Prepared by export agriculture degree program students at Uva Wellasssa university from entrepreneurial agriculture specialization area.

1. PRODUCTION
ECONOMICS AND LABOR
ECONOMICS
Group No: 02

2. PRODUCTION
ECONOMICS

3. Production Economics
• Production economics is the application of the
principles of microeconomics in production.
• Production economics, thus provides a
framework for decision making at the level of a
firm for increasing efficiency and profits.

4. Agricultural Production Economics
• Agricultural Production Economics is a sub-
discipline within the broad subject of agricultural
economics
• It may be defined as an applied field of science
where in principles of economic choice are
applied to the use of resources of land, labor,
capital and management in the farming industry

5. Nature of Agricultural Production
Economics
• Agriculture is no more confined to production at
the farm level.
• The storage, processing and distribution of
agricultural products involve an array of
agribusiness industries.
• Both microeconomics and macroeconomics have
applications in agriculture.
• The production problems on individual farms are
important.
• But agriculture is not independent of other
sectors of the economy.

6. Production
• The process through which some goods and
services called inputs are transformed into other
goods called products or output.

7. Relationships
1. Input-Output Relationship
2. Input-Input Relationship
3. Output-Output Relationship

8. Input-Output Relationship
(factor-product relationship )
• use to determine the amount of variable input,
that will be used in combination with the fixed
inputs
• Use to take decisions on,
Ex: -How much fertilizer to apply per acre?
-How much irrigation water to use?
-How many hens in a hen house of a
given size?

9. Production Functions
• Letting q represent the output of a particular good
during a period, K represent capital use, L
represent labor input, and M represent raw
materials, the following equation represents a
production function.
),,( MLKfq 

12. MARGINAL PHYSICAL PRODUCTAND
AVERAGE PHYSICAL PRODUCT

15. ELASTICITY OF PRODUCTION

17. STAGE 1
• MPP > APP
• APP is increasing throughout stage I
• Variable input is transformed into product,
increases until APP reached its maximum
• Fixed inputs are under utilized
• All inputs are not used
• Out put is increasing in increasing rate

18. STAGE11
• APP>MPP>0
• MPP is decreasing
• TPP at its maximum
• Physical efficiency of variable input reaches a
peak
• The efficiency of fixed input is greatest at the
end of stage II
• Profit will be maximized

19. STAGE111
• MPP is negative
• TPP begins to decrease(excessive amounts
of variable input are combine with fixed input)
• Efficiency of variable inputs are declining

20. PROFIT MAXIMIZATION

22. INPUT-INPUT RELATIONSHIP
• Relationships among one output and two or more
variable inputs
• Substitution possibilities among inputs create
what is called input-input relationship
• In here the basic problem is to finding the right
combination of inputs

23. PRODUCTION FUNCTION
• Shows the maximum amount of output (Q) that
can be produced within a given time period with
each combination of (L) and (K)
• This can be defined as follows:
Q= f (L,K)

24. ISO QUANT
• An isoquant is set of all possible bundles of
productive inputs exactly sufficient to produce a
given quantity of output
• Determine the optimum factor combination to
produce certain units of a commodity at the least
cost

25. ISO QUANT SCHEDULE
Combinations
of Labor and
Capital
Units of
Labor (L)
Units of
Capital (K)
Output of
Cloth
(meters)
A 5 9 100
B 10 6 100
C 15 4 100
D 20 3 100

26. ISO QUANT CURVE

27. ISOQUANT MAP
• An isoquant map is a set of isoquants that shows
the maximum attainable output from any given
combination inputs.

28. PROPERTIES OF ISOQUANT CURVE
• An isoquant curve slopes downward, or is negatively
sloped.
• An isoquant curve is convex to its origin.
• Isoquant curves cannot be tangent or intersect one
another.
• Isoquant curves in the upper portions of the chart yield
higher outputs.
• An isoquant curve should not touch the X or Y axis on the
graph
• Isoquant curves do not have to be parallel to one another
• Isoquant curves are oval shaped.

