Academic Year: 2012/2013 Instructors: Brenda Lynch and PJ HuntContact: email@example.com firstname.lastname@example.org
Production and Cost Production Function is the relationship between the maximum output attainable for a given quantity of variable inputs (such as capital and labour), for a given technology.
Average Product is total output divided bythe number of inputs (workers). Marginal Product: is the additional output generated from hiring 1 additional worker. Total Product: The total output produced by a firm in a given period of time.
The Stages of Production.Stage 1: Average product rising. Total Product is rising. Marginal product is beginning to turn.Stage 2: Average product declining, marginal product positive but is declining while total product reaches its peak.Stage 3: Marginal product is negative, average product is declining and total product is declining.
Stage 1 Stage 2 Stage 3 Ep > 1 Ep < 1 Ep < 0 Total Point of maximum Ep = 0 TP Output marginal returns Ep = 1 Q (Units) Increasing Returns Decreasing Returns Negative Returns X1 X2 X3 InputsAvg. Output,MarginalOutput,(units ofoutput perunit of input AP X1 X2 X3 Inputs MP
Production Elasticity. When MPL > APL, labour elasticity EL > 1 When MPL < APL, labour elasticity EL < 1
Law of diminishing marginal returns; As a firm uses more of a variable input, with a given quantity of fixed input, the marginal output of the variable input eventually diminishes. Technical and Economic Efficiency. All points on a production function are said to be technically efficient. However economic efficiency occurs only at one point, at the output level where MR = MC.
Do the following functions exhibit increasing,decreasing or constant returns to scale? Q = 3L + 2K This function exhibits constant returns to scale. For example if L = 2 and K = 2, Q = 10. If L = 4 and K = 4 then Q = 20. Hence when input is doubled output is doubled.
Q = (2L + 2K) ½ (to the power of a half) The function exhibits decreasing returns to scale. For example when L = 2 and K = 2 then Q = 2.8. If L= 4 and K = 4 then Q = 4. Hence when inputs are doubled output is less than double.
Q = (3LK)² This function exhibits increasing returns to scale. For example if L = 2 and K = 2 then Q = 144. If L= 4 and K = 4 then Q = 2,304. When inputs are doubled output will more than double.