1. The document discusses production and costs faced by firms. It defines production and the different types of inputs used, including fixed and variable inputs.
2. It explains the concept of production functions, which show the maximum output achievable from different input combinations. Production functions can have one or two variable inputs, corresponding to short and long run analyses.
3. The law of variable proportions is described, where marginal and average product initially increase with more of a variable input but eventually diminish, leading to stages of increasing, diminishing, and negative returns. Graphs demonstrate these relationships between total, marginal, and average product curves.
Given by J.R. Hicks and R.G.D. Allen.
It is a reconsideration of the theory of Value. Again it was reproduced Indifference Curve theory of Consumer's demand in "Value and Capital" by Hicks.
Isoquants represent combinations of inputs that produce the same level of output. They have several key properties:
1. Isoquants slope downward, meaning more of one input requires less of the other to maintain output.
2. They are convex to the origin, due to decreasing marginal rates of technical substitution between inputs as one is increased relative to the other.
3. Isoquants never intersect, as that would represent one combination producing two output levels. Higher isoquants correspond to higher output levels.
The document discusses isoquant curves and isocost curves.
1. An isoquant curve shows all the combinations of two inputs that can produce the same level of output. It assumes inputs are substitutable to some degree in production.
2. An isocost curve connects all combinations of two inputs that can be purchased with a given budget or expenditure level, based on the prices of the inputs.
3. Firms use isoquant and isocost curves to determine the most cost-effective combination of inputs to achieve a given output level.
Isoquant is also called as equal product curve or production indifference curve or constant product curve. Isoquant indicates various combinations of two factors of production which give the same level of output per unit of time.
Just as an indifference curve represents various combinations of two goods which give a consumer equal amount of satisfaction, an iso-product curve shows all possible combinations of two inputs physically capable of producing a given level of output. Since an iso-product curve represents those combinations which will result in the production of an equal quantity of output, the producer would be indifferent between them.
This law was given by Alfred Marshall in his book principle of economics.
It show particular pattern of change in output when some factor remain fixed.
Production depend upon factors of production , if factors of production are good, production may increase and vice-versa.
Production function show functional relationship between production and factors of production.
It refers to manner of change in output cost by the increase in all the input simultaneously and in the same proportion.
Returns refers to “change in physical output”
Scale refers to “quantity of input employed”
Change in scale means that all factors of production are increased or decreased in same proportion.
The cost advantage that arises with increased output of a product.
It arises because of the inverse relationship between the quantity produced and per-unit fixed cost.
Profit refers to the excess of receipts from the sale of goods over the expenditure incurred on producing them.
The amount received from the sale of goods is known as ‘revenue’ and the expenditure on production of such goods is termed as ‘cost’. The difference between revenue and cost is known as ‘profit’.
For example, if a firm sells goods for Rs. 10 crores after incurring an expenditure of Rs. 7 crores, then profit will be Rs. 3 crores.
The document discusses production theory, which forms the foundation of supply theory. It covers key concepts such as:
1) Short-run vs long-run production and the fixed and variable nature of inputs.
2) Production functions and the relationship between total, average, and marginal product.
3) The law of diminishing marginal returns and the three stages of production.
4) Isoquants, isocost lines, and how firms determine optimal input combinations to minimize costs.
Cost curves show the relationship between a firm's costs and output. There are several types of costs in the short-run and long-run:
1. Short-run costs include total, fixed, variable, average, and marginal costs. Total cost is the sum of fixed and variable costs. Average costs depend on total costs and output. Marginal cost is the change in total cost from a one-unit change in output.
2. Long-run costs have no fixed costs since all inputs are variable. Long-run total and average costs depend on minimum costs of production at different output levels. Long-run marginal cost is the change in total cost from a change in all variable inputs.
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Isoquants, MRTS, Concept of Total Product, Average & Marginal Product, Short Run and Long Run analysis of production, The Law of Variable proportion, Returns to scale,
Production Cost – Concept of Cost, Classification of Short run cost – Long run cost,
The Cobb-Douglas production function is widely used to model the relationship between output and two inputs, labor and capital. It takes the form of P(L,K) = B*L^α*K^β, where P is total production, L is labor input, K is capital input, B is total factor productivity, and α and β are output elasticities. The function was formulated by Cobb and Douglas based on statistical evidence showing how U.S. output and the two inputs changed together from 1889-1920. It has since been widely applied despite some criticisms around its lack of microeconomic foundations.
Given by J.R. Hicks and R.G.D. Allen.
It is a reconsideration of the theory of Value. Again it was reproduced Indifference Curve theory of Consumer's demand in "Value and Capital" by Hicks.
Isoquants represent combinations of inputs that produce the same level of output. They have several key properties:
1. Isoquants slope downward, meaning more of one input requires less of the other to maintain output.
2. They are convex to the origin, due to decreasing marginal rates of technical substitution between inputs as one is increased relative to the other.
3. Isoquants never intersect, as that would represent one combination producing two output levels. Higher isoquants correspond to higher output levels.
The document discusses isoquant curves and isocost curves.
1. An isoquant curve shows all the combinations of two inputs that can produce the same level of output. It assumes inputs are substitutable to some degree in production.
2. An isocost curve connects all combinations of two inputs that can be purchased with a given budget or expenditure level, based on the prices of the inputs.
3. Firms use isoquant and isocost curves to determine the most cost-effective combination of inputs to achieve a given output level.
Isoquant is also called as equal product curve or production indifference curve or constant product curve. Isoquant indicates various combinations of two factors of production which give the same level of output per unit of time.
Just as an indifference curve represents various combinations of two goods which give a consumer equal amount of satisfaction, an iso-product curve shows all possible combinations of two inputs physically capable of producing a given level of output. Since an iso-product curve represents those combinations which will result in the production of an equal quantity of output, the producer would be indifferent between them.
This law was given by Alfred Marshall in his book principle of economics.
It show particular pattern of change in output when some factor remain fixed.
Production depend upon factors of production , if factors of production are good, production may increase and vice-versa.
Production function show functional relationship between production and factors of production.
It refers to manner of change in output cost by the increase in all the input simultaneously and in the same proportion.
Returns refers to “change in physical output”
Scale refers to “quantity of input employed”
Change in scale means that all factors of production are increased or decreased in same proportion.
The cost advantage that arises with increased output of a product.
