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THEORY OF PRODUCTION

THEORY OF PRODUCTION. MARGINAL PRODUCT. The production in the short-run. The production function = the relationship between the amount of input required and the amount of output that can be obtained.

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THEORY OF PRODUCTION

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  1. THEORY OF PRODUCTION MARGINAL PRODUCT

  2. The production in the short-run The production function = the relationship between the amount of input required and the amount of output that can be obtained. • Total product (total physical product) = the total amount of output produced, in physical units • Average product (AP) – total output divided by total units of input, means production per unit of input. • Marginal product –the extra product or output added by 1 extra unit of that input while other inputs are held constant.

  3. Relationships between total and marginal product • at first MP grows, which means, TP grows faster than the amount of input, • in the second phase, MP declines, but is positive – means, TP grows slowly than the amount of used input, • theoretically can turn up third situation – MP is negative, which means decline in TP.

  4. The law of diminishing returns: = the extra production obtained from increase in a variable input will eventually decline as more of the variable input is used together with the fixed inputs Total, Marginal and Average Product

  5. Equal-product curve (Isoquants) Characteristics: more distant curve from the zero corresponds to higher output, equal-product curve is downward-sloping, convex The slope: Marginal rate of technical substitution The equal-cost line (Isocost line) = all combination of labor and capital that are of equal total cost The equation: TC = wL + rK the slope of equal-cost line: Production in the long-run

  6. THE MINIMUM-COST INPUT CONDITION • combining the equal-product and equal-cost lines, we can easily determine the optimal, or cost-minimizing, position of the firm. = the marginal product per crown received from the (last) euro of expenditure must be the same for every productive factor.

  7. Long-run Production Function and Least Cost Condition

  8. Returns to scale = reflects the responsiveness of total product when all the inputs are increased proportionately Three important cases should be distinguished: • constant returns to scale – where a change in all inputs leads to an equally large increase in output, • decreasing returns to scale – when a balanced increase of all inputs leads to a less-than-proportional increase in total output, • increasing returns to scale – arises when an increase in all inputs leads to a more-than-proportional increase in the level of output.

  9. TECHNOLOGICAL CHANGE • occurs when new or improved engineering and technical knowledge allows more output to be produced from the same inputs, or when the same output can be produced with fewer inputs • depict by two different ways: • production function as a relationship between inputs available and output produced in economy, • productions function as a combination of different kinds of outputs.

  10. TASKS: Decide how many workers will be optimal to hire, as long as the wage rate on the perfectly competitive labor market is 210 units/per hour and unit of production is sold for 42 units, having known following dates about total product: 2. Také decision about the area of land hired. Price of 1t production is 35,- units, rent for hiring land is 1 400,- units and having known following returns from land: 3. The production of the same output is possible by means of following combination of labor and capital: 4. Which combination would choose the economist minimizing cost in case: • Capital is three times more expensive than labor, • Price of capital is 24 unit, price of labor is 19 unit.

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