Transcript THEORY OF PRODUCTION

THEORY OF PRODUCTION
MARGINAL PRODUCT
The production in the short-run
The production function = the relationship between the amount of
input required and the amount of output that can be obtained.

Total product (total physical product) = the total amount of output
produced, in physical units
 Average product (AP) – total output divided by total units of input,
means production per unit of input.
AP 
TP
L
 Marginal product – the extra product or output added by 1 extra unit
of that input while other inputs are held constant.
MP 
TP
L
Relationships between total and marginal product
 at first MP grows, which means, TP grows faster than
the amount of input,
 in the second phase, MP declines, but is positive –
means, TP grows slowly than the amount of used
input,
 theoretically can turn up third situation – MP is
negative, which means decline in TP.
Total, Marginal and Average Product
The law of diminishing returns:
= the extra production obtained
from increase in a variable
input will eventually decline
as more of the variable input
is used together with the
fixed inputs
TP
TP
L
AP,
MP
APL
MPL
L
Production in the long-run
 Equal-product curve
 The equal-cost line (Isocost
(Isoquants)
 Characteristics:
 more distant curve from
the zero corresponds to
higher output,
 equal-product curve is
downward-sloping,
 convex
The slope: Marginal rate of
technical substitution
line)
 = all combination of labor
and capital that are of equal
total cost
 The equation:
TC = wL + rK
 the slope of equal-cost line:
MRTS K , L 
K MPL

L MPK
K w

L r
THE MINIMUM-COST INPUT CONDITION
 combining the equal-product and equal-cost lines, we
can easily determine the optimal, or cost-minimizing,
position of the firm.
w MPL

r MPK
= the marginal product per crown received from the
(last) euro of expenditure must be the same for every
productive factor.
Long-run Production Function and Least Cost
Condition
K
E
KE
Q3
TC
LE
Q1
L
Q2
Returns to scale
= reflects the responsiveness of total product when all the inputs
are increased proportionately
Three important cases should be distinguished:
 constant returns to scale – where a change in all inputs leads to
an equally large increase in output,
 decreasing returns to scale – when a balanced increase of all
inputs leads to a less-than-proportional increase in total output,
 increasing returns to scale – arises when an increase in all
inputs leads to a more-than-proportional increase in the level of
output.
TECHNOLOGICAL CHANGE

occurs when new or improved engineering and technical
knowledge allows more output to be produced from the same
inputs, or when the same output can be produced with fewer
inputs

depict by two different ways:
production function as a relationship between inputs available
and output produced in economy,
productions function as a combination of different kinds of
outputs.
a)
b)
TASKS:
Decide how many workers will be optimal to hire, as long as the wage rate on the perfectly competitive labor market is
210 units/per hour and unit of production is sold for 42 units, having known following dates about total product:
L
1
2
3
4
5
6
TP
11
19
24
28
30
31
2. Také decision about the area of land hired. Price of 1t production is 35,- units, rent for hiring land is 1 400,- units and
having known following returns from land:
ha
1
2
3
4
5
6
Total
return
80
140
190
230
260
290
3. The production of the same output is possible by means of following combination of labor and capital:
A
B
C
D
labor
7
10
23
40
capital
50
38
20
10
4. Which combination would choose the economist minimizing cost in case:
a)
Capital is three times more expensive than labor,
b)
Price of capital is 24 unit, price of labor is 19 unit.