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CENTRE FOR POLICY STUDIESUNIVERSITY COLLEGE CORK
EC2204TUTORIAL 7
W\S 26\11\2012
Academic Year: 2012/2013 Instructors: Brenda Lynch and PJ Hunt
Contact: [email protected] [email protected]
Production and Cost
Production Function is the relationship between the maximum output attainable for a given quantity of variable inputs (such as capital and labour), for a given technology.
Average Product is total output divided by the number of inputs (workers).
Marginal Product: is the additional output generated from hiring 1 additional worker.
Total Product: The total output produced by a firm in a given period of time.
The Stages of Production.
Stage 1: Average product rising. Total Product is rising. Marginal product is beginning to turn.
Stage 2: Average product declining, marginal product positive but is declining while total product reaches its peak.
Stage 3: Marginal product is negative, average product is declining and total product is declining.
Stage 1 Stage 2 Stage 3 Ep > 1 Ep < 1 Ep < 0
Ep = 1
Ep = 0 TP
Increasing Returns Decreasing Returns Negative Returns
Total OutputQ (Units)
Point of maximum marginal returns
Avg. Output,MarginalOutput, (units of output perunit of input
X1 X2 X3
X1 X2 X3
AP
MP
Inputs
Inputs
Production Elasticity.
When MPL > APL, labour elasticity EL > 1
When MPL < APL, labour elasticity EL < 1
Law of diminishing marginal returns;
As a firm uses more of a variable input, with a given quantity of fixed input, the marginal output of the variable input eventually diminishes.
Technical and Economic Efficiency. All points on a production function are
said to be technically efficient. However economic efficiency occurs only at one point, at the output level where MR = MC.
Do the following functions exhibit increasing, decreasing or constant returns to scale?
Q = 3L + 2K
This function exhibits constant returns to scale. For example if L = 2 and K = 2, Q = 10. If L = 4 and K = 4 then Q = 20. Hence when input is doubled output is doubled.
Q = (2L + 2K) ½ (to the power of a half)
The function exhibits decreasing returns to scale. For example when L = 2 and K = 2 then Q = 2.8. If L= 4 and K = 4 then Q = 4. Hence when inputs are doubled output is less than double.
Q = (3LK)²
This function exhibits increasing returns to scale. For example if L = 2 and K = 2 then Q = 144. If L= 4 and K = 4 then Q = 2,304. When inputs are doubled output will more than double.
