Describe the effect of production on economics

1. Production
Presentation on
IBA-
JU

2. Defining Production

3. *Alfred Marshall:
Marshall, a prominent economist from the late 19th and early 20th centuries,
defined production as -
“The process by which existing natural resources are so combined as to
result in the creation of utilities.”
*Paul Samuelson:
Samuelson, a Nobel laureate in Economics, defined production as –
“The transformation of factors into goods.”
*In Economics' production component looks at how inputs are changed
into outputs to meet the needs and desires of people.

4. Understanding production is crucial because it directly impacts factors like:
Costs: The cost of production determines how competitive a firm can be in the market.
Pricing Decisions: Firms consider production costs when setting prices for their outputs.
Efficiency: Efficient production allows firms to minimize costs and maximize profits.

5. Factors of Production
• Natural Resources used
in Production
Land • Human Effort applied
in Production
Labor • Wealth in the formof
Money or Assets
Capital

6. The Production Function
General Form of the Production
Function
*Q = f (L, C)
The Cobb-Douglas Production
Function
Q = A * L^α * K^β

7. *Cost Minimization
Cost minimization in production is a fundamental strategy for
firms in microeconomics. It involves identifying the most efficient
combination of inputs (resources) that allows them to produce a
desired level of output at the minimum possible cost.

8. *

9. *
Average product
*The overall output produced per unit
of input is referred to as the average
product
*Average product of labor (AP)
= Output/ Labor input
= Q/L
Marginal product
*Marginal product referred to as the
additional output produced as an
input is increased by one unit
*Marginal product of labor (MP)
= Change in output/change in labor
input
= ∆ Q/ ∆ L

10. Capital
(K)
Labor
(L)
Total
Output
(Q)
Average
Product (AP)
[Q/L]
Marginal
Product
(MP) [∆ Q/ ∆
L]
12 1 20 20 20
12 2 50 25 30
12 3 75 25 25
12 4 95 24 20
12 5 105 21 10
12 6 117 20 12
12 7 117 17 0
12 8 105 13 -12
12 9 90 10 -15
12 10 70 7 -20
*The Slopes of the Product Curve
•Table-: Production with One
Variable Input (Labor)

11. *Three Stages of Production
Stage -1
• From origin to the point where AP of labor is highest
• Range: This stage covers the initial units of labor (from Labor unit 1 to 2 )
Stage -2
• From Highest point of AP of labor to the point where MP of labor is Zero
• Range: This is the middle stage, encompassing labor units from 3 to 7
Stage -3
• The point where MP of labor starts to be negative
• Range: This is the final stage, covering labor units from 8 to 10

12. *
 As long as MPL is increasing, APL is also increasing ,then MPL is above of APL.
This is happening in stage 1.
 When the MP curve intersects the AP curve, the AP reaches its maximum level.
Where APL = MPL; APL is optimum. This is happening at point B in the graph.
This is happening in stages 2.
 When MPL is decreasing, APL also starts decreasing, then APL is above of MPL.
This is happening in stages 2 and 3.

13. IsoquantCurve
Isoquant Curve
represents all those
combinations of two
inputs which are
capable of producing
the same level of output.

14. Isoquant map
An Iso-product map
shows a set of iso-
product curves. They
are just like contour
lines which show the
different levels of
output.

15. 1.Isoquant is downward sloping.
2.Isoquant is convex to the origin.
3.Two Isoquants can not intereect.
4.Higher Isoquant is better than lower Isoquant.
*Characteristics of
Isoquant

16. 1. Iso-quant is downward sloping 2. Two Isoquants can not intersect
Two curves which represent two
levels of output cannot intersect
each other
They slope downward because MTRS
of labour for capital diminishes. When
we increase labour, we have to
decrease capital to produce a given
level of output.

17. 3. Isoquant is convex to the origin
 The marginal rate of technical
substitution between L and K is defined
as the quantity of K which can be given
up in exchange for an additional unit of
L. It can also be defined as the slope of
an isoquant.
4. Higher Isoquant is better than lower Isoquant.
The higher Isoquant which is produce
200 units it's better than 100 unit of
production.

18. Diminishing Marginal Returns
This theory says if we hold an
input fixed (Capital) and
increase a variable input
(Labor), then the output will
eventually decrease.

19. Marginal Rate of Technical Substitution (MRTS)
MRTS implies the rate at which one input should be decreased so that the
productivity level remains the same when another input increases.
MRTS =
− 𝐂𝐡𝐚𝐧𝐠𝐞𝐬 𝐢𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐈𝐧𝐩𝐮𝐭
𝐂𝐡𝐚𝐧𝐠𝐞𝐬 𝐢𝐧 𝐥𝐚𝐛𝐨𝐫 𝐈𝐧𝐩𝐮𝐭
MRTS =
−∆𝐊
∆𝐋

20. Here when labor increased from 1 to
2, to maintain the output 75 we have
to decrease capital from 5 to 2.
Thus, MRTS will be -2.
−∆𝐊
∆𝐋
=
−𝟐
𝟏
= − 𝟐

21. Production Functions - Two Special Cases
1. MRTS will be equal at each
point of the iso-quant if inputs
are perfect substitutes.
2. The factors of production will be used in
fixed (technologically pre-determined)
proportions, as there is no substitutability
between factors. It is called the Leontief
Production Function.

