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    Managerial Economics: Organization of Production and Production Function

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    This document discusses key concepts in production and the production function from a managerial economics perspective. It defines production as the transformation of inputs like labor, capital, land and raw materials into outputs like goods and services. A production function specifies the relationship between physical inputs and output. It distinguishes between short-run and long-run production based on whether inputs can be varied. Total, average and marginal products are also defined to understand how output changes with varying levels of input.

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    Managerial Economics: Organization of Production and Production Function

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    This document discusses key concepts in production and the production function from a managerial economics perspective. It defines production as the transformation of inputs like labor, capital, land and raw materials into outputs like goods and services. A production function specifies the relationship between physical inputs and output. It distinguishes between short-run and long-run production based on whether inputs can be varied. Total, average and marginal products are also defined to understand how output changes with varying levels of input.

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    This document discusses key concepts in production and the production function from a managerial economics perspective. It defines production as the transformation of inputs like labor, capital, land and raw materials into outputs like goods and services. A production function specifies the relationship between physical inputs and output. It distinguishes between short-run and long-run production based on whether inputs can be varied. Total, average and marginal products are also defined to understand how output changes with varying levels of input.

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    11 views14 pages

    Managerial Economics: Organization of Production and Production Function

    Uploaded by

    pubggandu12
    This document discusses key concepts in production and the production function from a managerial economics perspective. It defines production as the transformation of inputs like labor, capital, land and raw materials into outputs like goods and services. A production function specifies the relationship between physical inputs and output. It distinguishes between short-run and long-run production based on whether inputs can be varied. Total, average and marginal products are also defined to understand how output changes with varying levels of input.

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    MANAGERIAL ECONOMICS

    Organization of Production and


    Production Function
    Biplab Sarkar
    Department of Management Studies
    MANAGERIAL ECONOMICS

    Organization of Production and


    Production Function

    Biplab Sarkar
    Department of Management Studies
    MANAGERIAL ECONOMICS
    Important Set of Decisions

    First, the firm must choose its production process, selecting


    how much labour and capital to use.

    Second, if a firm wants to expand its output, it must decide


    how to do that in both the short run and the long run.

    Third, given its ability to change its output level, a firm must
    determine how large to grow based on its expectations about
    future demand and costs.
    MANAGERIAL ECONOMICS
    Input and Outputs

    The main lesson of this UNIT is that firms are no black boxes
    that mysteriously transform inputs into outputs.

    Economic theory explains how firms make decisions about


    production processes, the types of inputs to use, and volume
    of output to produce.
    MANAGERIAL ECONOMICS
    Concept of Production

    Inputs
    (factors of production) Outputs
    Raw Goods
    Natural Transformation
    resources materials
    Process

    Human Capital Services


    resources
    MANAGERIAL ECONOMICS
    Concept of Production Function

    A production function refers to the functional relationship,


    under the given technology, between physical rates of input
    and output of a firm at a given time period.
    MANAGERIAL ECONOMICS
    Simple Production Function

    A simple production function, assuming a two-factor model:

    Ox = f (L,K)

    Ox = Quantity of commodity X per unit of time


    L = Units of labour services
    K = Units of capital
    MANAGERIAL ECONOMICS
    Fixed Inputs and Variable Inputs

    Fixed inputs are those that cannot be readily changed during


    the time period under consideration, excepts perhaps at very
    great expense. Example.

    Variable inputs are those that can be varied on short notice.


    Example.
    MANAGERIAL ECONOMICS
    Time Element and Production Function

    Short-run: The term “short run” is defined as a period of time


    over which the inputs of some factors of production cannot
    be varied. Factors which cannot be altered in the short run
    are called fixed factors.

    Long-run: The term “long run” is defined as a period of time


    long enough to permit variations in the inputs of all factors of
    production employed by a firm. In other words, the long run
    is such a time period over which all factors become variable.
    MANAGERIAL ECONOMICS
    Simple Production Function

    In the short run, the firm’s production function becomes:

    ഥ
    Ox = f (L,𝐾)

    Ox = Quantity of commodity X per unit of time


    L = Amount of labour
    ഥ = Fixed amount of capital
    𝐾
    MANAGERIAL ECONOMICS
    Total Product, Average Product, and Marginal Product

    • Total Product (TP): It refers to the total amount of final


    output produced by a firm given inputs in a given period of
    time.
    • Average Product (AP): It refers to the output produced
    using per unit of factors of production.
    • Marginal Product (MP): It refers to the additional output
    produced as a result of employing an additional unit of the
    variable factor input, all other factors being held constant,
    is known as marginal product (MP).
    MANAGERIAL ECONOMICS
    Total Product, Average Product, and Marginal Product

    Total Marginal Product Average Product


    Capital Labour Product (TP) of Labour of Labour
    8 0 0
    8 1 5 5 5
    8 2 18 13 9
    8 3 36 18 12
    8 4 56 20 14
    8 5 75 19 15
    8 6 90 15 15
    8 7 98 8 14
    8 8 104 6 13
    8 9 108 4 12
    8 10 110 2 11
    8 11 110 0 10
    8 12 108 -2 9
    8 13 104 -4 8
    MANAGERIAL ECONOMICS
    Using Calculus: Calculating the Marginal Product of Labour

    For a linear production function q = f(L,K) = 2L+K and a


    multiplicative production function q = LK, what are the short-
    run production functions given that capital is fixed at 𝐾 ഥ=
    100? What are the marginal products of labour for these
    short-run production functions?
    THANK YOU

    Biplab Sarkar
    Department of Management Studies
    biplabsarkar@pes.edu
    +91 80 6666 3333 Extn 337

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