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The Organization of Production

The Organization of Production. Inputs Labor, Capital, Land Fixed Inputs Variable Inputs Short Run At least one input is fixed Long Run All inputs are variable. Production Function With Two Inputs. Q = f(L, K). Production Function With Two Inputs. Discrete Production Surface.

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The Organization of Production

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  1. The Organization of Production • Inputs • Labor, Capital, Land • Fixed Inputs • Variable Inputs • Short Run • At least one input is fixed • Long Run • All inputs are variable

  2. Production FunctionWith Two Inputs Q = f(L, K)

  3. Production FunctionWith Two Inputs Discrete Production Surface

  4. Production FunctionWith Two Inputs Continuous Production Surface

  5. TPL MPL = TP L APL = MPLAPL EL = Production FunctionWith One Variable Input Total Product TP = Q = f(L) Marginal Product Average Product Production orOutput Elasticity

  6. Production FunctionWith One Variable Input Total, Marginal, and Average Product of Labor, and Output Elasticity

  7. Production FunctionWith One Variable Input

  8. TCL Optimal Use of theVariable Input Marginal RevenueProduct of Labor MRPL = (MPL)(MR) Marginal ResourceCost of Labor MRCL = MRPL = MRCL Optimal Use of Labor

  9. Optimal Use of theVariable Input Use of Labor is Optimal When L = 3.50

  10. Optimal Use of theVariable Input

  11. Production With TwoVariable Inputs Isoquants show combinations of two inputs that can produce the same level of output. Firms will only use combinations of two inputs that are in the economic region of production, which is defined by the portion of each isoquant that is negatively sloped.

  12. Production With TwoVariable Inputs Economic Region of Production

  13. Production With TwoVariable Inputs Marginal Rate of Technical Substitution MRTS = -K/L = MPL/MPK

  14. Production With TwoVariable Inputs MRTS = -(-2.5/1) = 2.5

  15. Optimal Combination of Inputs Isocost lines represent all combinations of two inputs that a firm can purchase with the same total cost.

  16. Optimal Combination of Inputs Isocost Lines AB C = $100, w = r = $10 A’B’ C = $140, w = r = $10 A’’B’’ C = $80, w = r = $10 AB* C = $100, w = $5, r = $10

  17. Optimal Combination of Inputs MRTS = w/r

  18. Optimal Combination of Inputs Effect of a Change in Input Prices

  19. Returns to Scale Production Function Q = f(L, K) Q = f(hL, hK) If  = h, then f has constant returns to scale. If  > h, then f has increasing returns to scale. If  < h, the f has decreasing returns to scale.

  20. Returns to Scale Constant Returns to Scale Increasing Returns to Scale Decreasing Returns to Scale

  21. Empirical Production Functions Cobb-Douglas Production Function Q = AKaLb Estimated using Natural Logarithms ln Q = ln A + a ln K + b ln L

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