Inputs: Factors of Production Factors of production: Land Labor Capital Intermediate goods...
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Production and Costs IN PUTS COSTS OUTPUT ( Physical Product)
Inputs: Factors of Production Factors of production: Land Labor Capital Intermediate goods (Entrepreneurial Services ) Production Costs = Costs of Inputs
Inputs: Factors of Production Factors of production: Land Labor
Capital Intermediate goods (Entrepreneurial Services ) Production
Costs = Costs of Inputs
Slide 3
Production in the Short Run versus Production in the Long Run
In the short run at least one of the factors of production remains
unchanged (fixed). In the long run all factors of production are
variable. In a two-input production process, in the short run, only
one input is variable. In a two-input production model, in the
short run, the changes in the output (physical product) are the
result of changes in the variable input.
Slide 4
Production in the Long Run In the long run all inputs used in
the production process by the firm are variable. In a two-input
production model, in the long run, both inputs (say, capital and
labor) are variable. In the long run the level of the output of a
firm can change as a result of changes in any or all inputs.
Slide 5
A Short-Run Production (Function) Analysis Our model: A firm
using two inputs: Capital (K); Fixed Input Labor (L); Variable
input We examine the relationship between the variable input
(labor) and the output. We examine how changes in labor (the
variable input) affect the out put.
Slide 6
Output Measures Total (Physical) Product (output), TPP: The
total amount of output produced by the firm over a certain period
Average (Physical) Product (of the variable input), APP: Total
(Physical) Product divided by the number units of the variable
input Marginal (Physical) Product (of the variable input), MPP: The
change in total product resulting from employing one additional
unit of the variable input
Slide 7
Production in the Short Run P.
Slide 8
Total (Physical) Product and Marginal Physical Product
Slide 9
Average (Physical) Product and Marginal Physical Product
MP
Slide 10
MPP and APP Change in TPP Marginal Physical Product = MPP =
Change in V. Input Total Physical Product Average Physical Product
= APP = Total V. Input
Slide 11
The Law of Diminishing Return Increases in the amount of any
one input, holding the amounts all other inputs constant, would
eventually result in decreasing marginal product of the variable
input. Explanation: Unless all inputs are perfectly and infinitely
substitutable, as we increase the amount of one input, while
keeping other inputs constant, at some point the productive
effectiveness of that input starts to decline.
Slide 12
Long-Run Production Function
Slide 13
Choosing the Optimal Mix of Inputs One approach to choosing the
optimal (least costly) mix of inputs is to compare the (marginal)
cost of producing one extra unit of out put across different
inputs. The firm would likely use the input that increases its
output at the lowest cost by comparing Input Price across all
available inputs. MPP
Slide 14
Slide 15
Isoquant and Isocost Q = f ( K, L) Cost = rK + w L where r =
price of capital w = wage
Slide 16
Isoquant K L 0 Q1 Q2 Q3 Q4 Slope = MPL/MPK = MRTS
Slide 17
Isocost 0 L K Cost = r.K +w. L Cost/r Cost/w Slope = w/r
Slide 18
Isocost 0 L K Cost = r.K +w. L Cost/r Cost/w Slope = w/r Q1
Q2
Slide 19
Input Optimizing Rule MP L MP K MP M --------- = --------- =
--------- w r P M or, MP L w MP L w ------ = --------, ---------- =
--------- MP M r MP M P M
LATC 61 141 195.82.53.51 Q LATC o K= 10 L= 6 K= 20 L= 7 K= 30 L
= 8
Slide 30
Slide 31
Slide 32
Return to Scale Output elasticity: Q % Change in Output %Change
in all inputs Increasing Return: Q > 1 Constant Return: Q = 1
Diminishing Return: Q < 1 Cobb-Douglas function: Q = a K b1 L b2
b1+ b2 >1 b1 + b2 = 1 b1 + b2 < 1
Slide 33
Input Optimization Revisited Marginal revenue product of an
input is the value of the output produced from applying one
additional unit of that input: MRPL = MPL.Price of output = MPL. MR
MRPK = MPK.Price of output = MPK. MR Input-optimizing rule: A firm
will hire/buy each input to the point where the marginal revenue
product the input is equal to its price. MRPL = MPL. MR = w MRPK =
MPK. MR= r
Slide 34
Input optimization and demand for input : Wage D L :
MRPL=MPL.MR o L 2.00 3.10 4.30 6.00 10 22 45 90
Slide 35
Another look at optimization rule: MPL. MR = MRPL= w MPK. MR =
MRPK = r Alternatively: MPL. MR = w MR = MC MPL MPL MPL/MPK = MRTS
= w/r