It arises because of the inverse relationship between the quantity produced and per-unit fixed cost.
Profit refers to the excess of receipts from the sale of goods over the expenditure incurred on producing them.
The amount received from the sale of goods is known as ‘revenue’ and the expenditure on production of such goods is termed as ‘cost’. The difference between revenue and cost is known as ‘profit’.
For example, if a firm sells goods for Rs. 10 crores after incurring an expenditure of Rs. 7 crores, then profit will be Rs. 3 crores.
The document discusses production theory, which forms the foundation of supply theory. It covers key concepts such as:
1) Short-run vs long-run production and the fixed and variable nature of inputs.
2) Production functions and the relationship between total, average, and marginal product.
3) The law of diminishing marginal returns and the three stages of production.
4) Isoquants, isocost lines, and how firms determine optimal input combinations to minimize costs.
Cost curves show the relationship between a firm's costs and output. There are several types of costs in the short-run and long-run:
1. Short-run costs include total, fixed, variable, average, and marginal costs. Total cost is the sum of fixed and variable costs. Average costs depend on total costs and output. Marginal cost is the change in total cost from a one-unit change in output.
2. Long-run costs have no fixed costs since all inputs are variable. Long-run total and average costs depend on minimum costs of production at different output levels. Long-run marginal cost is the change in total cost from a change in all variable inputs.
3
Isoquants, MRTS, Concept of Total Product, Average & Marginal Product, Short Run and Long Run analysis of production, The Law of Variable proportion, Returns to scale,
Production Cost – Concept of Cost, Classification of Short run cost – Long run cost,
The Cobb-Douglas production function is widely used to model the relationship between output and two inputs, labor and capital. It takes the form of P(L,K) = B*L^α*K^β, where P is total production, L is labor input, K is capital input, B is total factor productivity, and α and β are output elasticities. The function was formulated by Cobb and Douglas based on statistical evidence showing how U.S. output and the two inputs changed together from 1889-1920. It has since been widely applied despite some criticisms around its lack of microeconomic foundations.
Theory of production describes the relationship between inputs and outputs in the production process. A production function defines this relationship mathematically. In the short run, some inputs are fixed while others are variable. As the variable input increases, total output initially increases at an increasing rate (stage 1), then at a decreasing rate (stage 2), and eventually decreases (stage 3), following the law of variable proportions. In the long run, all inputs are variable. If all inputs increase proportionately, we can see increasing, constant, or decreasing returns to scale. Isoquants show the combinations of inputs that produce the same output level.
Production function refers to the relationship between inputs used in production and the resulting outputs. It shows the technical relationship between inputs like labor, capital, land, and enterprise and the quantity of output.
There are short run and long run production functions. Short run production functions consider variable inputs while long run considers all inputs as variable.
Total, average, and marginal production are key concepts. Total production is the total output. Average production is output per unit of input. Marginal production is the change in output from a change in input.
There are laws like diminishing returns and returns to scale. Diminishing returns states that adding more of a variable input on fixed inputs initially increases output, then at a decreasing
Ram Kumar Phuyal presents on production theory and costs. He discusses production functions with one and two variable inputs and the concept of returns to scale. He explains the production function and differentiates between fixed and variable inputs. Total, average, and marginal products are defined for a single variable input. There are three stages of production as marginal product first increases, then decreases and becomes negative. Short-run costs include total fixed, variable, and total costs. Average and marginal costs are also analyzed.
The document discusses production functions and the law of diminishing returns. It defines production as the process of combining inputs to make goods or services. There are different forms of production like job production, batch production, and mass production. The key factors of production are land, labor, capital and entrepreneurship. The Cobb-Douglas production function represents the relationship between capital, labor and output. The law of diminishing returns states that increasing one variable input while holding others constant leads to lower marginal returns after a point, as illustrated by the marginal, total and average product curves.
1. A production function shows the maximum output that can be produced from a given set of inputs over a period of time. It can be expressed as an equation, table, or graph.
2. The Cobb-Douglas production function is an important example that was formulated by Paul Douglas and Charles Cobb. It expresses output as a power function of labor and capital inputs.
3. The law of variable proportions states that as one variable input is increased, initially average and marginal products will increase until diminishing returns set in, after which average and marginal products will decrease.
This document provides an overview of indifference curve analysis for consumer equilibrium. It discusses key concepts such as indifference curves, their properties, assumptions of indifference curve analysis, indifference maps, budget lines, price and income effects, derivation of demand curves, isoquants, iso-cost curves, short-run and long-run costs. The document contains definitions and explanations of these microeconomics concepts as well as examples and diagrams to illustrate them. It is intended as a reference for understanding consumer choice theory and producer theory using indifference curve and isoquant analysis.
The kinked demand curve model assumes that in an oligopolistic industry, firms will quickly match any price cuts by competitors but will not follow price increases, leading to an asymmetrically kinked demand curve. Specifically, (1) if one firm cuts prices, others will match and demand is inelastic, but (2) if one firm raises prices, others will not match and demand is elastic as customers switch to cheaper alternatives, maintaining a prevailing market price.
The document discusses the law of variable proportions, which examines how output changes when the quantity of one input (the variable factor) is increased while keeping other inputs fixed. It defines the law, lists its assumptions, and explains it using a tabular example of increasing a fixed amount of land with varying labor. Total product, marginal product, and average product are calculated at each stage. Graphically, there are three stages: increasing returns, diminishing returns, and negative returns. Causes of each stage are also provided, such as underutilization of fixed factors in the first stage and imperfect substitutability of factors in later stages.
Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of each of these combinations is equal to the money income of the consumer.
Here are the key points regarding Mallikarjuna's problem and suggestions to improve the functioning of the shop:
1. Mallikarjuna's problem fits the law of variable proportions. As he increases the number of assistants (variable input) from 0 to 3, total output/customers served initially increases at an increasing rate as one assistant can help multiple customers. However, beyond 3 assistants, adding more in the limited space leads to diminishing returns as customers get inconvenienced in the crowded shop.
2. Suggestions to improve:
- Increase shop floor area to accommodate more customers comfortably without overcrowding. This allows employing more assistants without diminishing returns.
