320 312 Ch9a RW

Producti on
PowerPoint Slides
prepared by: Andreea CHIRITESCU, Eastern Illinois University;
Modified by: Ronald WENDNER, University of Graz, Austria
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
1
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Plan
• Production and marginal/average productivity

– Marginal rate of technical substitution
– Elasticity of substitution
• Returns to scale
• Specific production functions
– Linear
– Fixed proportions
– Cobb-Douglas; CES
• Technical progress
2
Production function
• The firm’s production function
– particular good (q)
– maximum amount of q that can be produced
– using alternative combinations of capital (k) and labor (l)
q = f(k,l)
- In more general settings:

many inputs (and many outputs)
production possibility sets
Query. Identify important properties of a production function.
3
Relations between output & inputs
• Marginal product (MP)
– additional output from 1 more unit of an input
• Average product (AP)
– output per unit of input
4
Marginal Product
• Marginal product (MP)
– additional output that can be produced

– by employing one more unit of an input
holding other inputs constant
q
marginal physical product of capital  MPk   fk
k
q
marginal physical product of labor  MPl   fl
l
5
Diminishing Marginal Productivity
• Marginal physical product

– Depends on how much of that input is used
• Diminishing marginal productivity
MPk  2 f
 2  f kk  f11  0
k k
2
MPl  f
 2  f ll  f 22  0
l l
6
Diminishing Marginal Productivity
• Changes in the marginal productivity of labor
– Also depend on changes in other inputs such as capital

– We need to consider flk which is often > 0
MPl
f lk 
k
7
Average Product
• Average product of labor
output q f (k , l )
APl   
labor input l l
• APl also depends on the amount of capital

employed
Query. Define the APk

8
9.1 A Two-Input Production Function
• Suppose the production function for flyswatters can

be represented by
q = f(k,l) = 600k 2l2 - k 3l3
• To construct MPl and APl, we may assume a value

for k
• Let k = 10
• The production function becomes
q = 60,000l2 - 1000l3
9
• The marginal productivity function is

MPl = ∂q/∂l = 120,000l - 3000l2
• Which diminishes as l increases
• This implies that q has a maximum value:

120,000l - 3000l2 = 0
40l = l2
l = 40
• Labor input beyond l = 40 reduces output
10
• To find average productivity, we hold k=10 and
solve
APl = q/l = 60,000l - 1000l2
• APl reaches its maximum where
∂APl/∂l = 60,000 - 2000l = 0
l = 30
• When l = 30, APl = MPl = 900,000
• When APl is at its maximum, APl and MPl are equal
• Query: Is this a general result or is it specific to this example?

11
Input substitution
• So far:
– how increase in one input raises output

– how much output per unit of input
• Next: Can inputs be substituted for each other?
– graphically: isoquant maps

– analytically:
• marginal rate of technical substitution (MRTS or RTS)
• elasticity of substitution
12
Isoquant Maps
• Isoquant map
– illustrate the possible substitution of one input for
another
• An isoquant
– those combinations of k and l that can produce a
given(=fixed) level of output (q0)
f(k,l) = q0
13
9.1
An Isoquant Map
k per period
A q = 30
kA
B q = 20
kB
q = 10
lA lB l per period
14
Marginal Rate of Technical
Substitution
• Marginal rate of technical substitution (RTSlk)
– Shows the rate at which labor can be substituted for

capital
holding output constant along an isoquant
dk
RTS (l for k ) 
dl q  q0
15
RTS and Marginal Productivities
• Total differential of the production function:
f f
dq   dl   dk  MPl  dl  MPk  dk
l k
• Along an isoquant dq = 0, so
MPl  dl   MPk  dk
dk MPl
RTS (l for k )  
dl q  q0 MPk
16
RTS and Marginal Productivities
• RTS will be positive (or zero)

– Because MPl and MPk will both be nonnegative
• Diminishing marginal productivity does not imply

diminishing RTS
• Diminishing RTS ☞ isoquants are convex
– analytically: d(RTS)/dl < 0
17
The Elasticity of Substitution
• Elasticity of substitution (σ)
– For the production function q = f (k, l)

– Measures the proportionate change in k/l relative to the
proportionate change in the RTS along an isoquant
%(k / l ) d (k / l ) RTS d ln(k / l ) d ln(k / l )

