PRODUCTION

1. PRODUCTION

2. Production The transformation of resources into products. The process whereby inputs are turned into outputs. Economic efficiency of the production process is the issue under analysis. Economic efficiency calls for minimizing the cost of producing any output level during a period of time.

3. The Production Function For a profit maximizing firm, the revenues and the costs are the two important components. The costs will be related to the production of the good or service by using the different categories of inputs. The production function gives a mathematical representation of the relationship between 1. the output produced and, 2. the inputs used for production.

4. The Production Function Q = f (X1, X2, �, Xk) where Q = output X1, �, Xk = inputs used in the production process Q is a measure of output at a specific point in time. The production relationship holds for a given level of technology. Q is the maximum amount that can be produced with a given level of inputs.

5. The Production Function The production function defines the relationship between inputs and the maximum amount that can be produced within a given period of time and with a given level of technology. Traditionally, the production function is written for two categories of inputs, capital (K) and labor (L): Q = f (K, L)

6. The Production Function The exact mathematical specification of the production function depends upon the productivity of the inputs at various levels of employment. The productivity of the inputs depends on the state of the technology. State of the technology is the inherent ability of inputs to produce output, given the simultaneous efforts of all other inputs in the production process.

7. State of the Technology E.g. Labor can be more productive if it works with modern mechanical and computer-assisted equipment. E.g. Plant or equipment can be more productive if it is being operated by highly-skilled and well-trained workers.

8. Short-run versus Long-run A SR production function shows the maximum quantity of a good or service that can be produced by a set of inputs, assuming that the amount of at least one of the inputs used remains constant. A LR production function shows the maximum quantity of a good or service that can be produced by a set of inputs, assuming that the firm is free to vary the amount of all the inputs being used.

9. Short-run versus Long-run Long-run does not refer to a long period of time. The distinction has no direct connection with time at all. When changing the scale of production, the firm must operate under short-run conditions until its most-fixed input becomes variable.

10. Short-run versus Long-run E.g. Assembly of an automobile production. Fixed inputs: land and building, assembly lines, computerized plant and equipment. Variable inputs: worker-hours, component parts, energy.

11. Short-Run Analysis:Total, Average, and Marginal Product Terminology: Inputs: Factors, Factors of production, Resources Output: Quantity (Q), Total Product (TP), Product

12. Recall: Q = Total product = f (X, Y) Marginal product of X (MPX) = ?Q / ?X, holding Y constant Average product of X (MPX) = Q / X, holding Y constant Marginal product is the change in total product resulting from a unit change in a variable input. Average product is the total product per unit of input used. Short-Run Analysis:Total, Average, and Marginal Product