- Add more billing counters to reduce
This document discusses production functions and the law of diminishing returns. It begins by defining production as the process of transforming resources into goods or services using inputs like land, labor, capital and entrepreneurship. It then discusses short-run and long-run production functions. The short-run production function treats one input like capital as fixed and analyzes how output changes with varying levels of the variable input, labor. It demonstrates diminishing marginal returns to labor through a hypothetical example. The long-run production function considers how output changes with two variable inputs, capital and labor, as demonstrated using the Cobb-Douglas production function.
This document discusses production functions and their key concepts. It defines a production function as expressing the relationship between physical inputs and physical output of a firm for a given technology. It describes factors of production as land, labor, capital and entrepreneurship. It also discusses the difference between short-run and long-run production functions, fixed and variable factors, laws of variable proportions and returns to scale.
The document discusses Bain's limit pricing model. It states that under Bain's model, oligopoly firms do not maximize profits in the short run due to fear of attracting potential new entrants. Instead, firms fix a price on the inelastic portion of the demand curve called the limit price, which is the highest price that deters new firm entry. The limit price allows existing firms to earn abnormal profits above competitive levels but below monopoly profits, maintaining market stability. Diagrams are included showing the limit price between the perfect competition and monopoly price points.
1. The law of variable proportions examines production with one variable input while keeping other inputs fixed.
2. It describes three stages: initially increasing marginal returns, then diminishing marginal returns, and finally negative marginal returns.
3. An example is given of a farmer using increasing amounts of labor on a fixed amount of land, showing total product first rising at an increasing rate, then a diminishing rate, and eventually falling as marginal returns become negative.
Theory of Production and Costs & Cost ConceptsAakash Singh
This document discusses theories of production and cost concepts. It defines production as the conversion of raw materials into goods and services to satisfy consumer demand. It identifies the four factors of production as land, labor, capital, and entrepreneurship. It then explains various cost concepts like fixed, variable, total, average, and marginal costs. Finally, it describes break-even analysis, including how to calculate the break-even point using graphs and equations. It shows the break-even point as the level of output where total revenue and total costs are equal.
In a perfectly competitive market, firms are price-takers. It is largely regarded as an ideal situation and such a market situation is hard to find. In the real world, you are dealing with firms large enough to affect the market price. In many such markets there are handful of firms who dominate in one way or other. Such markets are market of imperfect competition.
This document discusses production functions and returns to scale. It defines production functions and different types including short run and long run production functions. It then explains key features like substitutability, complementarity and specificity of factors. Next it covers returns to scale, defining it as the change in output when all inputs change proportionately. It details increasing, constant and decreasing returns to scale, providing examples. Causes of each type of return are also outlined.
In a competitive market, supply and demand forces interact to determine an equilibrium price and quantity. At the equilibrium point:
- The quantity demanded is equal to the quantity supplied.
- There is no excess supply or demand, clearing the market.
- This equilibrium price is stable and will rule in the market, with buyers and sellers accepting this price.
The document discusses theories of production, including:
1. It defines production function and outlines concepts like inputs, outputs, fixed vs variable inputs, and short vs long run.
2. It summarizes the law of variable proportions and returns to scale, and how they relate to costs via concepts like economies and diseconomies of scale.
3. It provides an overview of oligopoly market structure and models for price and output determination under conditions like collusion, price leadership, and kinked demand curves.
This is part of an introduction to indifference curve analysis. A budget line shows the combinations of two products that a consumer can afford to buy with a given income – using all of their available budget
The gradient of the budget line reflects the relative prices of the two products
CH 4 The Theory of Production and Cost.pptxDawitHaile12
This chapter discusses production theory and cost theory in the short run. It defines key concepts such as production function, fixed and variable inputs, total product, average product and marginal product. It explains the three stages of production in the short run based on the law of diminishing returns. It also defines total, average and marginal costs, and describes how they change with output based on the total, average and marginal cost curves. Finally, it discusses the relationship between short run production functions and cost functions.
The document discusses production functions and their analysis in the short and long run. It defines:
- Production as the transformation of inputs like labor, capital, machines into outputs like goods, services, and pollution.
- Production functions show the maximum output possible given inputs and technology. They are represented as tables, schedules, or equations.
- Short run analysis assumes some inputs are fixed while long run assumes all inputs are variable, allowing changes to total capacity.
- Isoquants, isoquant maps, and marginal rate of technical substitution are discussed as showing efficient input combinations to produce different output levels. Isocost lines represent input combinations at a given cost.
Theory of production describes the relationship between inputs and outputs in the production process. A production function defines this relationship mathematically. In the short run, some inputs are fixed while others are variable. As the variable input increases, total output initially increases at an increasing rate (stage 1), then at a decreasing rate (stage 2), and eventually decreases (stage 3), following the law of variable proportions. In the long run, all inputs are variable. If all inputs increase proportionately, we can see increasing, constant, or decreasing returns to scale. Isoquants show the combinations of inputs that produce the same output level.
Production function refers to the relationship between inputs used in production and the resulting outputs. It shows the technical relationship between inputs like labor, capital, land, and enterprise and the quantity of output.
There are short run and long run production functions. Short run production functions consider variable inputs while long run considers all inputs as variable.
Total, average, and marginal production are key concepts. Total production is the total output. Average production is output per unit of input. Marginal production is the change in output from a change in input.
There are laws like diminishing returns and returns to scale. Diminishing returns states that adding more of a variable input on fixed inputs initially increases output, then at a decreasing
Ram Kumar Phuyal presents on production theory and costs. He discusses production functions with one and two variable inputs and the concept of returns to scale. He explains the production function and differentiates between fixed and variable inputs. Total, average, and marginal products are defined for a single variable input. There are three stages of production as marginal product first increases, then decreases and becomes negative. Short-run costs include total fixed, variable, and total costs. Average and marginal costs are also analyzed.
The document discusses production functions and the law of diminishing returns. It defines production as the process of combining inputs to make goods or services. There are different forms of production like job production, batch production, and mass production. The key factors of production are land, labor, capital and entrepreneurship. The Cobb-Douglas production function represents the relationship between capital, labor and output. The law of diminishing returns states that increasing one variable input while holding others constant leads to lower marginal returns after a point, as illustrated by the marginal, total and average product curves.
1. A production function shows the maximum output that can be produced from a given set of inputs over a period of time. It can be expressed as an equation, table, or graph.
2. The Cobb-Douglas production function is an important example that was formulated by Paul Douglas and Charles Cobb. It expresses output as a power function of labor and capital inputs.