    
%RTS dRTS k / l d ln RTS d ln( f1 / f k )
• The value of σ will always be positive because k/l

and RTS move in the same direction
• Query: Derive σ
• Query. What is the value for perfect substitutes?
23
9.3
Graphic Description of the Elasticity of Substitution
k per period
RTSA
A
RTSB
(k/l)A B q = q0
(k/l)B
l per period
In moving from point A to point B on the q = q0 isoquant, both the capital–labor

ratio (k/l) and the RTS will change. The elasticity of substitution (σ) is defined to be
the ratio of these proportional changes; it is a measure of how curved the isoquant
is.
24
Elasticity of Substitution
• If σ is high
– The RTS will not change much relative to k/l
– The isoquant will be relatively flat
• If σ is low
– The RTS will change by a substantial amount as k/l
changes
– The isoquant will be sharply curved
• σ can change along an isoquant

– Or as the scale of production changes
25
What if inputs change
simultaneously?
• How does output respond to increases in all inputs
together?
marginal product (why?)
• Case of interest: all inputs change proportionately
– Returns to scale
26
Returns to Scale
• How does output respond to increases in all inputs
together?
– Suppose that all inputs are doubled, would output

double?
• As inputs are doubled...
– Greater division of labor and specialization – higher

efficiency
– Loss in efficiency - management may become more
difficult
27
Returns to Scale
• Production function is given by q = f(k,l)
– And all inputs are multiplied by the same positive
constant (t >1)
– Then we classify the returns to scale of the production
function by
Effect on Output Returns to Scale

f(tk,tl) = tf(k,l) = tq Constant
f(tk,tl) < tf(k,l) = tq Decreasing
f(tk,tl) > tf(k,l) = tq Increasing
– Query. Possible that neither of the above is satisfied?

28
Returns to Scale
• Production function
– Constant returns to scale for some levels of input usage
– Increasing or decreasing returns for other levels
– The degree of returns to scale is generally defined within

a fairly narrow range of variation in input usage
29
Constant Returns to Scale
• Constant returns-to-scale production functions
particularly important
– Are homogeneous of degree one in inputs

f(tk,tl) = t1f(k,l) = tq
• The marginal productivity functions
– Are homogeneous of degree zero

– If a function is homogeneous of degree k, its derivatives
are homogeneous of degree k-1
30
Constant Returns to Scale
• Marginal productivity of any input

– Depends on the ratio of capital and labor
– Not on the absolute levels of these inputs
• The MRTS between k and l

– Depends only on the ratio of k to l
– Not the scale of operation (q)
– Holds for any homothetic production function

• All of the isoquants are radial expansions of one another
31
Isoquant Map for a Constant Returns-to-Scale Production
Function
k per period
q=3
q=2
q=1
l per period
•Because a constant returns-to-scale production function is homothetic, the RTS depends

only on the ratio of k to l, not on the scale of production. Consequently, along any ray through
the origin (a ray of constant k/l), the RTS will be the same on all isoquants. An additional
feature is that the isoquant labels increase proportionately with the inputs.
32
Frequently Used Production
Functions
• Linear production function (σ = ∞)
• Fixed-proportion production function (σ = 0)
• Cobb-Douglas production function (σ = 1)
• CES production function (σ >= 0)
34
The Linear Production Function
• Linear production function (σ = ∞):

q = f(k,l) = αk + βl
– Constant returns to scale

f(tk,tl) = α tk + β tl = t(αk + βl) = tf(k,l)
– All isoquants are straight lines with slope -β/α

• RTS is constant
• σ= ∞ (why?)
35
9.4 (a)
Isoquant Maps for Simple Production Functions with Various
Values for σ
(a) σ = ∞
k per period
slope = - β/α
q1 q2 q3
l per period
Three possible values for the elasticity of substitution are illustrated in these
figures. In (a), capital and labor are perfect substitutes. In this case, the RTS will
not change as the capital–labor ratio changes.
36
Fixed Proportions
• Fixed proportions production function (σ= 0):

q = min (αk,βl) α, β> 0
– Capital and labor must always be used in a fixed ratio

• The firm will always operate along a ray where k/l is constant
– Because k/l is constant, σ= 0
37
9.4 (b)
Values for σ
(b) σ = 0
k per period
q3/α q3
q2
q1
q3/β l per period
In the fixed–proportions case, no substitution is possible. The capital–labor ratio is

fixed at β/α.
38
Cobb-Douglas Production Function
• Cobb-Douglas production function (σ= 1):
q = f(k,l) = Akαlβ A,α,β> 0
• This production function can exhibit any returns to

scale
f(tk,tl) = A(tk) α(tl) β= At α+ β k αl β= t α+ β f(k,l)
– if α+β= 1 constant returns to scale

