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“ In its broadest formulation this theory is a crucial element of the economic theory of social organization ,for it underlies every question of market organization and the role of governmental control over economic life” - George J.Stigler
A production function indicates the output Q that a firm produces for every specified combination of inputs. For simplicity, we will assume that there are two inputs, labor L and capital K. We can then write the production function as
A bakery takes inputs like flour, water, yeast, labor, and heat and makes loaves of bread.
An earth-moving company takes capital equipment, ranging from shovels to bulldozers, and labor and digs holes.
A computer manufacturer buys parts, generally “off-the-shelf” like disk-drives and memory, along with cases and keyboards and other parts that may be manufactured specially for the computer manufacturer, and uses labor to produce computers.
Starbucks takes coffee beans, water, some capital equipment, and labor and produces brewed coffee.
The short run refers to a period of time in which one or more factors of production cannot be changed. Factors that cannot be varied over this period are called fixed inputs.
A firm's capital, for example, usually requires time to change-a new factory must be planned and built, machinery and other equipment must be ordered and delivered, all of which can take a year or more.
As the use of an input increases (with other inputs fixed), a point will eventually be reached at which the resulting additions to output decrease. When the labor input is small (and capital is fixed), small increments in labor input add substantially to output as workers are allowed to develop specialized tasks. Eventually, however, the law of diminishing returns applies. When there are too many workers, some workers become ineffective, and the marginal product of labor falls.
If one factor of production is substituted for other factor of production ,the marginal product of one factor declines as the marginal product of other increases.
Condition: Isoquants must be convex at every point in order to satisfy the principle of diminishing rate of marginal product
ISOQUANT An Isoquant is a curve representing the various combinations of two inputs that produce the same amount of output. Q = f( L ,K) Example- diff combinations of L n k ,required to produce 45 units of goods X, join the points by a curve……