3. The law of variable proportions states that as one variable input is increased, initially average and marginal products will increase until diminishing returns set in, after which average and marginal products will decrease.
This document provides an overview of indifference curve analysis for consumer equilibrium. It discusses key concepts such as indifference curves, their properties, assumptions of indifference curve analysis, indifference maps, budget lines, price and income effects, derivation of demand curves, isoquants, iso-cost curves, short-run and long-run costs. The document contains definitions and explanations of these microeconomics concepts as well as examples and diagrams to illustrate them. It is intended as a reference for understanding consumer choice theory and producer theory using indifference curve and isoquant analysis.
The kinked demand curve model assumes that in an oligopolistic industry, firms will quickly match any price cuts by competitors but will not follow price increases, leading to an asymmetrically kinked demand curve. Specifically, (1) if one firm cuts prices, others will match and demand is inelastic, but (2) if one firm raises prices, others will not match and demand is elastic as customers switch to cheaper alternatives, maintaining a prevailing market price.
The document discusses the law of variable proportions, which examines how output changes when the quantity of one input (the variable factor) is increased while keeping other inputs fixed. It defines the law, lists its assumptions, and explains it using a tabular example of increasing a fixed amount of land with varying labor. Total product, marginal product, and average product are calculated at each stage. Graphically, there are three stages: increasing returns, diminishing returns, and negative returns. Causes of each stage are also provided, such as underutilization of fixed factors in the first stage and imperfect substitutability of factors in later stages.
Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of each of these combinations is equal to the money income of the consumer.
Here are the key points regarding Mallikarjuna's problem and suggestions to improve the functioning of the shop:
1. Mallikarjuna's problem fits the law of variable proportions. As he increases the number of assistants (variable input) from 0 to 3, total output/customers served initially increases at an increasing rate as one assistant can help multiple customers. However, beyond 3 assistants, adding more in the limited space leads to diminishing returns as customers get inconvenienced in the crowded shop.
2. Suggestions to improve:
- Increase shop floor area to accommodate more customers comfortably without overcrowding. This allows employing more assistants without diminishing returns.
- Add more billing counters to reduce
This document discusses production functions and the law of diminishing returns. It begins by defining production as the process of transforming resources into goods or services using inputs like land, labor, capital and entrepreneurship. It then discusses short-run and long-run production functions. The short-run production function treats one input like capital as fixed and analyzes how output changes with varying levels of the variable input, labor. It demonstrates diminishing marginal returns to labor through a hypothetical example. The long-run production function considers how output changes with two variable inputs, capital and labor, as demonstrated using the Cobb-Douglas production function.
This document discusses production functions and their key concepts. It defines a production function as expressing the relationship between physical inputs and physical output of a firm for a given technology. It describes factors of production as land, labor, capital and entrepreneurship. It also discusses the difference between short-run and long-run production functions, fixed and variable factors, laws of variable proportions and returns to scale.
The document discusses Bain's limit pricing model. It states that under Bain's model, oligopoly firms do not maximize profits in the short run due to fear of attracting potential new entrants. Instead, firms fix a price on the inelastic portion of the demand curve called the limit price, which is the highest price that deters new firm entry. The limit price allows existing firms to earn abnormal profits above competitive levels but below monopoly profits, maintaining market stability. Diagrams are included showing the limit price between the perfect competition and monopoly price points.
1. The law of variable proportions examines production with one variable input while keeping other inputs fixed.
2. It describes three stages: initially increasing marginal returns, then diminishing marginal returns, and finally negative marginal returns.
3. An example is given of a farmer using increasing amounts of labor on a fixed amount of land, showing total product first rising at an increasing rate, then a diminishing rate, and eventually falling as marginal returns become negative.
Theory of Production and Costs & Cost ConceptsAakash Singh
This document discusses theories of production and cost concepts. It defines production as the conversion of raw materials into goods and services to satisfy consumer demand. It identifies the four factors of production as land, labor, capital, and entrepreneurship. It then explains various cost concepts like fixed, variable, total, average, and marginal costs. Finally, it describes break-even analysis, including how to calculate the break-even point using graphs and equations. It shows the break-even point as the level of output where total revenue and total costs are equal.
In a perfectly competitive market, firms are price-takers. It is largely regarded as an ideal situation and such a market situation is hard to find. In the real world, you are dealing with firms large enough to affect the market price. In many such markets there are handful of firms who dominate in one way or other. Such markets are market of imperfect competition.
This document discusses production functions and returns to scale. It defines production functions and different types including short run and long run production functions. It then explains key features like substitutability, complementarity and specificity of factors. Next it covers returns to scale, defining it as the change in output when all inputs change proportionately. It details increasing, constant and decreasing returns to scale, providing examples. Causes of each type of return are also outlined.
In a competitive market, supply and demand forces interact to determine an equilibrium price and quantity. At the equilibrium point:
- The quantity demanded is equal to the quantity supplied.
- There is no excess supply or demand, clearing the market.
- This equilibrium price is stable and will rule in the market, with buyers and sellers accepting this price.
The document discusses theories of production, including:
1. It defines production function and outlines concepts like inputs, outputs, fixed vs variable inputs, and short vs long run.
2. It summarizes the law of variable proportions and returns to scale, and how they relate to costs via concepts like economies and diseconomies of scale.
3. It provides an overview of oligopoly market structure and models for price and output determination under conditions like collusion, price leadership, and kinked demand curves.
This is part of an introduction to indifference curve analysis. A budget line shows the combinations of two products that a consumer can afford to buy with a given income – using all of their available budget
The gradient of the budget line reflects the relative prices of the two products
CH 4 The Theory of Production and Cost.pptxDawitHaile12
This chapter discusses production theory and cost theory in the short run. It defines key concepts such as production function, fixed and variable inputs, total product, average product and marginal product. It explains the three stages of production in the short run based on the law of diminishing returns. It also defines total, average and marginal costs, and describes how they change with output based on the total, average and marginal cost curves. Finally, it discusses the relationship between short run production functions and cost functions.
The document discusses production functions and their analysis in the short and long run. It defines:
- Production as the transformation of inputs like labor, capital, machines into outputs like goods, services, and pollution.
- Production functions show the maximum output possible given inputs and technology. They are represented as tables, schedules, or equations.
- Short run analysis assumes some inputs are fixed while long run assumes all inputs are variable, allowing changes to total capacity.
