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Welcome Theory of Production
Theory of Production  ,[object Object],[object Object]
Production Function  ,[object Object],[object Object],Q   = f (Land, Labour, Capital, Organization, Technology, etc)
Factors of Production
Inputs : Fixed inputs  and Variable inputs ,[object Object],[object Object],Inputs Factors Variable inputs  Fixed Inputs
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Inputs : Fixed inputs  and Variable inputs ,[object Object],[object Object],[object Object],[object Object]
Total Product Average Product-  Ratio of Total Product and one variable    inputs   Marginal Product –  The rate of change of out put as a    result changes in one variable input   Various concept of production
Production with One Variable Input Labour (L) Capital (K) Total Output (TP) Average Product (AP) 0 1 2 3 4 5 6 7 8 9 10 10 10 10 10 10 10 10 10 10 10 10 Marginal Product  (MP) 0 10 30 60 80 95 108 112 112 108 100 Short run Production Function with Labour as Variable factor
Production with One Variable Input Labour (L) Capital (K) Total Output (TP) Average Product  (AP) 0 1 2 3 4 5 6 7 8 9 10 10 10 10 10 10 10 10 10 10 10 10 0 10 30 60 80 95 108 112 112 108 100 10 20 30 20 15 13 4 0 -4 -8 - 10 15 20 20 19 18 16 14 12 10 Marginal Product  (MP) Short run Production Function with Labour as Variable factor
A C B Total Product Labor per month 3 4 8 8 4 3 E Average product Marginal product Output per month 112 Labor per month 60 30 20 10 D
Law of  Production Function  ,[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object]
Production with One Variable Input Labour (L) Capital (K) Total Output (TP) Average Product  (AP) 0 1 2 3 4 5 6 7 8 9 10 10 10 10 10 10 10 10 10 10 10 10 0 10 30 60 80 95 108 112 112 108 100 10 20 30 20 15 13 4 0 -4 -8 - 10 15 20 20 19 18 16 14 12 10 Marginal Product  (MP) 10 10 10 10 10 10 10 10 10 10 10 Land First   Stage Second   Stage Third   Stage Short run Production Function with Labour as Variable factor
A C B Total Product Labor per month 3 4 8 8 4 3 E Average product Marginal product Output per month 112 Labor per month 60 30 20 10 D First   Stage Second   Stage Third   Stage
[object Object],[object Object],[object Object],[object Object],[object Object],Stages in Law of variable proportion ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Where should rational firm produce?
[object Object],[object Object],[object Object],[object Object],[object Object],Where should rational firm produce?
[object Object],[object Object],[object Object],[object Object]
2. Law of return to scales: Long run  Production Function   ,[object Object],[object Object],[object Object],[object Object]
Law of return to scales: Long run  Production Function   Increasing returns to scale Constant returns to scale Decreasing returns to scale Labour Capital TP MP 2 1 8 8 4 2 18 10 6 3 30 12 8 4 40 10 10 5 50 10 12 6 60 10 14 7 68 8 16 8 74 6 18 9 78 4
[object Object],Increasing returns to scale Constant returns to scale Decreasing returns to scale Inputs 10% increase – Outputs 15% increase Inputs 10% increase – Outputs 10% increase Inputs 10% increase – Outputs 5% increase
Homogeneous production function   In the long run  all inputs are variable . The production function is  homogeneous if all inputs factors are increased in the  same proportions  in order to change the outputs.  A Production function Q  =  f  ( L, K  ) An increase in Q>  Q^  =  f  ( L+L.10%, K+K.10%  )-  Inputs increased same proportion  Increasing returns to scale Constant returns to scale Decreasing returns to scale Inputs increased 10% => output increased 15%  Inputs increased 10% => output increased 10%  Inputs increased 10% => output increased 8%
Homogeneous production function   In the long run  all inputs are variable . The production function is  homogeneous if  all inputs  factors are increased in the  same proportions  in order to change the outputs.  A Production function Q  =  f  ( L, K  ) An increase in Q>  Q^  =  f  ( L+L.10%, K+K.10%  )-  Inputs increased same proportion  Increasing returns to scale Constant returns to scale Decreasing returns to scale Inputs increased 10% => output increased 15%  Inputs increased 10% => output increased 10%  Inputs increased 10% => output increased 8%
Linearly Homogeneous production function   In the long run  all inputs are variable . The production function is  Linearly homogeneous  if all inputs factors are increased in the  same proportions  and the output is increased in the same proportion.  Constant returns to scale  Homogeneous production function  Inputs increased 10% => output increased 10%  A Linearly homogeneous Production function Q  =  f  ( L, K  ) if labour and capital increased 10% then output increased the same 10%
Linearly Homogeneous production function   A Linearly homogeneous Production function Q  =  f  ( L, K  ) if labour and capital increased 10% then output increased the same 10% 100 unit output 200 unit output 300 unit output 400 unit output %changes in factor Labour  %changes in factor  Capital
Iosquants  An isoquants represent all those possible combination of two inputs (labour and capital), which is capable to produce an equal level of output  .  Combination Labour Capital Output level A 20 1 100 unit B 18 2 100 unit C 12 3 100 unit D 9 4 100 unit E 6 5 100 unit F 4 6 100 unit
Iosquants  An isoquants represent all those possible combination of two inputs (Labour and Capital), which is capable to produce an equal level of output.  100 unit output Labour  Capital Isoquants or equal product curve
Marginal Rate Technical Substitute(MRTS)  The slop of isoquant is known as  Marginal Rate of Technical Substitution (MRTS).  It is the rate at which one factors of production is substitute with other factor so that  the level of the out put remain the same. MRTS = Changes in Labour / changes in capital  100 unit output Labour  Capital Isoquants or equal product curve
Welcome Theory of Production

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Theory of Production

  • 1. Welcome Theory of Production
  • 2.
