Theory of Production

Date4Theory of productionFixed factors resources and variable resources/FactorsQuantity of fixed resources remain unchanged when the output decreasesor increases in short run during the process of production beQuantity of variable resources directly change with the quantity ofoutput during the process of productionShort run vs. long runShort runne the period of time both variable resources and fixedresources can be seen There must be at least one resource whichis fixed-Long iun IS the period of time where only variable resources canbe seen It IS the period of time all types of resources have tobe increased in order to increase the quantity of output(Production scale is the max.mum output which can be gained withFixed resources )Long run IS the period of time where production scale or productionccionaly have to be increased in order to increase the outputexistingLong run is just a concept Long run is just the plan to expand the productssoale Everybody 16 producing the sholt run.We can't measure the length of shottium It depends on the type ofbusinessIf of someone does not expand the production scale for his lifetime heIS in the short run For his life time Variable factorseg-: row materialuncontracted laboursFixed factorseo- machinerybuildinglandcontracted laboursProduction functionThis is the Functional relationship between quantity and of inputsand quantity of outputs.This is practical concept since this should be developed by anoperational managerThis only conceins about technical relationshipsThis IS the production schedule which shows the maximum quantityof output which can be gained by employing alternative comb-nations of resources.1 (CL,K,M)Quantity of output is a function of labour, capital & 104 materalDSholt run production functionThis IS the functional relationship between inputs and quantity ofoutput when technology and scale are held constant C whentechnology and fixed resources held constantori0 FCLQuantity of output IS o function of labour and material whencapital remain unchangedRATHNA DateProperties of a production FunctionofThere's a boundary /limit for extra production when Quantity OFone input increases when other inputs and technology remainunchangedO2There's a complementary relationship amone the inputs But thereIS certain possibility w substitute one input instead of other input.Short run production conceptTotal productTotal quantity of outout which can be produced by employing a particularlevel of inputs- TP in short run specially depend on vanable inputs.Average product9419MAverage quantity of output per unit of an input.eg- AP of labour + Average quantity of output produced byone unit of labourAP - (TP) Total productQuantity of labour input CL)9AMarginal productChange in quantity of output as a result of changing one unit ofinput.eg- MP of labour - Change in product resulting from change inone unit of labour.MPATPXMR = ATROLAQInputoutputRATHNAMKt Graphical illustration of shoro un production plan/production curveQ2(3)Additionalproductivityadded toTPthe totalproductiveincreasing2 Addressadded toproductiveTP IS decie-asing.123LOLI L2L3MP/APdowboidAPsoutena70LIL2toia L3RTA = IMXMPisWHOTAI-XMRATHNA 201NPStages of short run productionThere are 3 stages of short run productionStage IMP > APJulization OF Fixed resources-is comparatively lower (under utilization)The from can employ more variable resourceseg: construction industryStage 3government euntrepreneursMP coUtilization of fixed resources as comparatively whigher. probably excessutilization of fixed resouices eg- government contrepreneurs CAG offices)Stage 9MP > OMP < APThere IS optimul utilization of fixed resources. No under or over utilizationRational producer in the shot run always willing to be in the stage 2.A Firm producing in stage 1 can increase the TP by increasing labour CVFA Firm producing in stage 3 can increase the TP by reducing labour CUP)so stage rs called, optimal stage ofAMX9M98MReason for the behaviour of production Function of shoit run.The reason: for behaviorit of short 1000 production's function is the lowof diminishing marginal returnsThis says that AP and MP decreases beyond a particularlevel when quantity of variable inputs IS added to a particular levelof fixed inputs gradually under the given technology and scale.Evis[AMtosridsim in2 AssumptionsTechnology and scale remain unchanged02 Each unit of the variable input is homogeneousEquilibrium in shoit run production processMain purposeTo decide the quantity of variable inputs, must beemployed in order to maximize the total profits by the FirmMRP (Marginal Revenue ProductMR is the increase in total revenue as a result of increase in oneunit of output.MP IS the increase in total production as a result of Encleose in oneunit of inputMRP is the increase in total revenue as a result of increase in oneunit of inputMRP is the