- Isoquants, isoquant maps, and marginal rate of technical substitution are discussed as showing efficient input combinations to produce different output levels. Isocost lines represent input combinations at a given cost.
This document discusses production theory and cost theory in the short run. It defines key concepts such as production, inputs, outputs, production functions, fixed and variable inputs, total product, average product and marginal product. It explains the three stages of production based on these productivity measures. It also introduces isoquants and isocost lines to determine optimal input combinations. Finally, it defines total, fixed, variable and average costs, and how total cost is calculated in the short run.
This document discusses production and costs in both the short-run and long-run. In the short-run, at least one factor of production is fixed, while in the long-run all factors are variable. The factors of production are land, labor, capital, and entrepreneurship. Laws of returns to scale describe how output responds to changing variable inputs. Short-run costs include total, fixed, and variable costs. Long-run average costs depend on whether there are increasing, constant, or decreasing returns to scale. Economies of scale from specialization, bulk purchasing, and other factors can lower long-run average costs.
This document defines production and costs, and discusses the theory of production and cost. It covers:
1) Definitions of production, inputs, production functions, and the relationship between inputs and output.
2) The characteristics of short-run and long-run production periods and production functions.
3) The measurement of total product, average product, and marginal product and how they relate at different stages of production.
4) Cost concepts including total, fixed, variable, marginal, average, and their relationships as depicted through cost curves.
The document discusses key concepts related to production and returns to scale. It can be summarized as follows:
1. Production involves using factors of production like labor, capital, land, and raw materials to transform inputs into outputs. The relationship between inputs and outputs is represented by production functions.
2. In the short run, at least one factor is fixed while others can vary. This relationship is explained by the law of variable proportions, which outlines three stages of production - increasing, constant, and diminishing returns.
3. In the long run, all factors are variable. The behavior of output with changes in all inputs is known as returns to scale and can exhibit increasing, constant, or diminishing returns depending
The document discusses production analysis and key concepts including:
1. Production refers to the transformation of inputs into outputs using a given technology. A production function shows the relationship between inputs like labor, capital, and technology and the maximum output.
2. The law of diminishing returns explains that as one variable input is increased while others stay fixed, marginal and then average product will eventually diminish.
3. Returns to scale refer to how output changes proportionally with a proportional change in all inputs and can be increasing, constant, or decreasing.
This document defines key concepts related to production functions including: total, marginal, and average products; the law of diminishing marginal returns; isoquants and their properties; and production possibilities frontiers. It explains that a production function shows the maximum output possible from given inputs. Total product is total output, average product is output per input, and marginal product is the change in output from an extra unit of input. The law of diminishing marginal returns states that the marginal product of an input decreases with increasing usage of that input. Isoquants depict equal output combinations of two inputs, and have properties like downward sloping and convex shapes. A production possibilities frontier shows the maximum attainable combinations of two outputs given limited resources.
This document defines production and costs of production. It discusses:
- Factors of production including land, labor, capital and entrepreneurship.
- Production functions showing the relationship between inputs and outputs.
- The law of diminishing marginal returns and how it impacts total, average and marginal product.
- Short and long run production functions and the law of returns to scale.
- Cost concepts including explicit, implicit, opportunity and social costs.
- Cost curves including total, average and marginal costs in the short and long run.
- Economies of scale and how costs are impacted by scale of production.
This document discusses production functions and the factors that influence them. It defines key concepts like total product, average product, marginal product, and different types of production functions.
The short-run production function, known as the law of variable proportions, describes how output changes as one input varies while others are held fixed. It outlines the three stages of increasing, decreasing, and negative returns. The long-run production function examines how output changes as all inputs vary, governed by laws of returns to scale. Constant, increasing, and decreasing returns to scale are defined. Isoquants and the marginal rate of technical substitution are also explained. The document concludes by discussing how production functions inform managerial decision making.
production analysis by Neeraj Bhandari ( Surkhet.Nepal )Neeraj Bhandari
This document discusses key concepts in production analysis including the production possibility curve (PPC), inputs and outputs, fixed and variable inputs, and short and long run time periods. It also explains the production function and how total product, marginal product, and average product are determined by the quantity of labor input based on the law of variable proportions. Finally, it covers the different types of returns to scale including increasing, constant, and diminishing returns based on how total output changes with proportional increases in all factor inputs in the long run.
Production analysis by Neeraj Bhandari ( Surkhet.Nepal )Neeraj Bhandari
This document discusses key concepts in production analysis including the production possibility curve (PPC), inputs and outputs, fixed and variable inputs, and short and long run time periods. It also explains the production function and how total product, marginal product, and average product are determined by the quantity of labor input based on the law of variable proportions. Finally, it covers the concept of returns to scale and how total output can increase more than, equal to, or less than proportionately based on increasing, constant, and diminishing returns to scale respectively in the long run.
This document discusses different types of business organizations including sole proprietorships, partnerships, and corporations. It also covers key concepts related to production functions including inputs, outputs, marginal products, average products, and diminishing returns. Finally, it introduces isoquants and defines the marginal rate of technical substitution.
Production analysis by Neeraj Bhandari ( Surkhet.Nepal )Neeraj Bhandari
The document provides information on production functions and related concepts:
- A production function describes the technological relationship between inputs and outputs. It represents the maximum output attainable from various combinations of inputs.
- Inputs can be fixed or variable. The short run is when some inputs are fixed, while the long run allows variation in all inputs.
- Isoquants represent combinations of inputs that produce equal output. They have properties like being negatively sloped, non-intersecting, and convex to the origin.
- Laws of production include diminishing marginal returns and variable proportions. Returns to scale can be increasing, constant, or decreasing in the long run depending on output and input changes.
- Production refers to transforming inputs like labor and capital into goods and services. There are short and long run perspectives.
- The production function defines the relationship between inputs and output. Total, average, and marginal product measure output at different levels of a variable input while holding others fixed.
- The law of diminishing marginal product states that as more of a variable input is added, each additional unit produces less, because it has less of the fixed inputs to work with.
- Production occurs in three stages - in stage I, total, average, and marginal product all rise; in stage II they fall; in stage III marginal product is negative. Firms aim to operate at the output maximizing point
The document discusses key concepts related to cost and revenue analysis, including:
- Fixed and variable inputs in the short-run vs long-run.
- The production function and how it relates inputs to output.
- Marginal product and the law of diminishing returns.