29. ISO COST LINE

30. ISOCOST CURVE
• Shows various combinations of labor and capital that the
firm can buy for a given factor prices (budget line or
budget constraint line )
• C= wL + rK
• Where ;
w= wage rate
r=rental rate (price of the capital)
C=cost

31. LEAST COST FACTOR COMBINATION
(OPTIMAL COMBINATION OF INPUTS)
• The firm can achieve maximum profits by
choosing that combination of factors which will
cost it the least
• The least cost factor combination can be
determined by imposing the isoquant map on iso
-cost line

32. MARGINAL RATE OF TECHNICAL
SUBSTITUTION
Essential condition
is that the slope of
the iso cost line
must equal the
slope of the
isoquant

33. PRODUCTION EXPANSION PATH
Joins the tangency
points of isoquant
curves and isocost
lines.
𝑀𝑃(𝐿)
𝑀𝑃 (𝐾)
=
𝑃(𝐿)
𝑃(𝐾)

34. RETURNS TO SCALE
• Returns to scale describes what happens to total output
as all of the inputs are changed by the same proportion

35. OUTPUT-OUTPUT RELATIONSHIP
• OUTPUT-OUTPUT RELATIONSHIP
• What combination of products (Y1,Y2) should be
produced from a given bundle of fixed and variable
inputs

36. PRODUCTION POSSIBILITY
FRONTIER
• A production possibility frontier (PPF) shows the
maximum possible output combinations of two goods or
services an economy can achieve when all resources are
fully and efficiently employed

38. LAW OF INCREASING OPPORTUNITY
COST

39. OPPORTUNITY COSTAND THE PPF
• Reallocating scarce resources from one product to
another involves an opportunity cost
• If the law of diminishing returns holds true then the
opportunity cost of expanding output of X measured in
terms of lost units of Y is increasing.
• the law of diminishing returns occurs because not all
factor inputs are equally suited to producing items

40. • The maximum revenue combination of output on
a production possibility curve can be determined
using,
ΔY2 = PY1
ΔY1 PY2
MRT=slope of production slope of isorevenue
possibility curve line

41. MARGINAL RATE OF TRANSPORTATION

42. • The slope of the production–possibility frontier
(PPF) at any given point is called the marginal
rate of transformation (MRT).
• The slope defines the rate at which production of
one good can be redirected (by reallocation of
productive resources) into production of the other.
• It is also called the (marginal) "opportunity cost"
of a commodity, that is, it is the opportunity cost
of X in terms of Y at the margin.
• Thus, MRT increases in absolute size as one
moves from the top left of the PPF to the bottom
right of the PPF.[8]

43. LABOR ECONOMICS

44. LABOR ECONOMICS
• Labor economics studies how labor
markets work
• Labour Economics can be defined as a study of
the organization, institutions and behavior of
the labour market in an industries or industrial
economy

45. LABOR DEMAND
• The relation between the price of labor and how many
workers firms are willing to hire is summarized by the
downward-sloping labor demand curve

46. SHIFT IN LABOR DEMAND

47. LABOR SUPPLY

48. SHIFTS IN MARKET LABOR SUPPLY
CURVE

49. LABOR SUPPLY TO INDIVIDUAL FIRMS

50. LABOR MARKET EQUILIBRIUM

51. EQUILIBRIUM IN A COMPETITIVE
LABOR MARKET

52. MARGINAL REVENUE PRODUCTION
MPR is the additional revenue that results from the
use of an additional unit of labor
MRP = TR
L

53. MARGINAL FACTOR COST (MFC)
• MFC is the additional cost associated with
the use of an additional unit of labor
MFC = TC
L

54. Slope of MRP curve

55. • MRP = MR x MP
• MR is constant if the output market is perfectly
competitive and decreasing if the output market is
imperfectly competitive.

56. Marginal factor cost

57. Short-run labor demand in a perfectly
competitive labor market

58. Theory of Labour supply
• Households are suppliers of labour
• Workers maximize their utility
• Worker’s utility is determined by the choice between income
and leisure
(Y)
W=wage rate
b= benefit from leisure time
(as a good)