increase m. total revenue as a result of increase in oneunit of labour inputMRPL = MP, XMRMRC (Marginal Resource cost)/MFC (Marginal Factor cost)MRC/MFC is the increase in total East as a result of increase in oneunit of inputLet's assume that in a perfectly competitive market for labour, therate of wage is constant the rate of wage equals MRCRATHRA AJanP@BAMRC/MEC/WRc06 : 9MMRP6L.L1LEL2G € 99M-MRPL is a downward slope since MP is also a downward slope-From B to A when the quantity of labour units are increased theprofit IS increased until the point A since between 13 and A MRP orthe increase in revenue IS greater than MRC 01 increase in revenue. Butthe additional profit of a one unit IS decreasing until point A.missioned2117TC HOWoursmooLWnonentimes does us baing&Vrogo but (10SMIDSrelationto corporidmed thos us bonosm 4355 Inan] (Ro DateTheory of long run production processLong run production FunctionLong run production Function IS the technical relationship betweenthe quantity of output and the quantities of inputs when allresources are belonging to variable resources.Q = f CL,KQuantity of output is a Function of all inputs such as labour, capitalMP, = IQSHPOLMPK = 00OKeve Q = 20L3K+ + 10LK 5L+ 2KMPL = 60L2K+ + 10K -5MPK = 80L3K3 + IOL - 2I Soquant curve DADThis indicates alternative combinations of 2 resources which producesame quantity of outputODTotal Quantity of output indicated by each combination of resources on aparticular rsoguant curve IS same.02.Total cost incurred by each combination of resources or a particularIsoquant IS different. DayK20A12B10CIQ = 200L024ISProperties of Isoguants51Qantily of output represented by isoguant further fom origin is greaterthan quantity of output represented by an isoquant closer to theoriginCBecause reaching an upper isoquant mean utilizing more resources whichindicates producing mate products)KproduceIQq 300IQ 200a2T3McularRATHNA Lett02Isoquant curves cannot be intersectedC Reason IS there's no rationality since we can't say more cap be producedat a intersetced point0303)There is an isoguant culve through every poss, ble combination ofresources.04Isoquant IS a downward sloping curve.C Because of the substitutability among resources)Isoguants are convex to the onon(Because capital and labor are not perfectly substitable )Marginal Rate of Technical SubstitutionQuantity of one input can be reduced when quantity of anothernput increases by one unit while keeping the quantity of outputis constant.MRTS of labour For capitalQuantity of capital can be reduced is in order to increase quantitydonof labour one additional unit while keeping the quantity of outputsIS a constant.The rate of labour which can be substituted instead of capital whenquantity of output IS a constantACEcasdecARS =MRTS is equal to the slope of iso-quant curve=yKfor10AMRTS of labour of capital =AK MPL.31DLMPKDKksBIQOLIL2IS 'o' 30 AL-MPL+AKMPK=OSince.on Isoquant curve it hasIncrease in TPDecease in TPsame level of production on eachdue to the increasedue to the decreaseunit final result is zeroin labour units.in capital unitsAL. MPL+AK-MPK=150100AK. MP, - - AL.MPLAK. - MPLAL MPKMRTSOKMPLDLMRTSOFlabourforcapitalLKMPKALMRTS KLMPK4KMRTS of capital For labourMPLWhen labour units are increased by one unit by one unit the quantity whichshould be reduced in capital is decreasingKktThe law of dimmishing MR TSquantityreducedincaptalisdecreasingK2K3I Qk4ofLOL1L2L3L4Labour units are increasedby one unit by one Unit CityWhen the quantity of input is increased by one unb by oneunit while the Quantity of output remain unchanged. its MRTSgradually decreases This is called as the law of diminishing MRTSThis happens because of the complementary relationship among theInputsIso- cost line /curve/equationIso- cost curve is the curve which shows alternative combinationsof 2 resources having the same amount of costrk WL -o . price/cost per unit of capital (interest)K - quantity of capitalw = pace/case of unit of capital (wagerateLquantity of labourC costteg-: rk+wl = CK2000K+ 1000L , 9000027RM40If total cost is allocated to capital,80 000IS2000K=404rPI53Iso-costOleL80plE)isisORATHONDID class wodeJto on td IDMChanges in iso-cost curveHOL (200) OR mondayOIIf the price per unit of one input decreases ISO - cost curve will berotated rightward from the relavant axis20200 toICICAN LO02)If the price per unit of one input increases Iso cost curve will berotated leftward from the relevant axisORS92IC2IC,oDwill03)IF the producers budget (c) increases ISO-cost curve shift nohaardporallely(atoIC20001:32 asIf the producers budget decreases there a leftwardwill be04parallel shift of iso guant culve.ICIIC2oRATHIN DateEgulibrium on long run productionObjectives / Alternative viewsFinding least cost resource combination C ISO cost line) for a givenlevel of output.02Finding the quantity of output (IsoQuant curve for a given