- Short-run and long-run costs including total, average, and marginal costs.
- Revenue analysis including total, average, and marginal revenue.
- Break-even and shutdown points for firms.
- Economies and diseconomies of scale in the long-run.
The document provides information on production theory and costs. It defines production as the process of converting inputs into outputs. The relationship between inputs and outputs is represented by the production function. There are laws of variable proportions that show how total product increases at different rates as variable inputs are added. Cost concepts like fixed, variable, total, average and marginal costs are introduced in the short run. Long run costs include economies of scale and different cost curves. Key economic principles like opportunity cost, sunk costs and accounting versus economic costs are also summarized.
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2. INTRODUCTION
• Up to this you have learnt all about demand,
consumers , their preferences and decision
making.
• Now we would learn about producers
preference and their behavior though the
concept of optimum production with efficient
choice of differ factor inputs.
3. ….contd
• The basic problem that any firm faces is
duality of paradoxical objectives
– Maximum output.
– Minimum cost.
• In the next sessions we are going to discuss
how can a firm achieve this objective.
• What are the resources they may use, how to
combine them , what are the constraints in
optimization of production etc
4. PRODUCTION
• Production is the process of transformation
of inputs into goods and services of utility to
consumers and /or producers.
• It is a process of creation of value or wealth
through the production of goods and services
that have economic value to either
consumers or other producers.
• The process of adding value may occur
– By change in form(input to out put)
– Change in place(factory to retailer)
– By change in hands(retailer to consumer)
5. TYPES OF INPUTS
• You know what is production……………..?
• What are the inputs…………….?
• What are their characteristics…………….?
• Let us start with technology
– Technology is one of the most important input in any
of production process.
– Technology determines the type, quantity and
proportion of inputs
– It determines the maximum limit of output from a
given combination of inputs.
6. FIXED AND VARIABLE INPUTS
• Typically the production analysis of a firm is
done using two distinct time frames
– Short run production
• Period of time when the firm cannot vary some of its
inputs
• Supply of some inputs are fixed
– Long run production
• Have sufficient time to vary all inputs including
technology.
7. .. contd
• Based on short run and long run the inputs are
classified in to variable and fixed.
• Variable input
– Made to vary in short run
– Example – raw material , unskilled and skilled labor
• Fixed input
– It cannot be varied in short run
– Example – land, machine, technology skill set etc.
• Each of this input has a unique cost associated
itself
8. FACTORS OF PRODUCTION
LAND
ORGANIZATION LABOR
5 FACTORS OF
PRODUCTION
ENTERPRISE CAPITAL
9. PRODUCTION FUNCTION
“Production function is the technical
relationship between inputs and outputs over
a given period of time”
• A commodity may be produced by various
methods using different combinations of
inputs with given state of technology.
– Example–textiles(different raw materials,
technology)
• Production function includes all such
technically efficient methods.
10. …contd
• Production function
– Always related to a given time period
– Always related to a certain level of technology
– Depends upon relation between inputs
• Production function shows the maximum
quantity of the commodity that can be
produced/unit of time for each set of
alternative inputs.
11. MATHEMATICAL EXPRESSION OF
PRODUCTION FUNCTION
• Normally a production function is written as
Q = F ( L , K , I , R ,E )
Where Q is the maximum quantity of output
Where L = Labor, K = Capital, I = Land, R= Raw
material, E = Efficiency parameter
12. TYPES OF PRODUCTION FUNCTION
• On the basis of characteristics of inputs
production function normally divided into 2
broad categories
– With one variable input or variable production
function.(short run)
– With two variable inputs or constant production
function.(long run)
13. PRODUCTION FUNCTION WITH ONE
VARIABLE INPUT
• In the short run producers have to optimize with
only one variable input.
• Let us consider a situation in which there are
two inputs
– Capital and labor
– Capital is the fixed and labor is the variable input.
• The amount of capital is kept constant and labor
is increased to increase output.
• Any change in output can be manifested only
through a change in labor input only
14. ..contd
• This production function also known as variable
proportion production function.
“The short run production function shows the
maximum output a firm can produce when only
one of its inputs can be varied other inputs
remaining constant”
• It can be written as
Q= F ( L , Kc)
Q- Out put
L- labor
Kc – Fixed amount of capital
15. AVERAGE PRODUCT, MARGINAL
PRODUCT, TOTAL PRODUCT
• The short run production function is governed
by law of variable proportions.
• Concept of average , marginal products, total
product of factor inputs.
• Assuming capital to be constant and labor to
be variable. So total product of labor function
is given as
TP L = F (Kc , L)
16. • If instead labor is fixed in short run, capital is
varied
TP k = F (K, Lc)
• AVERAGE PRODUCT (Ap) is total product per
unit of variable input
AP L = TP/L (Capital fixed)
AP k = TP/K (Labor fixed)
17. MARGINAL PRODUCT
• Marginal product (MP) is defined as addition
in total output per unit change in variable
input thus marginal product of labor (MPL)
MPL = ∆ TP / ∆ L
MPL = d TP / d L
18. EXPLANATION – WITH EXAMPLE
• Assume that a manufacturer starts production
with an investment of Rs 10 C in plant and
machinery.
• The manufacturer increases units of labor
keeping investment in plant fixed …….
• LAW OF VARIABLE PROPORTIONS
law of variable proportions states that with
the increase in the quantity of variable factor
its marginal and average product will
eventually decline other inputs remain
unchanged (constant)
SEE THE TABLE………..
19. ….contd
“The law of variable proportions is also called
as law of diminishing marginal returns”
21. LAW OF VARIABLE PROPORTIONS
160
140
120
100
80
OUTPUT
TOTAL PRODUCT
60
MARGINAL PRODUCT
40 AVERAGE PORODUCT
20
0
1 2 3 4 5 6 7 8 9
-20
-40
LABOR
22. GRAPH - INFERENCE
• With small increase in units of labor, capital
being constant, extra units of labor manifests
through an increase in output.
• After a certain point where there are too
many workers with fixed capital.
• So the part of the workforce becomes
ineffective and the marginal products of
labor starts falling.
• This law is based on the assumption that
each unit of labor is homogenous (i.e. each
worker has same skills)
23. TOTAL ,MARGINAL AND AVERAGE
PRODUCT CURVE
B C
X AXIS – LABOR
PANEL A Y AXIS – TOTAL OUTPUT
TP
A MP
AP
STAGE I STAGE II STAGE III
A* B*
PANEL B
24. GRAPH INFERENCE
• PANEL A explains the behavior of TP
• PANEL B exhibits the nature of AP and MP curves.
