Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my- business-economics-and-financial.html The Theory of the Firm and the cost of production Production Function States the relationship between inputs and outputs or maximum output from various combinations of factors in puts. Inputs – the factors of production classified as: Input Land Labour Capital Description All natural resources of the earth. all physical and mental human effort involved in production buildings, machinery and equipment not used for its own sake but for the contribution it makes to production Price paid to acquire Rent Wages Interest Mathematical representation of the relationship: = (, , ) Q - Output K - Capital L - Land La - Labor
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Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html
The Theory of the Firm and the cost of production
Production Function
States the relationship between inputs and outputs or maximum output from various combinations of
factors in puts.
Inputs – the factors of production classified as:
Input Land Labour Capital
Description All natural resources of the earth.
all physical and mental human effort involved in production
buildings, machinery and equipment not used for its own sake but for the contribution it makes to production
Price paid to acquire Rent Wages Interest
Mathematical representation of the relationship:
𝑄 = 𝑓 (𝐾, 𝐿, 𝐿𝑎)
Q - Output K - Capital L - Land La - Labor
Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html
Analysis of Production Function (Short Run and Long run):
Short Run
In the short run at least one factor fixed in supply but all other factors capable of being changed
Reflects ways in which firms respond to changes in output (demand)
Can increase or decrease output using more or less of some factors but some likely to be easier
to change than others.
Long Run
The long run is defined as the period taken to vary all factors of production
By doing this, the firm is able to increase its total capacity – not just short-term capacity and
Associated with a change in the scale of production
The period varies according to the firm and the industry
In electricity supply, the time taken to build new capacity could be many years; for a market
stallholder, the ‘long run’ could be as little as a few weeks
Marginal Product
The marginal product of any input in the production process is the increase in output that arises from an