Production 1

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Production 1

  1. 1. <ul><li>PRODUCTION CONCEPT </li></ul><ul><ul><li>PRODUCTION DIRECTLY OR INDIRECTLY SATISFIES THE NEEDS AND WANTS OF PEOPLE. </li></ul></ul><ul><ul><li>IT IS CONCERNED WITH THE SUPPLY SIDE OF THE MARKET. </li></ul></ul><ul><ul><li>IT IS THE TRANSFORMATION OF INPUTS INTO OUTPUT OF A COMMODITY OR SEVERAL COMMODITIES IN A SPECIFIC PERIOD OF TIME AT THE GIVEN STATE OF TECHNOLOGY. </li></ul></ul><ul><ul><li>IT IMPLIES CREATIONS OR ADDITION OF FORM, PLACE & TIME UTILITIES BY THE PRODUCTION AND STORAGE, DISTRIBUTION OF DIFFERENT USUABLE COMMODITIES AND SERVICES. </li></ul></ul>
  2. 2. <ul><li>FACTORS OF PRODUCTION : </li></ul><ul><li>(i) LAND </li></ul><ul><li>(ii) LABOUR </li></ul><ul><li>(iii) CAPITAL </li></ul><ul><li>(iv) ENTERPRENEURS </li></ul><ul><li>PRODUCTION FUNCTION </li></ul><ul><li>Q = f (K, L, l, O) </li></ul><ul><li>Q = OUTPUT, K = CAPITAL </li></ul><ul><li>L = LABOUR, l = LAND </li></ul><ul><li>O = ORGANISATION </li></ul>
  3. 3. <ul><li>PRODUCTION FUNCTION </li></ul><ul><ul><li>DIFFERENT COMBIMATIN OF INPUTS & OUTPUTS. </li></ul></ul><ul><ul><li>IT SHOWS FOR A GIVEN TECHNOLOGICAL KNOWLEDGE & MANAGERIAL ABILITY. </li></ul></ul><ul><ul><li>MAXIMUM AMOUNT OF GOODS THAT CAN BE OBTAINED FROM DIFFERENT CONDITION OF PRODUCTIVE FACTORS. </li></ul></ul><ul><ul><li>MINIMUM QUANTITIES OF VARIOUS INPUTS REQUIRED TO YIELD A GIVEN QUANTITY OF OUTPUT. </li></ul></ul>
  4. 4. <ul><li>THE CHOICE OF PARTICULAR PRODUCTION METHOD DEPENDS ON </li></ul><ul><li>* RATIONALITY </li></ul><ul><li>* TECHNICALLY COEFFICIENT. </li></ul><ul><li> Q = F (K,L) </li></ul><ul><li> OUTPUT </li></ul><ul><li> LABOUR & CAPITAL </li></ul><ul><li>PRODUCTION FUNCTION </li></ul>
  5. 5. <ul><li>TYPES OF PRODUCTION FUNCTION : </li></ul><ul><li>(I) FIXED PROPORTION & VARIABLE PROPORTION. </li></ul><ul><li>(II) LINEAR & NON LINEAR PRODUCTIN FUNCTION. </li></ul><ul><li>Q = αK + βL α = CONTRIBUTION OF CAPITAL </li></ul><ul><li> TO OUTPUT. </li></ul><ul><li> β = CONTRIBUTION OF LABOUR </li></ul><ul><li> TO OUTPUT. </li></ul><ul><li>LINEAR HOMOGENOUS PRODUCTION FUNCTION </li></ul><ul><li>Q = f (K, L) </li></ul><ul><li> nQ = f (nK, nL) </li></ul>
  6. 6. <ul><li>(III) COBB - DOUGLAS PRODUCTION FUNCTION. </li></ul><ul><li>Q = AL  K  (O < α) (β < 1) </li></ul><ul><li>Q = OUTPUT L >O, K >O </li></ul><ul><li>A = EFFICIENCY PARAMETER. </li></ul><ul><li>THE MORE EFFICIENT FIRM WILL HAVE A LARGER VALUE OF A. </li></ul><ul><li>α, β ARE PARTIAL ELASTICIES OF OUTPUT WITH RESPECT TO LABOUR AND CAPITAL. </li></ul>
  7. 7. <ul><ul><li>ISO QUANTS / ISO PRODUCT CURVE / EQUAL PRODUCT CURVE </li></ul></ul><ul><ul><li>IT REPRESENTS ALL POSSIBLE INPUT COMBINATION OF TWO FACTORS WHICH ARE CAPABLE OF PRODUCING SAME LEVEL OF OUTPUT. </li></ul></ul><ul><ul><li>PRODUCER WOULD BE INDIFFERENT BETWEEN SUCH COMBINATIONS, SO IT IS OFTEN REFERRED TO AS PRODUCER’S INDIFFERENCE CURVE OR PRODUCTION INDIFFERENCE CURVE. </li></ul></ul>
