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Production

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15 views19 pages

Production

Uploaded by

ashkletron
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Production

Input #1

Input #2

Input #3
Q=f(#1 #2 #3………)

Output = f (input1, input2, input3 …. inputn)


Input #4
Q = f (L, K, T)

1. Q denotes the quantity of output produced


2. L and K denote the respective quantities of labour—the human resource— and capital—the physical
resource—used and T represents Technology.
3. By using L and K in a production process, one obtains output (Q).
4 slices in 10 minutes 1 slices in per minutes

Slice of toasted bread per hour

= min(slice of bread per hour, 24*number of toasters, 60*number of workers)


The Production Function:
o The key concept in the theory of production is the production function.
o The word ‘function’ in mathematics expresses the relationship between
dependent and independent variables.
o Or a function shows a cause—and—effect relationship.
o The production function shows the technological or engineering relationship
between inputs (independent variables or cause) and output (dependent
variable or effect).
Production
Function

Short Run Long Run

Variable Factors
Fixed factors Variable Factors
Labor, Raw
Building, Almost
Material, Fuel,
Machinery everything
power etc.
Types of Production

Total Product Average Product Marginal Product

The output that is The additional output


The output per unit of that is generated by an
produced by all of the
variable factors additional worker
employed workers
AP=TP/Q MP=TPN-TPN-1 or
TP=AP*Q
MP=∆TP/∆Q
Diminishing Returns
o The law of diminishing marginal returns states that as
successive amounts of the variable input, i.e., labor, are
added to a fixed amount of other resources, i.e., capital, in
the production process the marginal contribution of the
additional variable resource will eventually decline.
o As the marginal product begins to fall but remains positive,
total product continues to increase but at a decreasing rate.
o As long as the marginal product of a worker is greater than
the average product, computed by taking the total product
divided by the number of workers, the average product will
rise.
o If your g.p.a. for this semester, i.e., your marginal g.p.a., is
greater than your cumulative g.p.a., i.e., your average
g.p.a., then your average g.p.a. will rise.
o But if your g.p.a. this semester is lower than your
cumulative g.p.a., then your cumulative g.p.a. will fall.
o Thus the marginal product will always intersect the average
product at the maximum average product.
Amount Amount
of K of L TP
2 0 0
2 1 57
2 2 118
2 3 177
2 4 228
2 5 270
2 6 300
2 7 322
AP
2 8 336
2 9 342
2 10 340
MP
o There may even come a point where adding an additional worker makes things
so crowded that TP begins to fall. In this case the MP is negative.
o In our example, adding the ninth and tenth worker yields lower output than what
was produced with only eight workers.
o So how many workers should be employed?
o We know that we would not stop in the region where marginal product is increasing
and we would not produce in the region where marginal product is negative.
o Thus we will produce where marginal product is decreasing but positive, but without
looking at the costs and the price that the output sells for, we are unable to
determine how many workers to employ.
o A production function shows the output or total product as more of the variable
input, in our case labor is added.
o The function shows the regions of increasing marginal product, decreasing marginal
product, and negative marginal product.
Increasing
Diminishing
Marginal
Marginal
Returns
Returns
If MP is increasing TP is increasing at increasing rate
If MP is negative TP is decreasing MP AP
II III
QL (#Workers) TP(Output) I

1 2 AP MP
2 5
3 9
4 12
5 14
6 15
7 13
8 10
Production involves a number of important decisions that define a firm's behavior. These
decisions include, but are not limited to:
• What product or products should the firm produce?
• How should the firm produce the products (i.e., what production process should the firm
use)?
• How much output should the firm produce?
• What price should the firm charge for its products?
• How much labor should the firm employ?

The answers to these questions depend on the production and cost conditions facing each
firm. The theory of production is importance because:
o Firstly, cost theory is a derived theory—it is derived from the production theory. Cost
has great relevance in the determination of price of a commodity.
o Secondly, the theory of production may be used in the determination of rewards of an
input. The basis of input demand theory is indeed the theory of production.

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