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    Production Anlysis 100818

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    SubratKumar
    Here are the key points about returns to scale: - Constant returns to scale occur when a doubling of all inputs results in a doubling of output. The scale of production does not affect average or marginal costs. - Increasing returns to scale occur when a doubling of all inputs results in more than a doubling of output. Average costs fall with increasing scale of production as fixed costs are spread out over more units of output. - Decreasing returns to scale occur when a doubling of all inputs results in less than a doubling of output. Further expansion results in higher average costs due to inefficient coordination of larger operations and other diseconomies of scale. The shape of the isoquants provides information about returns to scale - equ

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    Production Anlysis 100818

    Uploaded by

    SubratKumar
    44 views35 pages
    Here are the key points about returns to scale: - Constant returns to scale occur when a doubling of all inputs results in a doubling of output. The scale of production does not affect average or marginal costs. - Increasing returns to scale occur when a doubling of all inputs results in more than a doubling of output. Average costs fall with increasing scale of production as fixed costs are spread out over more units of output. - Decreasing returns to scale occur when a doubling of all inputs results in less than a doubling of output. Further expansion results in higher average costs due to inefficient coordination of larger operations and other diseconomies of scale. The shape of the isoquants provides information about returns to scale - equ

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    Here are the key points about returns to scale: - Constant returns to scale occur when a doubling of all inputs results in a doubling of output. The scale of production does not affect average or marginal costs. - Increasing returns to scale occur when a doubling of all inputs results in more than a doubling of output. Average costs fall with increasing scale of production as fixed costs are spread out over more units of output. - Decreasing returns to scale occur when a doubling of all inputs results in less than a doubling of output. Further expansion results in higher average costs due to inefficient coordination of larger operations and other diseconomies of scale. The shape of the isoquants provides information about returns to scale - equ

    Copyright:

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    44 views35 pages

    Production Anlysis 100818

    Uploaded by

    SubratKumar
    Here are the key points about returns to scale: - Constant returns to scale occur when a doubling of all inputs results in a doubling of output. The scale of production does not affect average or marginal costs. - Increasing returns to scale occur when a doubling of all inputs results in more than a doubling of output. Average costs fall with increasing scale of production as fixed costs are spread out over more units of output. - Decreasing returns to scale occur when a doubling of all inputs results in less than a doubling of output. Further expansion results in higher average costs due to inefficient coordination of larger operations and other diseconomies of scale. The shape of the isoquants provides information about returns to scale - equ

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    Production Analysis

     What is production?

     Factors of production

     Production function with one variable

     Production function with two variables

     Economies of scale and scope


    Production

    Production - an organized activities of converting inputs


    into output or creation of value and utility

    Factors of production – Rewards

    Land - rent

    Labor - wages

    Capital - interest

    Organization - profit
    Production function

     Production function –

    The functional relationship between physical inputs and


    physical output
    What do Tata Motors, Reliance Power and SBI , have in
    common?

    Like every firm,


     They must decide how much to produce.
     How many people to employ.
     How much and what type of capital equipment to
    use.

    How do firms make these decisions?


    Law of diminishing marginal
    productivity
     – as more and more of a variable input is added
    to an existing fixed input, after some point the
    additional output one gets from the additional
    input will fall.
     This means that initially the production function exhibits
    increasing marginal productivity
     Then it exhibits diminishing marginal productivity.
     Finally, it exhibits negative marginal productivity
    Production Function
    With One Variable Input

    Total Product TP = Q = f(L)


    TP
    Marginal Product MPL =
    L
    Average Product TP
    APL =
    L
    Production or MPL
    EL =
    Output Elasticity APL
    Production Function
    With One Variable Input

    Total, Marginal, and Average Product of Labor, and Output Elasticity

    L Q MPL APL EL
    0 0 - - -
    1 3 3 3 1
    2 8 5 4 1.25
    3 12 4 4 1
    4 14 2 3.5 0.57
    5 14 0 2.8 0
    6 12 -2 2 -1
    Production Function
    With One Variable Input
    Production Function
    With One Variable Input
    Optimal Use of the
    Variable Input

    Marginal Revenue
    MRPL = (MPL)(MR)
    Product of Labor
    Marginal Resource TC
    MRCL =
    Cost of Labor L

    Optimal Use of Labor MRPL = MRCL


    Optimal Use of the
    Variable Input

    Use of Labor is Optimal When L = 3.50

    L MPL MR = P MRPL MRCL


    2.50 4 $10 $40 $20
    3.00 3 10 30 20
    3.50 2 10 20 20
    4.00 1 10 10 20
    4.50 0 10 0 20
    Optimal Use of the
    Variable Input
    Production