  8. 8. <ul><ul><li>AN ISO QUANTS REPRESENTS DIFFERENT TECHNIQUES OF PRODUCTION. </li></ul></ul><ul><ul><ul><li>CAPITAL INTENSIVE. </li></ul></ul></ul><ul><ul><ul><li>LABOUR INTENSIVE. </li></ul></ul></ul><ul><ul><li>EACH HIGHER ISO QUANTS REPRESENTS HIGHER LEVEL OF OUTPUT. </li></ul></ul><ul><li> </li></ul><ul><li>IQ IQ 1 IQ 1 </li></ul><ul><li>CAPITAL </li></ul><ul><li> 300 </li></ul><ul><li> 200 </li></ul><ul><li> 100 </li></ul><ul><li> LABOUR </li></ul>
  9. 9. <ul><ul><li>MARGINAL RATE OF TECHNICAL SUBSTITUTION (MRTS) </li></ul></ul><ul><ul><li>MRTS INDICATES THE RATE AT WHICH FACTORS CAN BE SUBSTITUTED AT THE MARGIN IN SUCH A MANNER THAT THE TOTAL OUTPUT REMAINS SAME. </li></ul></ul><ul><ul><li>MARGINAL RATE OF TECHNICAL SUBSTITUTION OF LABOUR FOR CAPITAL IS THE QUANTITY OF CAPITAL CAN BE GIVEN UP IN EXCHANGE FOR AN ADDITIONAL UNIT OF LABOUR. </li></ul></ul><ul><ul><li>MRTS = ΔK = SLOPE </li></ul></ul><ul><ul><li> ΔL </li></ul></ul>
  10. 10. <ul><li>TOTAL OUTPUT </li></ul><ul><ul><li>LOSS OF OUTPUT = GAIN IN OUTPUT. </li></ul></ul><ul><ul><li>i.e. REDUCTION IN K* = INCREMENT IN L* </li></ul></ul><ul><ul><li>MARGINAL PHYSICAL MARGINAL PHYSICAL </li></ul></ul><ul><ul><li>PRODUCT OF K PRODUCT OF L </li></ul></ul><ul><ul><li>ΔK X MPK = ΔL X MPL </li></ul></ul><ul><ul><li>ΔK = MPL </li></ul></ul><ul><ul><li>ΔL MPK </li></ul></ul><ul><ul><li> MPL </li></ul></ul><ul><ul><li>MRTS L,K = MPK </li></ul></ul><ul><ul><li>MRTS OF FACTOR L FOR FACTOR K IS THE RATIO OF MARGINAL PRODUCTIVES OF TWO FACTORS. </li></ul></ul>
  11. 11. <ul><li>SLOPE OF ISO QUANT </li></ul><ul><li>Q = f (K, L) = k. Q = OUTPUT </li></ul><ul><li>k = CONSTANT </li></ul><ul><li>SLOPE OF A CURVE = SLOPE OF TANGENT </li></ul><ul><li> AT ANY POINT AT THAT POINT </li></ul><ul><li>TAKING TOTAL DERIVATIVE. </li></ul><ul><li>  Q  Q </li></ul><ul><li>dQ =  K . dK +  L . dL </li></ul><ul><li> = MP K . dK + MP L . dL </li></ul><ul><li>SINCE THE TOTAL OUTPUT REMAINS THE SAME ALONG AN ISO QUANT </li></ul><ul><li>dQ = MP K . dK + MP L . Dl = O </li></ul>
  12. 12. <ul><li> dK MP L </li></ul><ul><li> dL MP K </li></ul><ul><li> MP L </li></ul><ul><li>MRTS L, K = MP K </li></ul><ul><li>SLOPE AND HENCE THE MRTS IS THE MEASURE OF THE RELATIVE MARGINAL PRODUCT OF THE FACTORS. </li></ul>
  13. 13. <ul><li>PROTERTIES OF ISO QUANTS </li></ul><ul><li>* ISO QUANTS SLOPE DOWNWARD FROM </li></ul><ul><li>LEFT TO RIGHT. –When quantity of one factor Increases, the quantity of other factor reduces, so that total product remains const. </li></ul><ul><li>* ISO QUANTS NEVER CUTS, TOUCH OR </li></ul><ul><li>INTERSECT EACH OTHER. </li></ul><ul><li>* ISO QUANTS ARE CONVEX TO THE ORIGIN-because of diminishing rate of technical substitution. </li></ul>

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