  • 3.
  • 5.
  • 6.
  • 7. Total Product Average Product- Ratio of Total Product and one variable inputs Marginal Product – The rate of change of out put as a result changes in one variable input Various concept of production
  • 8. Production with One Variable Input Labour (L) Capital (K) Total Output (TP) Average Product (AP) 0 1 2 3 4 5 6 7 8 9 10 10 10 10 10 10 10 10 10 10 10 10 Marginal Product (MP) 0 10 30 60 80 95 108 112 112 108 100 Short run Production Function with Labour as Variable factor
  • 9. Production with One Variable Input Labour (L) Capital (K) Total Output (TP) Average Product (AP) 0 1 2 3 4 5 6 7 8 9 10 10 10 10 10 10 10 10 10 10 10 10 0 10 30 60 80 95 108 112 112 108 100 10 20 30 20 15 13 4 0 -4 -8 - 10 15 20 20 19 18 16 14 12 10 Marginal Product (MP) Short run Production Function with Labour as Variable factor
  • 10. A C B Total Product Labor per month 3 4 8 8 4 3 E Average product Marginal product Output per month 112 Labor per month 60 30 20 10 D
  • 11.
  • 12.
  • 13. Production with One Variable Input Labour (L) Capital (K) Total Output (TP) Average Product (AP) 0 1 2 3 4 5 6 7 8 9 10 10 10 10 10 10 10 10 10 10 10 10 0 10 30 60 80 95 108 112 112 108 100 10 20 30 20 15 13 4 0 -4 -8 - 10 15 20 20 19 18 16 14 12 10 Marginal Product (MP) 10 10 10 10 10 10 10 10 10 10 10 Land First Stage Second Stage Third Stage Short run Production Function with Labour as Variable factor
  • 14. A C B Total Product Labor per month 3 4 8 8 4 3 E Average product Marginal product Output per month 112 Labor per month 60 30 20 10 D First Stage Second Stage Third Stage
  • 15.
  • 16. Where should rational firm produce?
  • 17.
  • 18.
  • 19.
  • 20. Law of return to scales: Long run Production Function Increasing returns to scale Constant returns to scale Decreasing returns to scale Labour Capital TP MP 2 1 8 8 4 2 18 10 6 3 30 12 8 4 40 10 10 5 50 10 12 6 60 10 14 7 68 8 16 8 74 6 18 9 78 4
  • 21.
  • 22. Homogeneous production function In the long run all inputs are variable . The production function is homogeneous if all inputs factors are increased in the same proportions in order to change the outputs. A Production function Q = f ( L, K ) An increase in Q> Q^ = f ( L+L.10%, K+K.10% )- Inputs increased same proportion Increasing returns to scale Constant returns to scale Decreasing returns to scale Inputs increased 10% => output increased 15% Inputs increased 10% => output increased 10% Inputs increased 10% => output increased 8%
  • 23. Homogeneous production function In the long run all inputs are variable . The production function is homogeneous if all inputs factors are increased in the same proportions in order to change the outputs. A Production function Q = f ( L, K ) An increase in Q> Q^ = f ( L+L.10%, K+K.10% )- Inputs increased same proportion Increasing returns to scale Constant returns to scale Decreasing returns to scale Inputs increased 10% => output increased 15% Inputs increased 10% => output increased 10% Inputs increased 10% => output increased 8%
  • 24. Linearly Homogeneous production function In the long run all inputs are variable . The production function is Linearly homogeneous if all inputs factors are increased in the same proportions and the output is increased in the same proportion. Constant returns to scale Homogeneous production function Inputs increased 10% => output increased 10% A Linearly homogeneous Production function Q = f ( L, K ) if labour and capital increased 10% then output increased the same 10%
  • 25. Linearly Homogeneous production function A Linearly homogeneous Production function Q = f ( L, K ) if labour and capital increased 10% then output increased the same 10% 100 unit output 200 unit output 300 unit output 400 unit output %changes in factor Labour %changes in factor Capital
  • 26. Iosquants An isoquants represent all those possible combination of two inputs (labour and capital), which is capable to produce an equal level of output . Combination Labour Capital Output level A 20 1 100 unit B 18 2 100 unit C 12 3 100 unit D 9 4 100 unit E 6 5 100 unit F 4 6 100 unit
  • 27. Iosquants An isoquants represent all those possible combination of two inputs (Labour and Capital), which is capable to produce an equal level of output. 100 unit output Labour Capital Isoquants or equal product curve
  • 28. Marginal Rate Technical Substitute(MRTS) The slop of isoquant is known as Marginal Rate of Technical Substitution (MRTS). It is the rate at which one factors of production is substitute with other factor so that the level of the out put remain the same. MRTS = Changes in Labour / changes in capital 100 unit output Labour Capital Isoquants or equal product curve
  • 29. Welcome Theory of Production