Lecture notes for Business

Economics (BUS-704) - 4

- Dr. Mirza Azizul Islam

PRODUCTION AND BUSINESS ORGANIZATION (CH-6)

 Many products in an economy – assumes that all producers

seek to produce maximum output for given amount of inputs.
 Production function shows the relationship between the
amounts of input required and amount of output that can be
obtained – Specifies the maximum output that can produced
with given quantity of inputs and the given state of
technology.
PRODUCTION AND BUSINESS ORGANIZATION

 Total, average and marginal products.

 Total product is the total amount of output produced.

 Marginal product of an input is the extra product or

output added by 1 extra unit of that input, holding other
inputs constant.
 Average product is the total output divided by total units
of that input.
Units of Total Marginal Average
labour product product product

1 2000 2000 2000

2 3000 1000 1500

3 3500 500 1167

THE LAW OF DIMINISHING RETURNS
 States that less and less of extra output is obtained by adding
extra units of input while holding other inputs constant i.e.
marginal product declines.
 The reason is that additional inputs are combined with fixed
amount of other inputs (machines are overworked, land gets
crowded and so marginal product of labour declines)
 Relationship between total and marginal product – total rises,
margin falls, total rises at a diminishing rate.
 A widely observed reality – but not necessarily an immutable
law – may not hold at all levels of production – very first
inputs may show increasing marginal products.
RETURNS TO SCALE
 Diminishing returns and diminishing marginal products refer
to change in total output in response to change in single input;
what happens when all inputs are changed, say, increased i.e.
change in total product in response to proportionate increase
of all inputs – refers to return to scale.
 Constant return to scale – all inputs doubled, output doubled

 Increasing returns to scale – all inputs doubled, output more

than doubled.
 Decreasing returns to scale – all inputs doubled, output less
than doubled, problems of management etc. as firm become
larger and larger.
SHORT RUN AND LONG RUN

 Short run defined as a period in which firms can adjust

production by changing variable factors such as materials
and labour, not fixed factors e.g. capital – cyclone – high
demand for CI sheets – workers over time, more workers
more materials – but not the plant size.
 Long run defined as the period when all factors – both
variable and fixed e.g. capital and technology can be
changed.
TECHNOLOGICAL CHANGE/
PROGRESS

 Refers to improvements in the processes for producing

goods and services, changes in old products, or
introduction of new products.
 More output with the same input or same output with
less input
 Process innovation

 Product innovation – cell phones, computers

TECHNOLOGICAL REGRESS
– Socially wasteful process.
 Labour productivity

= Amount of output/ Units of labour

 Capital productivity

= Amount of output/ Units of capital

 Total factor productivity

= Amount of output/ Total units of labour and capital

BUSINESS ORGANIZATIONS
 The nature of the firm: needed to
 take advantage of large-scale production

 raise resources

 manage the production process

 Individual proprietorship

 partnership –

 private limited companies

 Public limited companies

 Statutory corporations

 Listed companies – role of shareholders/ management