– if α+β> 1 increasing returns to scale
– if α+β< 1 decreasing returns to scale
39
Cobb-Douglas Production Function
• The Cobb-Douglas production function is linear in

logarithms:
ln q = ln A + α ln k + β ln l
– α is the elasticity of output with respect to k

– β is the elasticity of output with respect to l
– Query. Why are α,β elasticities?
40
9.4 (c)
Values for σ
σ = 1 (limited, but constant substitutability)
k per period
q=3
q=2
q=1
l per period
Query. Why can isoquant NOT be increasing?
41
CES Production Function
• CES production function (σ= 1/(1-ρ)):
q = f(k,l) = [αkρ+ (1-α)lρ] γ/ρ ρ≤1, ρ≠0, γ> 0
– γ> 1 increasing returns to scale

– γ< 1 decreasing returns to scale
– For this production function, σ= 1/(1-ρ)

• ρ= 1 linear production function
• ρ= -∞ fixed proportions production function
• ρ= 0 Cobb-Douglas production function (show!)
42
Technical Progress
• Methods of production change over time
– Following the development of superior production

techniques
• The same level of output can be produced with fewer inputs
• The isoquant shifts towards origin
43
9.5
Technical Progress
k per period
k2
k1 q0
q’0
l1 l2 l per period
Technical progress shifts the q0 isoquant towards the origin. The new q0 isoquant,
q’0, shows that a given level of output can now be produced with less input. For
example, with k1 units of capital it now only takes l1 units of labor to produce q0,
whereas before the technical advance it took l2 units of labor.
44
Measuring Technical Progress
• Production function: q = A(t)f(k,l)
– Where A(t) represents all influences that go into

determining q other than k and l
– Changes in A over time represent technical progress
• A is shown as a function of time (t)

• dA/dt > 0
• This is just one form of technical progress
45

320 312 Ch9a RW

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

320 312 Ch9a RW

Uploaded by

Copyright:

Available Formats

Producti on

• Production and marginal/average productivity

- In more general settings:

Query. Identify important properties of a production function.

• Marginal product (MP)

– additional output from 1 more unit of an input

• Average product (AP)

– output per unit of input

• Marginal product (MP)

– additional output that can be produced

• Marginal physical product

• Diminishing marginal productivity

• Changes in the marginal productivity of labor

– Also depend on changes in other inputs such as capital

• Average product of labor

• APl also depends on the amount of capital

Query. Define the APk

• Suppose the production function for flyswatters can

• To construct MPl and APl, we may assume a value

• The marginal productivity function is

• This implies that q has a maximum value:

• Labor input beyond l = 40 reduces output

• When APl is at its maximum, APl and MPl are equal

• Query: Is this a general result or is it specific to this example?

– how increase in one input raises output

• Next: Can inputs be substituted for each other?

– graphically: isoquant maps

– Shows the rate at which labor can be substituted for

• RTS will be positive (or zero)

• Diminishing marginal productivity does not imply

• Diminishing RTS ☞ isoquants are convex

– analytically: d(RTS)/dl < 0

– For the production function q = f (k, l)

%(k / l ) d (k / l ) RTS d ln(k / l ) d ln(k / l )

• The value of σ will always be positive because k/l

In moving from point A to point B on the q = q0 isoquant, both the capital–labor

• σ can change along an isoquant

marginal product (why?)

• Case of interest: all inputs change proportionately

– Suppose that all inputs are doubled, would output

• As inputs are doubled...

– Greater division of labor and specialization – higher

Effect on Output Returns to Scale

– Query. Possible that neither of the above is satisfied?

– Constant returns to scale for some levels of input usage

– Increasing or decreasing returns for other levels

– The degree of returns to scale is generally defined within

– Are homogeneous of degree one in inputs

• The marginal productivity functions

– Are homogeneous of degree zero

• Marginal productivity of any input

• The MRTS between k and l

– Holds for any homothetic production function

•Because a constant returns-to-scale production function is homothetic, the RTS depends

• Fixed-proportion production function (σ = 0)

• Cobb-Douglas production function (σ = 1)

• CES production function (σ >= 0)

• Linear production function (σ = ∞):

– Constant returns to scale

– All isoquants are straight lines with slope -β/α

• Fixed proportions production function (σ= 0):

– Capital and labor must always be used in a fixed ratio

– Because k/l is constant, σ= 0