    You are an employer seeking to fill a vacant


    position on an assembly line. Are you more
    concerned with the average product of labor or
    the marginal product of labor for the last person
    hired? If you observe that your average product is
    just beginning to decline, should you hire any
    more workers? What does this situation imply
    about the marginal product of your last worker
    hired?
    Production With Two
    Variable Inputs
    Production decisions of the firm

    Three Steps:

     Production Technology

     Cost constraints

     Input choices
    Isoquants

    Isoquants show combination of two inputs that


    can produce the same level of output.
    Properties of Isoquant

     Downward sloping
     Two isoquants never intersect
     Convexity
    - MPlabour / MPcapital = - MPL / MPK = ΔK / ΔL
    The slope of the isoquant is called the marginal rate of
    technical substitution which can be defined as the rate at
    which a firm can substitute capital for labour and hold
    output constant.
    Isoquants Showing All Combinations of Capital and
    Labour That Can Be Used to Produce 50, 100, and
    150 Units of Output
    The Slope of an Isoquant Is Equal to
    the Ratio of MPL to MPK
    Isocosts

     Isocost lines represent all combinations of two


    inputs that a firm can purchase with the same
    total cost.

    C w
    C  wL  rK K  L
    r r
    Isocost Lines Showing the Combinations of
    Capital and Labour Available for $5, $6, and $7
    Isocost Line Showing All Combinations of
    Capital and Labour Available for $25

     The slope of an
    isocost line is
    equal to - PL / PK.

     The simple way to


    draw an isocost is
    to calculate the
    endpoints on the
    line and connect
    them.
    The Cost Minimizing Equilibrium
    Condition

     Slope of isoquant = - MPL / MPK


     Slope of isocost = - PL / PK

     For cost minimization we set these equal and


    rearrange to obtain:

    MPL / PL = MPK / PK
    Finding the Least-Cost Combination of Capital
    and Labour to Produce 50 Units of Output

     Profit-maximizing firms
    will minimize costs by
    producing their chosen
    level of output with the
    technology represented
    by the point at which
    the isoquant is tangent
    to an isocost line.
     Point A on this diagram
    Minimizing Cost of Production for qx
    = 50, qx = 100, and qx = 150

     Plotting a series of
    cost- minimizing
    combinations of
    inputs - shown
    here as A, B and C
    - enables us to
    derive a cost
    curve.
    Expansion path
    Production

    Suppose a chair manufacturer finds that the


    marginal rate of technical substitution of capital
    for labor in production process is substantially
    greater than the ratio of the rental rate on
    machinery to the wage rate for assembly-line
    labor. How should the producer alter the use of
    capital and labor to minimize the cost of
    production?
     The question states that the MRTS of capital for
    labor is greater than r/w. Note that this is different
    from the MRTS of labor for capital, The MRTS of
    labor for capital equals MPK/MPL. So, it follows that
    MPK/MPL > r/w, or, written another way, MPK/r >
    MPL/w. These two ratios should be equal to
    minimize cost. Since the manufacturer gets more
    marginal output per dollar from capital than from
    labor, he should use more capital and less labor to
    minimize the cost of production.
    Production

     A political campaign manager must decide


    whether to emphasize television advertisements
    or letters to potential voters in a reelection
    campaign. Describe the production function for
    campaign votes. How might information about
    this function (such as the shape of the
    isoquants) help the campaign manager to plan
    strategy?
     The marginal product of labor in the production
    of computer chips is 50 chips per hour. The
    marginal rate of technical substitution of hours
    of labor for hours of machine capital is 1/4.
    What is the marginal product of capital?
    Ans

     The marginal rate of technical substitution is defined at


    the ratio of the two marginal products. Here, we are
    given the marginal product of labor and the marginal
    rate of technical substitution. To determine the marginal
    product of capital, substitute the given values for the
    marginal product of labor and the marginal rate of
    technical substitution into the following formula:

     MRL/MPK = MRTS = 50/MPK =1/4. MRK = 200


    Returns to Scale

     Measuring the relationship between the scale


    (size) of a firm and output

    1) Increasing returns to scale: output


    more than doubles when all inputs
    are doubled
     Larger output associated with lower cost (autos)
     One firm is more efficient than many (utilities)
     The isoquants get closer together
    Returns to Scale

     Measuring the relationship between the scale


    (size) of a firm and output

    2) Constant returns to scale: output


    doubles when all inputs are doubled
     Size does not affect productivity
     May have a large number of producers
     Isoquants are equidistant apart
    Returns to Scale

     Measuring the relationship between the scale


    (size) of a firm and output

    3) Decreasing returns to scale: output less than


    doubles when all inputs are doubled
     Decreasing efficiency with large size
     Reduction of entrepreneurial abilities
     Isoquants become farther apart
    Returns to Scale

    Constant Increasing Decreasing


    Returns to Returns to Returns to
    Scale Scale Scale

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