Support for Production Function

Chapter 6Production

Chapter 6

Chapter 6Slide *The Technology of ProductionThe Production ProcessCombining inputs or factors of production to achieve an outputCategories of Inputs (factors of production)LaborMaterialsCapital

Chapter 6

Chapter 6Slide *The Technology of ProductionProduction Function:Indicates the highest output that a firm can produce for every specified combination of inputs given the state of technology.Shows what is technically feasible when the firm operates efficiently.

Chapter 6

Chapter 6Slide *The Technology of ProductionThe production function for two inputs:Q = F(K,L) Q = Output, K = Capital, L = LaborFor a given technology

Chapter 6

Chapter 6Slide *Production Function for Food120405565752406075859035575901001054658510011011557590105115120Capital Input12345Labor Input

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Chapter 6Slide *IsoquantsIsoquantsCurves showing all possible combinations of inputs that yield the same output

Chapter 6

Chapter 6Slide *Production with Two Variable Inputs (L,K)Labor per year1234123455Q1 = 55The isoquants are derivedfrom the productionfunction for output ofof 55, 75, and 90.ADBQ2 = 75Q3 = 90CECapitalper yearThe Isoquant Map

Chapter 6

Chapter 6Slide *IsoquantsShort-run:Period of time in which quantities of one or more production factors cannot be changed.These inputs are called fixed inputs.The Short Run versus the Long Run

Chapter 6

Chapter 6Slide *IsoquantsLong-runAmount of time needed to make all production inputs variable.The Short Run versus the Long Run

Chapter 6

Chapter 6Slide *AmountAmountTotalAverage Marginalof Labor (L)of Capital (K)Output (Q)ProductProductProduction withOne Variable Input (Labor)0100------110101010210301520310602030410802020510951915610108181371011216481011214091010812-4101010010-8

Chapter 6

Chapter 6Slide *Labor per MonthOutputper Month60112023456789101Production withOne Variable Input (Labor)

Chapter 6

Chapter 6Slide *Production withOne Variable Input (Labor)81020Outputper Month02345679101Labor per Month30

Chapter 6

Production withOne Variable Input (Labor)Laborper MonthOutputper Month60112023456789101ABCD81020E0234567910130Outputper MonthLaborper Month

Chapter 6

Chapter 6Slide *As the use of an input increases in equal increments, a point will be reached at which the resulting additions to output decreases (i.e. MP declines).Production withOne Variable Input (Labor)The Law of Diminishing Marginal Returns

Chapter 6

Chapter 6Slide *When the labor input is small, MP increases due to specialization.When the labor input is large, MP decreases due to inefficiencies.The Law of Diminishing Marginal ReturnsProduction withOne Variable Input (Labor)

Chapter 6

Chapter 6Slide *Can be used for long-run decisions to evaluate the trade-offs of different plant configurationsAssumes the quality of the variable input is constantThe Law of Diminishing Marginal ReturnsProduction withOne Variable Input (Labor)

Chapter 6

Chapter 6Slide *Explains a declining MP, not necessarily a negative oneAssumes a constant technologyThe Law of Diminishing Marginal ReturnsProduction withOne Variable Input (Labor)

Chapter 6

Chapter 6Slide *The Effect ofTechnological ImprovementLabor pertime periodOutputper timeperiod50100023456789101

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Chapter 6Slide *Production withTwo Variable Inputs

Long-run production K& L are variable.Isoquants analyze and compare the different combinations of K & L and output

Chapter 6

Chapter 6Slide *The Shape of IsoquantsLabor per year1234123455In the long run both labor and capital arevariable and bothexperience diminishingreturns.Capitalper year

Chapter 6

Chapter 6Slide *Substituting Among InputsThe slope of each isoquant gives the trade-off between two inputs while keeping output constant.Production withTwo Variable Inputs

Chapter 6

Chapter 6Slide *Substituting Among InputsThe marginal rate of technical substitution equals:Production withTwo Variable Inputs

Chapter 6

Chapter 6Slide *Marginal Rate ofTechnical SubstitutionLabor per month1234123455Capital per yearIsoquants are downwardsloping and convexlike indifferencecurves.

Chapter 6

Chapter 6Slide *

The change in output from a change in labor equals:Production withTwo Variable Inputs

Chapter 6

Chapter 6Slide *

The change in output from a change in capital equals:Production withTwo Variable Inputs

Chapter 6

Chapter 6Slide *

If output is constant and labor is increased, then:Production withTwo Variable Inputs

Chapter 6

Chapter 6Slide *Isoquants When Inputs are Perfectly SubstitutableLaborper monthCapitalper month

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Chapter 6Slide *Fixed-ProportionsProduction FunctionLabor per monthCapitalpermonth

Chapter 6

Chapter 6Slide *A Production Function for WheatFarmers must choose between a capital intensive or labor intensive technique of production.

Chapter 6

Chapter 6Slide *Isoquant Describing theProduction of WheatLabor(hours per year)Capital(machinehour peryear)25050076010004080120

Chapter 6

Chapter 6Slide *Returns to ScaleMeasuring the relationship between the scale (size) of a firm and output1)Increasing returns to scale: output more than doubles when all inputs are doubledLarger output associated with lower cost (autos)One firm is more efficient than many (utilities)The isoquants get closer together

Chapter 6

Chapter 6Slide *Returns to ScaleLabor (hours)Capital(machinehours)

Chapter 6

Chapter 6Slide *Returns to ScaleMeasuring the relationship between the scale (size) of a firm and output2)Constant returns to scale: output doubles when all inputs are doubledSize does not affect productivityMay have a large number of producersIsoquants are equidistant apart

Chapter 6

Chapter 6Slide *Returns to ScaleLabor (hours)Capital(machinehours)Constant Returns:Isoquants are equally spaced

Chapter 6

Chapter 6Slide *Returns to ScaleMeasuring the relationship between the scale (size) of a firm and output3)Decreasing returns to scale: output less than doubles when all inputs are doubledDecreasing efficiency with large sizeReduction of entrepreneurial abilitiesIsoquants become farther apart

Chapter 6

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