A firm or an organization is an economic unit that converts inputs (labor, materials, and capital) into outputs (goods and services) by employing various factors of production.It carries out the following functions:1. Employment of FOP2. Production of goods and services3. Profit maximisation
Also called as Inputs, refers to the resources consisting of land, labour, capital, technology, information, organization etc… which are collectively employed in the process of manufacturing a specific product or delivering a defined service.
Products Services1. Tangible 1. Intangible2. Durable 2. Non durable3. Homogeneous 3. Heterogeneous4. Consumption can be 4. Simultaneous postponed production & consumption
Once the product decision is taken, producer has to look at main major areas pertaining to production. They are:1. Quantity of output2. Optimal combination of inputs for a specified level of output. In order to do the above mentioned, a producer has to define the production function & optimal input employment rate.
production process: transform inputs or factors of production into outputs common types of inputs: •capital (K): buildings and equipment •labor services (L) •materials (M): raw goods •Orgnisiation: organising various fop in one place for the purpose of producing products .
It explains the functional relationship between quantities of inputs used and maximum quantity of output that can be produced, given current knowledge about technology and organization.Note:We assume in our discussion that the producer employs only two factors of production, usually labor or capital.
In simple words, firm’s production function for a particular good (q) shows the maximum amount of the good that can be produced using alternative combinations of capital (k) and labor (l)
a production function that uses only labor and capital: q = f (L, K, A, M, T…) to produce the maximum amount of output given efficient production.Here, q is quantity of output f denotes the functional relationship L denotes unit of Labor K denotes unit of capital A denotes unit of land M denotes management or organising T denotes Technology
Shows max level of output that can be produced by employing one and all input combinations. It defines max level of output for all or any combination of inputs. It does not tell about the least cost combination. It does not trace out the profit max output levels.
one of the most widely estimated production functions is the Cobb- Douglas: q = ALα Kβ A, α, β are positive constants Q is the quantity of output K & L are units of Capital & LaborEg: Q = 100Lα Kβ
Cobb-Douglas production function helps in taking decision on method of prodn:1. Labor intensive2. Capital intensive Eg: from the table it is evident that 1L & 5C or 5L & 1C gives 500 units of output. The decision on the method depends on the cost of production. Least cost combination is the tool to take production decision.
Explains the relationship between the factors of production (land, labor, capital, entrepreneurs) and output of goods and services. Short run – change in one input & other units are kept constant due to less time Long run – change in more or all variables or inputs i:e land & capital
This is a short run production theory. Here, only one input is made variable and all other inputs are constant. This is so because, short run does not allow many factors to get altered.Assumptions:1. Short run2. Constant technology3. Homogeneous - marginal product
The Law is defined as proportion of one factor in a combination of factors is increased, marginal & average outputs will increase then after a point, first marginal and then average output will diminish”. It explains how total & marginal output is affected by change in one input keeping other inputs constant.
NO OF NO OF TOTAL AVERAGE MARGINALMACHINE WORKERS PRODUCTION PRODUCTION PRODUCTION 1 1 8 8 8 1 2 20 10 12 1 3 36 12 16 1 4 48 12 12 1 5 55 11 8 1 6 60 10 5 1 7 60 8.6 0 1 8 56 7 -4
NO OF TOTAL AVERAGE MARGINAL STAGES OFWORKERS PRODUCTION PRODUCTION PRODUCTION PRODUCTION 1 8 8 8 I stage 2 20 10 12 I 3 36 12 16 I 4 48 12 12 II stage 5 55 11 8 II 6 60 10 5 II 7 60 8.6 0 III stage 8 56 7 -4 III
Stage I – Increasing returns output rises at an increasingly faster rate (each new worker makes more than the previous worker did) Stage II – Diminishing returns output rises at a diminishing rate (each new worker increases output, but not as much as the previous worker did) Stage III – Negative returns output decreases as each new worker is added
no of aircraft taking part in bombing mission and destruction sought. no of guns allotted to neutralise a target and effect achieved. amount of time allocated to training and standards achieved. no of men allocated to a task and output. in short, in situations where one factor is increased, while others remain constant.
Measures the change in output for a proportionate change in both inputs. It deals with effect on output, when all inputs change simultaneously in same ratio - double, treble etc… Returns to scale can be:1. Increasing2. Constant3. Decreasing
explains how output changes if all inputs are increased by equal proportions how much does output change if a firm increases all its inputs proportionately? answer to this question helps a firm to determine its scale or size in LR
FACTORS OF PRODN EMP TOTAL MARGINAL STAGE OF PRODUCTS/ PRODUCT/ RETURN TO RETURNS RETURNS SCALE
FACTORS OF PRODN EMP TOTAL MARGINAL STAGE OF PRODUCTS/ PRODUCT/ RETURN TO RETURNS RETURNS SCALE1 WORKER+3 hrs
FACTORS OF PRODN EMP TOTAL MARGINAL STAGE OF PRODUCTS/ PRODUCT/ RETURN TO RETURNS RETURNS SCALE1 WORKER+3 hrs2 WORKERS + 6 hrs
OPTIMAL POINT IN EMPLOYMENT OF FACTORS 6 STAGE 2marginal STAGE 5 STAGE 3 1output 4 MARGINA 3 L PRODUCT 2 CURVE 1 1 2 3 4 5 6 7 8 9 0 no of composite units of factors of production 10 11
curve that shows efficient combinations of labor and capital that can produce a single or equal (iso) level of output (quantity).Iso cost on the other hand, describes the various combinations of capital and labor inputs that can be employed at a given cost limit.It can be expressed as:C= RK + WL, where C is the cost, R is the rate of interest, K is the capital, W is wage rate, L is the labor unit.
DIFFERENT ISOQUANT FOR 4 DIFFERENT OUTPUTS 3CAP 2IT 1AL 0 1 2 3 4 5 6 LABOR
100 VARIOUS COMBINATIONS OF80 INPUTS AT A GIVEN BUDGET60 X40200 0 20 40 Y 60 80 100 Y 1
1. Further an isoquant is from the origin, the greater is the level of output2. Isoquants do not cross3. Isoquants slope down4. Convex in nature5. Never intersect each other.
We can find a producer at his equilibrium at the point of intersection between isoquant curve and the isocost line. Expansion path is the set of combinations of inputs that meet the equilibrium condition.
1008060 A4020 E1 E0 0 20 40 D60 80 100 B
K An Expansion PathTC2/rTC1/r Expansion path, normal inputsTC0/r • • Isoquant Q = Q0 • L TC0/w TC1/w TC2/w 39