level ofcost CIso cost lineLOTk8AIQ3 = 250(4)KIPT202IQ2=150CIQ1=100C1JL1I'so cost curve,(3)r=1000207rk+ WLw 2000browsoC 10,00001.)given level of output - 150least cost resource combination 4 units of capital3unitsoflabourcost 10,000IDI202 [2002given level of budget e. 10,000optimum quantity of output -e 150 units22Different ways of identifieng long run equlibrumX.I.Tangency point of the ISO-cost curve with an ISO quant curveII.Slope of isoquant curve equals slope of 150cast curve at this pointMathematical indicationSlope of iso-cost curverk +WL = Crk = w C-WLK-C WLrcoefficians Cy=K =CwTC equation as anrequal on for a straightline.Wslope of ISO cost curvebetweenThis 16 called as inputs price ratiothe rate of exchanginginputsIIIMathematical representationKOK wOLrMPL3orIsoquantMPKrIsocostAken MPe andOMRT5LKSUIUSIndusce!DLMPKrMRTSALMPK==rKCOKMPLEATHERIsoquantIsocastk 7152Shapes of isoquant curves for different types of resourcesOI.If resources are imperfect substructionsIsoquant curve IS downward slopingIQLO02.)If resources are perfect complementseg-: In a garment factory each sewing machine requires a labouresmachinesaddress@ A- in order to operate ( machmeoats2 labouters are required.My&ofB-IQ2A&B are technically2efficient com binationseg*Aof inputsIQThere also the fitionLabourO24Isoquant culve is a right angle curve with go if resources are perfectcomplements.03If 2 resources are perfect substitutes@A - All inputs can be produced byBMonly using labour resourceIfIQInOAIsoquant curve IS a straight the with negative slopeRM theLongProduction expansion pathKPEPgrotenkkisPEPIOHID,0Ltis140IQC1C2C3C40Production expansion path IS the path or the culve which showsdifferent egulibro at different producers budget (different levelsof producers' cost) when input prices are remain unchange d.This shows the path of expanding the Firms' production, profit,market share etc.Production ridge line (D) oranLower ridge line is the curve which shows each point atbeach ISOquantine where morginal product offlabour rs zero/.Therefore at each and every pointon RL MP, IS zerolowsTIDEasignDimoridoequit10991Upper ridge line IS the line which shows calliopoinwhere marginal product of capital is zeroTherefore at each point on upper ridge line MPK IS zeroRATENA KURLLRL123IQ2=200I21-100L0swedaloveIn the area: below lower ridge line MP, is negativeIn the area above upper ridge line MPK IS negativeIn the area between lower and upper ridge line both MP and MPKis positiveA rational producer will never produce in the area below the lowerridge line since MP is negativeA rational producer will never produce in the area above the upperridge,line since , M Pk's negative ourstowalA rational producer isialways trying to produce in the area betweenlower and upper ridge lines Therefore the area between Lower andupper ridge line is called economic region optimum region inBOODSstong Tan prodactionisprocess error order et Gail SOON reggli010= a teams 70 coubora temptom stadistandsobitT CascapitalK.12labour rato=4-1:4L3=Factor SubstitutionK^capitalK 10F= 0.5 - 1:00labour mooL2012AC10B10, 200IQ: 400C1CRLO.345201aFactorProductionsubstitutioneffecteffectIsocost curve shift from C1 to C2 due to the decrease in labour cost.At equilbrium A umore capital intensive production techniqueAt equilibrium Bmore labour in tensive production techniqueFrom A to B ratio change from 4 to 1: O.ScapitalIt says that certain quantity or % of tobout has been abbstitutedinstead of labour . It is the Factor substitutionQuantity of labour increases from 3 to 20, employed by the Filmdue to the decrease in cost of labour.RATHRA Datewe have devide this total increase in 20 units of labour inputsinto 2 catagones.-Increase in quantity of labour units because quantity oflabour has become more cheaper than capital3-5 umts2.Increase in quantity of labour units because of the increaseInidin the purchasing power of producer or the cost savingof producer.5 units to 20 unitsReturns to scale-Rate of retum can be taken by increasing all inputs or scale-a concept from long term production-3 types of returns to scale in long run01. Increasing returns to scaleA. situati on where % increase in quantity of output isgreater than % increase in all inputs02 Decreasing returns to scale% increase in quantity of output is less than % increase10 all inputs03- Constant returns to scalemoreincrease in quantity of output equals %increase inall inputswadebustansmitedeudboyotomaor LenThere are 2 methods of indicating return to scale by isoquantcurve.OD I st methodConstant returns to scale6IQ2*9003100%IQ=100LOIncrease in returns to scale3100%IQ2*00010IQ1=1006o2 3willDecrease in returns to scale93IQ2=200100%IQ100LO26300 xBATHNA Date02) 2nd methodkConstant returns w scaleIQ3=300IQ2=200IQ1=100O-LKIncrease in returns to scale709.400IQ3=300IQ2=200IQ1=100okDecrease in returns to scaleIR4.400IQ3= 300IQ2=200OS