Production Process

1. PRODUCTION

2. WORD SEARCH

5. Identify the four basic categories of inputs in production and
give examples of each.
Explain the concept of production functions, the difference
between fixed and variable inputs, and the difference between
the economic short run and long run.
Explain the concepts of the marginal product of labor, the
total product of labor, the average product of labor, and the
law of diminishing marginal returns.
Describe and illustrate isoquants generally and for Cobb-
Douglas, perfect complements (fixed proportions), and perfect
substitutes.
Objectives:

6. Production
the process of making or growing goods to be sold: dictionary.cambridge.org
the act or process of producing - merriam-webster.com
the process in which various inputs, such as land, labor, and capital, are used
to produce the outputs in the form of products or services -
studysmarter.co.uk

7. Production Economics
Managers must decide not only what to produce for the market, but also
how to produce it in the most efficient or least cost manner.
Economics offer widely accepted tools for judging whether the production
choices are least cost.

8. Four Basic Categories
of Inputs in Production
This category of input encompasses physical labor as well as intellectual
labor. It includes less skilled or manual labor, managerial labor, and skilled
labor
Labor (L)
Capital (K)
This input category describes all the machines that are used in production,
such as conveyor belts, robots, and computers.

9. Four Basic Categories
of Inputs in Production
Some goods, most notably agricultural goods, need land to produce. Fields
that grow crops and forests that grow trees for lumber and pulp for paper
are examples of the land input in production.
Land (N)
Materials (M)
This input category describes all the raw materials (trees, ore, wheat, oil,
etc.) or intermediate products (lumber, rolled aluminum, flour, plastic, etc.)
used in the production of the final good.

10. Production Function
a mathematical expression of the maximum output that results from a
specific amount of each input.
Suppose for each cup of lemonade the child can sell, it takes exactly one lemon,
two cups of water, one tablespoon of sugar, and ten minutes of labor, including
the making and the selling of the beverage. A production function that describes
this process would look something like this:
Cups of Lemonade=f(lemons, sugar, water, labor time)

11. Production Function
A more generic description of a production function would look like this:
Output,Q=f(L,K,M,N)
Similar to the way we simplified the consumer choice problem, we will generally
use two input production functions to keep the problem simple and tractable. By
convention, we typically use labor (L) and capital (K) as the two inputs, and so
the generic production function is
Q=f(L,K)

12. Fixed Input
Variable Input
an input than cannot be adjusted by the firm in a given time period.
an input that can be adjusted by the firm in a given time period.

13. Short Run and Long
Run in Economics
Short Run
a period of time in which some inputs are fixed
Long Run
a period of time long enough that all inputs can be adjusted

14. To describe the short run using our production function, we write it like this:
Production Functions
and Characteristics in
the Short Run
where Q is the quantity of the output, L is the quantity of the labor (generally
measured in labor hours), and K is the quantity of capital (generally measured in
capital hours). The bar over the capital variable indicates that it is fixed: K

15. Production Functions
and Characteristics in
the Short Run
The relationship between the amount of the variable input used and the amount
of output produced (given a level of the fixed input) is the total product, or in
this case the total product of labor (Q), as labor is the variable input.

16. Table 6.1 Input, Output, Marginal Product, and Average Product

17. The extra contribution to output of each worker is critically important to
the firm’s decision about how many workers to employ. The extra output
achieved from the addition of a single unit of labor is the marginal product
of labor (MPL).
the extra unit is an additional worker, but in general, we might measure
units as worker hours. MPL is a key measure listed in the fifth column of
table 6.1. Formally, it is

18. important to keep track of is the average product of labor (APL), or how
much output per worker is being produced at each level of employment:

19. Figure 6.1 Short-run total product curve and average and marginal product curves

20. The Law of Diminishing
Marginal Returns.
This “law” states that if a firm increases one input while holding all others
constant, the marginal product of the input will start to get smaller, just like in
our example at three labor units.

21. Production Functions
in the Long Run
It should come as no surprise then that the way we solve the problem is similar as
well. Let’s start with the production function.
Q=f(L,K)
Note that there is no bar above the K, meaning that both labor and capital are
now variable.

22. Table 6.2 Output from the use of two variable inputs, capital (K) and labor (L)

23. To draw one, we can start by arbitrarily choosing an output level and
then finding all the combinations of labor and capital the firm could
possibly use to produce this quantity:
Drawing this on a graph with capital on the vertical axis and labor on the
horizontal axis produces an isoquant: a curve that shows all the possible
combinations of inputs that produce the same output. Iso means “the
same” and quant means “quantity.”

24. Figure 6.2 Selected isoquants from table 6.2

25. Isoquants that represent greater output are farther
from the origin.
1.
Isoquants do not cross each other.
2.
Isoquants are downward sloping.
3.
Isoquants do not bow out.
4.
Properties of Isoquants

26. Perfect Substitute Production Functions
Some production processes can substitute one input for another in
a fixed ratio.
Thus the production function for the quantity of lemonade (Q)
given labor (L) and capital (K) looks like this:
Three Types of
Production Functions and
Their Related Isoquants

27. Figure 6.3 Isoquants for a production function with inputs that are perfect substitutes

28. A more general form of this production function that incorporates a
measure of overall productivity is this:
Perfect substitute production functions generally have the form

29. Perfect Complement (Fixed-Proportions) Production Functions
If inputs have to be used in fixed proportions, then we have a fixed-
proportions production function where the inputs are perfect
complements, also known as a fixed-proportions production
function.
Three Types of
Production Functions and
Their Related Isoquants

30. Perfect complement production functions have the general functional
form of
A production function that describes the daily output of the metal-
stamping business looks like this:

31. Figure 6.4 Isoquants for a production function with inputs that are perfect complements

32. Cobb-Douglas Production Functions
The Cobb-Douglas function that we used to describe consumer
choice with the preference for variety assumption is used for just
such a production process.
An example of a Cobb-Douglas production function is
Three Types of
Production Functions and
Their Related Isoquants

33. The marginal rate of technical substitution (MRTS) describes how much
you must increase one input if you decrease the other input by one unit
in order to produce the same output. The MRTS is simply the ratio of the
marginal product of labor to the marginal product of capital:
To see where this ratio comes from, remember that the marginal product
of an input tells us how much extra output will result from a one-unit
increase in the input. Earlier we defined the marginal product of labor as

34. The marginal rate of technical substitution (MRTS) describes how much
you must increase one input if you decrease the other input by one unit
in order to produce the same output. The MRTS is simply the ratio of the
marginal product of labor to the marginal product of capital:

35. Figure 6.5 Isoquant with marginal rate of technical substitution (MRTS)

36. Technological change refers to new production technology or knowledge that
changes firms’ production functions so that more output is produced by the same
amount of inputs. Technological change is also known as total factor productivity
growth.
How they Affect
Production Functions
Productivity, refers to how much overall output a firm gets from a set amount of
inputs. The more a firm produces with the same inputs, the more productive it is.

38. Thankyou!