Class Copy of Production Function

8/8/2019 Class Copy of Production Function

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Astha Khanna


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The Productio Process

Combi i g i puts or f ctors of productio to

chieve output

C tegories of I puts (f ctors of productio ) L bor

M teri ls

C pit l


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Productio Fu ctio :

I dic tes thehighest output that a firm can

produce for every specified combination of

inputs given the state of technology.

Shows what is technically feasible when the firm

operates efficiently.


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The Short Run

A period of time during whichat least one factor of

production is fixed - cannot be increased.

The Long Run

A period of time during which all factors ofproduction can be varied.


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Witha simple two factor production function

of the form:

Q= F(K,L)wenormally assume capital ( ) is the fixed

factor, and labour(L) is thevariable factor


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Amount Amount Total Average Marginalof Labor (L) of Capital (K) Output (Q) Product Product

0 10 0 --- ---

1 10 10 10 10

2 10 30 15 20

3 10 60 20 30

4 10 80 20 20

5 10 95 19 15

6 10 108 18 13

7 10 112 16 4

8 10 112 14 0

9 10 108 12 -4

10 10 100 10 -8


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Observations:

1) Withadditional workers, output (Q)

increa

ses, r

eache

sa

maximum,

andthen decreases.


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Observations:

2) Theaverage product of labor (AP),

or output per work

er, i

ncrea

sesan

dthen decreases.

LQ

InputLaborOutputAP !!


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Observations:

3) The marginal product of labor (MP), or

output of the

additio

nal work

er,increases rapidly initially and then

decreases and becomes negative..

L

Q

InputLabor

OutputMPL

(

(

(

(


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Total Product

B i cr as at i cr asi rat

Bt D i cr at dimi is i ratD max prd. N t d cli

Labor per Month

Output

per

Month

60

112

0 2 3 4 5 6 7 8 9 101

A

B

C

D


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Average Product

8

10

20

Outpu

t

per

Month

0 2 3 4 5 6 7 9 101 Labor per Month

30

E

Marginal Product

Obs rvati s:

ft f E: MP > AP & AP is i cr asi

i t f E: MP < AP & AP is d cr asi

E: MP = AP & AP is at its maxim m


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Observations:

WhenMP= 0, TPis at its maximum

WhenMP> AP, APis increasing

WhenMP< AP, AP is decreasing WhenMP= AP, APis at its maximum


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Labor

per Month

Output

per

Month

60

0 3 4 5 6 7 8 9 0

A

B

C

8

0

0

E

0 3 4 5 6 7 9 0

30

Output

per

Month

Labor

per Month

AP = slope of line from origin to a point on TP, lines b, & c.

MP = slope of a tangent to any point on the TPline, lines a & c.


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As the se f an in t in reases in eq al

in re ents, a int ill e rea he at hi h the

res ltin a iti ns t t t e reases (i.e. MPde lines).

The Law of Diminishing Marginal Returns


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Labor Productivity

InputLaborTotal

OutputTotaltyProductiviAverage !


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Measuring the relationship between the scale

(size) of a firm and output

1) Increasing returns to scale: output

more than doubles whenall inputs

are doubled

Utilizing Economies of Scale


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Measuring the relationship between the

scale (size) of a firm and output

2) Constant returns to scale: output

doubles whenall inputs are doubled

y Moving towards Optimum


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Measuring the relationship between the scale

(size) of a firm and output

3) Decreasing returns to scale: output less

than doubles whenall inputs are doubled

Decreasing efficiency with large size

Reduction of entrepreneurial abilities

Diseconomies of scale


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Aproduction function describes the

maximum output a firm can produce for each

specified combination of inputs.


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Average product of labormeasures the

productivity of theaverage worker, whereas

marginal product of labormeasures the

productivity of the last worker added.


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Thelawofdiminishing returns explains that

the marginal product of an input eventually

diminishes as its uantity is increased.

Class Copy of Production Function

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