression for the isoquant with Q = 4.
 
DECISION:

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It is important to distinguish between the short and
long run when analyzing production. The short run
refers to a period of time in which one or more factors
of production cannot be changed. Factors that cannot
be varied over this period are called fixed inputs. A
firm's capital, for example, usually requires time to
change-a new factory must be planned and built,
machinery and other equipment must be ordered and
delivered, all of which can take a year or more.

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The long run is the amount of time needed to make all inputs
variable. In the short run, firmls vary the intensity with
which they utilize a given plant and machinery; in the
long run, they vary the size of the plant. All fixed inputs
in the short run represent the outcomes of previous long-
run decisions based on firms' estimates of what they
could profitably produce and sell. There is no specific
time period, such as one year, that separates the short run
from the long sun. Rather, one must distinguish them on
a case-by-case basis. For example, the long sun can be as
brief as a day or two for a child‘s lemonade stand, or as
long as five or ten years for a petrochemical producer or
an automobile manufacturer.
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TASK. CALCULATION OF THE VOLUME OF VOLUME
Suppose that the production function of the company has the form:
Q=L 3/4*K 1/4
If the amount of labor applied increases by 8%, and capital by 4%, how
much will the output increase?
 
DECISION:
The amount of labor applied will increase by 8%:
 
The amount of capital used will increase by 4%:
 
Production function after the changes will take the form:
 Q1=

Calculate the growth rate of the issue:

 
Consequently, the output will increase by …%.
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TASK. CALCULATION OF PRODUCT GROWTH RATE
The company operates on technology, characterized by the production
function:
Q0 = L 0.5 * K 0.25
How many times will the output of a company increase if it increases the
use of both resources by 4 times?
 
DECISION:

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