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Microeconomics SEMII
Microeconomics SEMII
SEM II
Anuradha Saikia
Production Function
Transforming resources—such as labor, power, raw materials, and the services
provided by facilities and machines—into finished products.
Q = f (K,L)
Minimise Costs
Maximize output
Anuradha Saikia
Short Run VS Long Run
Anuradha Saikia
Production Function With Single Input
Anuradha Saikia
TP : total output produced with the available input(s).
AP: average amount of output per unit of labor.(also called average physical
product of labour).
MP: the rate at which total output changes as the firm changes its quantity of
labor.
MPL =
Anuradha Saikia
Stage 1: When TP is increasing
RELATONSHIP between MP and AP?
AP increases
MP is greater than AP (MP>AP)
MP is negative
AP is falling
Anuradha Saikia
Standard of living in the United States,
Europe, and Japan
The level of output per employed person
in the United States in 2009 was higher
than in other industrial countries.
Anuradha Saikia
Production with two variable Inputs
(K,L)
ISOQUANT : Curve showing
all possible combinations of
inputs that yield the same
output
Anuradha Saikia
Marginal rate of technical substitution
(MRTS)
MRTS: Amount by which the quantity of one input
can be reduced when one extra unit of another
input is used, so that output remains constant.
Similarly, the decrease in output resulting from the reduction in capital is the
loss of output per unit reduction in capital.
∆Q = MPK (∆K)
Anuradha Saikia
What is the MRTS of capital
for labour at point B?
Anuradha Saikia
Let’s Think !
Consider the production function whose equation is given by the formula
Q=
What is the equation of the isoquant corresponding to Q = 20?
A firm’s production function requires that it use at least 1 unit of labor and 1 unit of capital,
i.e., L ≥ 1 and K ≥ 1. Initially, the production function is
Q= , with MPK = ) and MPL =0.5( ). Over time, the
production function changes to Q= , with MPK = ) and MPL =
Anuradha Saikia
Can an isoquant be upward sloping ?
Anuradha Saikia
Q1. CALCULATE TP,AP and MP
AP = Q/L
MP =
change in Q/Change in
L
Anuradha Saikia
Labour TP APL MPL
0 0 0 - For 3rd labour units
1 19 19 19
MPL = TP(4th labour units)-TP (at 3rd
2 72 36 53 labour units/(4-3)
3 153 51 81 103 = 256 – x
x =153
4 256 64 103
TP = 153
5 375 75 119 AP = 153/3 = 51
6 504 84 129 MP = 153-72/1 = 81
7 637 91 133
8 768 96 129
9 891 99 133
Anuradha1 Saikia
10 1000 100 131
11 1089 99 89
12 1152 96 63
13 1147 88.2 -5
14 1140 81.4 -7
15 1125 75 -15
Suppose the production function is given by the
following equation (where a and b are positive
constants):
Q = aL + bK.
What is the marginal rate of technical substitution
of labor for capital (MRTSL,K) at any point along an
isoquant?
Anuradha Saikia
How Isoquant Properties Aid in Decision-
Making for Managers
Optimising Resource Use: If there is a shortage of labour supply, businesses
can increase their capital to maintain the production level or vice-versa.
Production Planning: Managers can choose the most practical and cost-
effective combination of inputs for each output level.
Anuradha Saikia
Properties of Isoquant
Convex shape: Increase in the other input, the additional output obtained
from the extra unit of the increased input gradually decreases.
Anuradha Saikia
L Q (TP) AP MP
0 0 0 -
1 5 5 5
2 16 8 11
3 27 9 11
4 32 8 5
5 25 5 -7
6 0 0 -
Anuradha Saikia
Suppose the production function for automobiles is Q = LK, where Q is the
quantity of automobiles produced per year, L is the quantity of labor
(man-hours), and K is the quantity of capital (machine-hours).
Anuradha Saikia
TYPES OF PRODUCTION FUNCTION
LINEAR : The MRTS of one input for another may
be constant. For example, a manufacturing
process may require energy in the form of
natural gas or fuel oil, and a given amount of
natural gas can always be substituted for each
liter of fuel oil.(PERFECT SUBSTITUTES).
Q = aL + Bk (constant slope)
Elasticity of substitution : infinity
Anuradha Saikia
LEONTIFF : Inputs must be
combined in fixed proportions
is called a fixed-proportions
production function, and the
inputs in a fixed-proportions
production function are called
perfect complements.
Q = min(2H,O)
Elasticity of substitution : 0
Anuradha Saikia
COBB DOUGLAS : Intermediate
between a linear production
function and a fixed-proportions
production function.
With the Cobb–Douglas
production function, capital and
labor can be substituted for
each other. Unlike a fixed-
proportions production
function, capital and labor can
be used in variable proportions.
Unlike a linear production
function, though, the rate at
which labor can be substituted
for capital is not constant as
you move along an isoquant.
Q= ALαKβ
U.S. and European companies to exploit information
technology (IT) to raise productivity. Specifically, they
estimated production functions of the general form:
Q = A Lά Kβ ITγ
Anuradha Saikia
RETURNS TO SCALE
Percentage increase in output when a firm increases all of
its input quantities by a given percentage amount:
Anuradha Saikia
Increasing returns to scale : a proportionate increase in all input quantities
results in a greater than proportionate increase in output.
Anuradha Saikia