Professional Documents
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CH 05
CH 05
Production
2
Production Functions
q f ( K , L, M )
3
Two-Input Production Function
q f ( K , L)
4
Application 5.1: Everyone is a Firm
5
Application 5.1: Everyone is a Firm
6
Marginal Product
Marginal physical productivity, or more
simply, the marginal product of an input is the
additional output that can be produced by
adding one more unit of a particular input while
holding all other inputs constant.
The marginal product of labor (MPL) is the
extra output obtained by employing one more
unit of labor while holding the level of capital
equipment constant.
7
Marginal Product
8
Diminishing Marginal Product
9
FIGURE 5.1: Relationship between Output and
Labor Input Holding Other Inputs Constant
Output Total
per week Output
L* Labor input
10 (b) Marginal product per week
Diminishing Marginal Product
11
Marginal Product Curve
12
Average Product
13
Appraising the Marginal Product
Concept
14
APPLICATION 5.2: Why Do the Japanese
Have a Cost Advantage in Making Cars?
15
APPLICATION 5.2: Why Do the Japanese
Have a Cost Advantage in Making Cars?
16
APPLICATION 5.2: Why Do the Japanese
Have a Cost Advantage in Making Cars?
17
Isoquant Maps
18
Isoquant Map
19
FIGURE 5.2: Isoquant Map
Capital
per week
KA
A
KB
B q = 10
0 LA LB Labor
per week
20
Isoquant Map
21
FIGURE 5.2: Isoquant Map
Capital
per week
KA
A
q = 30
q = 20
KB
B q = 10
0 LA LB Labor
per week
22
Isoquant Map
23
Rate of Technical Substitution
25
Rate of Technical Substitution
26
The RTS and Marginal Products
27
Diminishing RTS
28
APPLICATION 5.3: Engineering and
Economics
29
FIGURE 1: Construction of an Isoquant
from Engineering Data
K per
period A
B
a
C
b c
q0
L per period
30
APPLICATION 5.3: Engineering and
Economics
31
APPLICATION 5.3: Engineering and
Economics
32
Returns to Scale
33
Returns to Scale
35
FIGURE 5.3: Isoquant Maps showing Constant,
Decreasing, and Increasing Returns to Scale
Capital A
per week
4
q = 40
3
q = 30
2
q = 20
1
q = 10
0 1 2 3 4 Labor
per week
(a) Constant Returns to Scale
36
Decreasing Returns to Scale
37
FIGURE 5.3: Isoquant Maps showing Constant,
Decreasing, and Increasing Returns to Scale
A Capital A
Capital
per week per week
4 4
q = 40
3 3 q = 30
q = 30
2 2
q = 20 q = 20
1 1
q = 10 q = 10
0 1 2 3 4 Labor 0 1 2 3 4 Labor
per week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
38
Increasing Returns to Scale
39
FIGURE 5.3: Isoquant Maps showing Constant,
Decreasing, and Increasing Returns to Scale
A Capital A
Capital
per week per week
4 4
q = 40
3 3 q = 30
q = 30
2 2
q = 20 q = 20
1 1
q = 10 q = 10
0 1 2 3 4 Labor 0 1 2 3 4 Labor
per week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
Capital A
per week
4
3
q = 40
2 q = 30
q = 20
1
q = 10
0 1 2 3 4 Labor
40 per week
(c) Increasing Returns to Scale
APPLICATION 5.4: Returns to Scale in
Beer Brewing
41
APPLICATION 5.4: Returns to Scale in
Beer Brewing
42
APPLICATION 5.4: Returns to Scale in
Beer Brewing
43
APPLICATION 5.4: Returns to Scale in
Beer Brewing
44
Input Substitution
45
Fixed-Proportions Production
Function
46
Fixed-Proportions Production
Function
47
FIGURE 5.4: Isoquant Map with Fixed
Proportions
Capital A
per week
K2 q2
K1 q1
K0 q0
0 L0 L1 L2 Labor
per week
48
Fixed-proportions Production
Function
49
The Relevance of Input
Substitutability
50
Changes in Technology
51
Changes in Technology
K1
K0
A
q0
q’0
0 L1 L0 Labor
53 per week
54
Technical Progress versus Input
Substitution
55
Technical Progress versus Input
Substitution
56
APPLICATION 5.5: Multifactor
Productivity
57
APPLICATION 5.5: Multifactor
Productivity
58
APPLICATION 5.5: Multifactor
Productivity
59
TABLE 1: Annual Average Change in Output
per Hour in Manufacturing
60
TABLE 2: Annual Average Change in
Multifactor Productivity Manufacturing
61
A Numerical Example
62
A Numerical Example
63
TABLE 5.1: Hamburger Production Exhibits
Constant Returns to Scale
64
Average and Marginal
Productivities
65
TABLE 5.2: Total Output, Average Productivity,
and Marginal Productivity with Four Grills
Grills (K) Workers (L) Hamburgers per Hour (q) q/L MPL
4 1 20.0 20.0 -
4 2 28.3 14.1 8.3
4 3 34.6 11.5 6.3
4 4 40.0 10.0 5.4
4 5 44.7 8.9 4.7
4 6 49.0 8.2 4.3
4 7 52.9 7.6 3.9
4 8 56.6 7.1 3.7
4 9 60.0 6.7 3.4
4 10 63.2 6.3 3.2
66
Average and Marginal
Productivities
67
The Isoquant Map
69
TABLE 5.3: Construction of the q = 40
Isoquant
Grills
(K)
10
q = 40
1 4 10 Workers
(L)
71
Technical Progress
73
FIGURE 5.6: Technical Progress in
Hamburger Production
Grills
(K)
10
q = 40 after invention
q = 40
1 4 10 Workers
(L)
74