22. Three Important Relationships
1. Substitutability between Factors: To produce same output variables can be
replaced with one another. Example,
+ =
+ =

23. Three Important Relationships
2. Return to Scale: If input rates are doubled, the output rate also doubles.
Example,
+ =
+ =

24. Three Important Relationships
3. Return to Factor: The changes in output rate due to one input changes while
the other remains fixed is called return to factor. Example,
+ =
+ =
Here, Changes in Labor is 1
and changes in output is 2.
MPL =
𝐂𝐡𝐚𝐧𝐠𝐞𝐬 𝐢𝐧 𝐨𝐮𝐭𝐩𝐮
𝐂𝐡𝐚𝐧𝐠𝐞𝐬 𝐢𝐧 𝐥𝐚𝐛𝐨𝐫
=
𝟐
𝟏
= 2

25. Return to Scale
Returns to scale is the rate at which output increases as inputs
are increased proportionately
There are 3 types of Returns to Scale:
1. Increasing Returns to Scale
2. Constant Returns to Scale
3. Decreasing Returns to Scale

26. 3 types of Returns to Scale
1. Increasing Returns to Scale (IRS):
If output more than doubles when inputs are doubled.
2. Constant Returns to Scale (CRS):
If output doubles when inputs are doubled.
3. Decreasing Returns to Scale (DRS):
If output less than doubles when inputs are doubled.

27. Returns to Scale
Input Increases = Output Increases Returns to Scale
1% [K,L] = 1% Constant Returns to Scale
1% [K,L] > 1% Increasing Returns to Scale
1% [K,L] < 1% Decreasing Returns to Scale

28. Mathematical
Exercises

29.  Q = 18L2 – 0.6L3
For a manufacturing company we find at what labor average product is highest.
APL= Q/L =18L-0.6L2
MPL= dQ/dL = 36L-1.8L2
Now, APL = MPL
 18L-0.6L2 = 36L-1.8L2
 1.2L2 = 18L
 1.2L2 - 18L = 0
 L(1.2L-18) = 0 [L=0, 1.2L-18=0, L=15]
 L= 0 ; 15
L* = 15
At L=15,
 MPL= 36L-1.8L2 = (36x15)-(1.8x152) = 135
 APL= Q/L =18L-0.6L2 = (18x15)-(0.6x152) = 135
If we add one more labor say 16, APL and MPL both start decreasing.
Say if we use 16 labor, MPL and APL both would decrease.
* APL & MPL math example:

30. MPL =
MPK =
Using Cobb-Douglas:
Q K L LNQ LNK LNL
Q = AKαLβ (A = Technology Parameter)
LnQ = LnA + αLnk + βLnL
= 2.8 + 0.23LnK + 0.85LnL
= 16.45 K0.23 L0.85
Put a value of L=22 and K=7; we get,
MPL = Marginal product of labor = dQ/dL = 16.45 x 0.85 x K0.23 L0.85-1
= 16.45 x 0.85 x 70.23 220.85-1
= 13.76
MPK = Marginal product of capital = dQ/dk = 16.45 x 0.23 x K0.23-1 L0.85
= 16.45 x 0.23 x 70.23 -1220.85
= 11.70
[α+β = 0.23+0.85 = 1.08; IRS(Increasing Returns to scale); if we increase capital and labor by
1%, output increases by more than 1% (1.08%)]
* MPL & MPK math example:

31. Q = 3L+4K
[Let, L=K=2] then Q = 14
[Let, L=K=4] then Q = 28
Inputs are double and output is also double, so its Constant returns to scale.
……………………………………………………..
Q = 3L+4K
MPL = dQ/dL = 3 [Capital is fixed]
MPK = dQ/dK = 4 [Labor is fixed]
Q = (3L+3K)1/2
[Let, L=K=2] then Q = 3.46
[Let, L=K=4] then Q = 4.90
Inputs are double but output is below the double, so its decreasing returns to
scale. ……………………………………………………..
Q = (3L+3K)1/2
MPL = dQ/dL = 1/(3L+3K)3/4 (As labor is increased MPL is decreased)
MPK = dQ/dK = 1/(3L+3K)3/4 (As capital is increased MPK is decreased)
* Returns to Scale math example:

32. Q = 4LK2
[Let, L=K=2] then Q = 32
[Let, L=K=4] then Q = 256
Inputs are double but output is above the double, so its increasing
returns to scale. ……………………………………………………..
Q = 4LK2
MPL = dQ/dL = 4K2
MPK = dQ/dK = 8LK
* Continued…….

33. Manufacturer- 1 follow the production function Q1 = 10K0.5L0.5 (regular car) &
manufacturer –2 follow the production function Q2 = 10K0.7L0.3 (hybrid car); where Q
is the number of cars produced per day, K is hours of machine time, and L is hours of
labor input.
We assume the capital is limited to 10 machines hours but labor is unlimited to
supply. So now we can find out the manufacturing company which is the marginal
product of labor is greater.
With capital limited to 10 machine units, the production functions become,
 Q1 = 10K0.5L0.5 = 10x100.5L0.5 =31.62L0.5
 Q2 = 10K0.7L0.3 = 10x100.7L0.3 = 50.12L0.3
Through the below table we find out the decision,
Q1 = 31.62 x L0.5
Q2 = 50.12 x L0.3
* Returns to Scale math example:

34. For each unit of labor above Manufacturer- 1 the marginal productivity
of labor is greater for the first Manufacturer. So the production
function of manufacturer- 1 is more effective.
* Continued…….
L Q1
Manufacturer- 1
MPL
Manufacturer- 1
Q2
Manufacturer- 2
MPL
Manufacturer- 2
0 0.0 --- 0.0 ---
1 31.62 31.62 50.12 50.12
2 44.72 13.10 61.70 11.58
3 54.77 10.05 69.68 7.98

35. Any
Queries!

36. Group Members & ID
Utsash Kumar Sarker- 202202031
Kazi Muhammad Tanzimul Islam- 202301072
Mahfuzur Rahman Akash- 202302019
Mahia Musfique- 202303003
Abida Sultana- 202303026