With successive change in the variable input labor.
• Point A – inflexion of TP curve
• Point A* on the MP curve in PANEL B it corresponds to
Point A.
• Point A*- It is the point where MP attains its highest
and starts falling thereafter.
• Point B on TP curve is where AP is equal to MP
• After point B* in PANEL B the AP starts falling.
• Point C- TP is maximum after it falls
• Point C* - where MP cuts x axis
25. STAGES IN GRAPH
• STAGE I – Increasing returns to the variable
factor
– This is first stage
– In this additional units of labor are employed the total
out put increases. So marginal product rises.
– In this MP > 0 and MP > AP
• STAGE II – Diminishing returns to the variable
factor
– It is second stage
– Total output increases but less than proportionate to
increase in labor
– This stage marginal product falls and this is known as
law of diminishing returns to the variable factor.
– Both AP and MP are positive but declining
– Here MP > 0 but AP is falling MP < AP where TP is
increasing at diminishing.
26. ..contd
• STAGE III – Negative returns to variable factor
– This is third stage
– Which MP < 0 and TP is falling
– Technically this is inefficient stage of production
– A rational firm never operate in this stage.
27. PRODUCTION FUNCTION WITH TWO
VARIABLE INPUTS
• So far we dealt with production functions
with one variable input – short run
• Let us move a head to long run in which all
the inputs are variable.
• Thus the firm has the opportunity to select
the combinations of inputs and maximizes
returns.
• We restrict ourselves to most simplistic form
of production function with 2 variable inputs
and a single out put
28. ISOQUANT
• ISOQUANT (iso- equal quant- quantity) is the
locus of all technically efficient combinations
for producing a given level of output.
• ISOQUANT are similar to concept of
indifference curve/iso utility curve.
• ISO QUANT
– It is the different combinations of two inputs that
corresponds to the same output.
• It is also referred to as ISOPRODUCT curve.
29. EXPLANATION
• Taking the production function
• Q = F ( L , K)
• With a fixing level of out put Q at some
quantity we have an implicit relationship
between units labor( L ) and capital (K)
• Qc = F ( L , K )
• It is possible to produce the same amount of
output by using different combination of
input.
30. EXAMPLE
• Firm produces 150 thousand tones of out put,
with investment of Rs 40 C and 600 labor
units.
• The manufacturer wants to know which
different combinations of this inputs can be
used to produce 150 thousand tones of out
put
see the table…………..
31. INPUT COMBINATIONS
POINT CAPITAL (Rs CRORE) LABOR (000 UNITS)
A 40 6
B 28 7
C 18 8
D 12 9
E 8 10
33. GRAPH - INFERENCE
• The curve in graph shows the locus of
different combinations of labor and capital
that produce 150 thousand tones of out put.
• Locus of points
– A at curve Q1 shows Rs 40 c and 600 Labor units
give the 150 Thousands tones of output.
– like that all points B , C,D,E (combinations) may
infer that the level of output remains the same at
all points on the same isoquant.
35. CHARACTERISTICS OF ISOQUANTS
• Down ward sloping
– Slope downwards from left to right
– Using more of input to produce the same level of
output must imply using less of other input
– slope = -(∆K / ∆L)
• A higher isoquant represent a higher output.
• Iso quants do not intersect.
• Convex to the origin.
36. MARGINAL RATE OF SUBSTITUTION
MRTS
“MRTS measures the reduction in one input
due to unit increase in the other input that is
just sufficient to maintain the same level of
out put”
37. ..contd
• For the same quantity of output , MRTS of
labor ( L ) for capital (k) = MRTS LK
• MRTS LK would be the amount of capital that
the firm would be willing to give up for an
additional unit of labor.
• It is similarly for MRTS KL.
• MRTS LK is expressed in
– MRTS LK = - ( ∆K / ∆ L)
38. ..CONTD
• MRTS of labor for capital is equal to the slope of
the isoquant.
• MRTS also equal to the ratio of the a marginal
product of one input to the marginal product of
other input.
• Let see how
– Since output along isoquant is constant
– If units of labor( ∆L) is substituted for units of capital
( ∆K) then the increase in output due to increase in
labor ( ∆L) should match with decrease in output due
to decrease in capital ( ∆K)
39. ..CONTD
• SO
• ∆L X MP L = - (∆K X MP K )
• MP L / MP K = - (∆K/ ∆L)
MRTS LK = - ( ∆K / ∆ L) = MP L / MP K
40. TYPES OF ISOQUANTS
• LINEAR ISO QUANT
– Two inputs are perfect substitutes
– Qc = F ( L , K ) = α K + β L
– Where α , β are constant
– In this case MP L = d Q / d L , MP K = d Q / d K
– MP L = α , MP K = β
– Therefore MRTS LK = α / β
– ISOQUANTS in this case is down ward sloping
straight lines
41. GRAPH – LINEAR ISOQUANT
X AXIS – LABOR
Y AXIS - CAPITAL
O Q1 Q2 Q3
42. …contd
• RIGHT ANGLED ISO QUANT
– In this the inputs are perfect
complements.(assumption)
– Non substitutability between the two factors
– This isoquant is right angled
– Production function
• Q = MIN (L / α, K / β)
• Where β, α fixed coefficient.
43. GRAPH – RIGHT ANGLED ISOQUANT
Q3
Q2
Q1
X AXIS – LABOR
Y AXIS - CAPITAL
44. ISOCOST LINES
• The concept of ISOCOST line is similar to
budget line.
• ISOCOST line is the budget line of a producer
in terms of two inputs.
“ ISOCOST line is the locus of points of all the
different combinations of labor and capital
that firm can employ given the total cost and
prices of inputs”
45. …contd
• ISOCOST lines expressed as
– C =wL + r K
– Where price of labor is wage = w
– The price of the capital is interest = r
– The total cost is C
• The total cost C of the firm is fixed and the input
prices are given the ISOCOST line gives various
combinations of labor and capital
• Usually the ISOCOST line is linear with slope
equal to ratio of the factor prices. …..*
46. ..contd
• See the graph
– The intercept of the ISOCOST line on the capital
axis is the maximum amount of capital employed
when labor is not used in the production process
is given by C / r
– Similarly the intercept in labor axis is given by
C/w
– SO therefore
• Slope = (∆K /∆ L) = {(C/r)/(C/w)} = w/r … *
49. GRAPH - INFERENCE
• The set of parallel ISOCOST lines is called
ISOCOST map.
• Line AB basic ISOCOST line.
• AB1 shows a rise in W more of labor can
acquired.
• AB 2 shows a fall in W.
• Same as for BA2 and BA1
50. PRODUCERS EQUILIBRIUM
• A firm may maximize its profits at given
production function.
• When producers faced with several technically
efficient combinations the decision is taken on
basis of economic efficiency.
• Producers use the combinations which minimize
the cost of production.
• The producers must determine the combinations
of inputs that produces the output at minimum
cost.
• Assume that producers act rationally that
means choosing which combination gives
minimize cost and maximum output.
51. ..contd
• For minimum cost we need ISOCOST line and
maximum output we need ISOQUANTS.
• Combining the ISOQUANTS and ISOCOST lines
will help to understand the producers
equilibrium.
52. GRAPH - PRODUCERS EQUILIBRIUM
X AXIS – LABOR
Y AXIS – CAPITAL
A CONDITION FOR
C PRODUCE
REQUILIBRIUM
SLOPE OF ISOCOST
LINE = ISOQUANT
K* E CURVE
Q3
D Q2
Qo
L* B
53. GRAPH - INFERENCE
• Point E is producer equilibrium.
• At this point the firm would employ L* and K*
units of labor and capital respectively.
• Q2 amount of output can also be considered to
be the maximum output that can be produced at
a given cost.
• Any amount of output above AB is not feasible
• Below AB is feasible but not desirable because
the firms aims to maximize output so like to use
entire funds.
54. contd
• Point C and D are also on the ISOCOST line
• But C and D are on Q1 which is lower than
Q2.
• So point C , D, E shows the combinations of
inputs L and K which come for the same cost
but give different output.
• Thus E is preferred to C and D which is on the
highest possible ISOQUANT.
55. PRODUCERS EQUILIBRIUM- FOR GIVEN
LEVEL OF OUT PUT(CONSTANT)
X AXIS – LABOR
A2 Y AXIS - CAPITAL
R
A
CONDITION FOR
PRODUCE
REQUILIBRIUM
A1 E SLOPE OF ISOCOST
K LINE = ISOQUANT
CURVE
v
S
Q
O L B1 B B2
56. GRAPH - INFERENCE
• In this the firm already decided the level of
output at ISOQUANT Q.
• So we have a single ISOQUANT line.
• Q out put can be produced with three
combinations of two inputs shown by points
R , S , E. which are on different ISOCOST line.
• Given the assumption of rationality the firm
will take the combination which minimize its
cost for given out put.
• So the firm choose point E ( OL AND OK of
inputs) on AB as equilibrium.
57. EXPANSION PATH
“ Expansion path is the line formed by joining
the tangency points between various isocost
lines and the corresponding highest
attainable isoquants.”
• It is also defined as the locus of equilibrium
points of the isoquant with lowest possible
isocost line
58. EXPANSION PATH – LONG RUN GRAPH
X AXIS – LABOR
A Y AXIS - CAPITAL
E2
E
K*
E1
Q1
O L* B
59. GRAPH - INFERENCE
• Expansion path is a long run concept and
each point on the expansion path represents
a combination of inputs that minimizes cost.
• The arrow from the origin shows all the cost
minimizing input combinations for various
levels of out put the firm could produce in the
long run.
• Long run expansion path E1 E E2
60. …CONTD
• Is the expansion path always linear …………. No.
• The slope of the expansion path depends on the
ratio of the input prices.
• When production function is homogenous then
the slope of expansion path is linear.
• If production function not homogenous then
expansion path is not linear.
61. RETURNS TO SCALE
• Returns to scale refer to the degree by which
the level of out put changes in response to a
given change in all the inputs in a production
system.
• Types of returns to scale
– Constant return to scale
– Decreasing return to scale
– Increasing return to scale.
62. ..contd
• Constant return
– If a proportional increase in all inputs yields an equal
proportional increase in output.
– Example = if labor and capital are doubled then
output also doubled.
• Decreasing return
– If a proportional increase in all inputs yields a less
than proportional increase in output.
– Example = if labor and capital are doubled then
output is less than doubled.
• Increasing return
– If a proportional increase in all inputs yields an more
than proportional increase in output.
– Example = if labor and capital are doubled then
output is more than doubled.
63. GRAPHS – RETURN TO SCALE
CONSTANT DECREASING
50 100 200 50 125
B C
A
90
INCREASING 50 150 400
65. Cob-Douglas Production Function
• Type of Empirical production function.
• Proposed by WICKSELL
• Tested against statistical evidence by CHARLES
W.COBB & PAUL H.DOUGLAS.
• Equation is
1b
Q AL K b
– Q = Total Output
– L = Units of Labor.
– K = Units of Capital.
– A = a constant
– B = a parameter
66. COB-DOUGLAS FUNCTION -
PROPERTIES
• Both L and K should be positive for Q to exist.
• b + (1-b) =1. It assumes only constant returns
to scale. It does not support Increasing or
Decreasing returns to scale.
• Cob-Douglas equation rewritten
Q AL K
• α = Wage share / Total Income.
• β = Capital share / Total Income.
67. PROPERTIES CONTD…
• If (α+β) = 1, it is Constant return to scale.
• If (α+β) > 1, it is increasing returns to scale.
• If (α+β) < 1, it is decreasing returns to scale.
1b
Q AL K b
68. LIMITATIONS OF COB-DOUGLAS
• It cannot show marginal product of an input
passing the 3 stages of Production.
• It assumes Constant return to scale. Certain
Production function cannot be increased in
the same proportion.
• Difficulty in measurement of various inputs.
• It assumes there is a fixed relation of raw
materials and output.
69. CES – CONSTANT ELASTICITY OF
SUBSTITUTION PRODUCTION FUNCTION
/
X KC (1 K ) L
– X = Output, C = Capital, L = Labour
– γ = Efficiency parameter (scale effect)
– K = Capital intensity factor coefficient
– K-1 = Labour intensity factor coefficient
– ν = Degree of returns to scale.
– α = Substitution parameter.