how can production be optimized or cost optimized? how does output respond to change in quantity of...
TRANSCRIPT
THEORY OF PRODUCTION
How can production be optimized or cost optimized?
How does output respond to change in quantity of inputs?
How does technology matter in reducing the cost of production?
How can the least cost combination of input be achieved?
Given the technology, what happens to the rate of return when more plants are added to the firm?
Introduction
o ‘Production’ means a process by which resources are transformed into a different and more useful commodity or service.
o Input is anything which a firm buy for use in its production & output is goods that come out of production.
Some Basic Concepts
o Fixed Input is one whose supply is inelastic for short-run.
o Variable Input is one whose supply in the short-run is elastic.
o Short-run & Long- run are the period involve in the production process.
o It state the technological relationship between input and output in the form of an equation, a table or a graph.
o Q = ƒ (LB, L, K, M, T, t)
LB: Land and Building, L: Labour, K: Capital,M: Raw Materials, T: Technology, t: Time
Production Function
Production function with two variables
Q = ƒ (L, K)
Qc = ƒ (K, L)
Qc: The quantity of coal produce per unit timeK : Capital L: Labour
Coal Mining Production Function
Short-run Production function
Q = ƒ ( , L) Where K: Constant
Q = bL Where b= gives constant return
to labour
Long-run production function
Q = ƒ (K, L)
Q = A Where A, a & b are parameters
10 158 223 274 316 354 387 418 447 474 500
9 150 212 260 300 335 367 397 424 450 474
8 141 200 245 283 316 346 374 400 424 447
7 132 187 229 264 296 324 350 374 397 418
6 122 173 212 245 274 300 324 346 367 387
5 112 158 194 224 250 274 296 316 335 354
4 100 141 173 200 224 245 264 283 300 316
3 87 122 150 173 194 212 229 245 260 274
2 70 100 122 141 158 172 187 200 212 224
1 50 70 87 100 112 122 132 141 150 158
K L
1 2 3 4 5 6 7 8 9 10
No. of Workers(N)
Total Product (TPL) (tonnes)
Marginal Product (MPL) Avg Product (APL)
Stages of Production (Based on MPL)
(i) (ii) (iii) (iv) (v)
1 24 24 24
1. Increasing returns
2 72 48 36
3 138 66 46
4 216 78 54
5 300 84 60
6 384 84 64
7 462 78 66
2. Diminishing returns8 528 66 66
9 576 48 64
10 600 24 60
11 594 -6 543. Negative returns
12 552 -42 46
Short-run Law of Production
1 2 3 4 5 6 7 8 9 10 11 120
100
200
300
400
500
600
700To
tal outp
ut
(Ton
nes)
Labour
TPL
Total, Average & Marginal Product
1 2 3 4 5 6 7 8 9 10 11 12
-60
-40
-20
0
20
40
60
80
100
Labour
Marg
inal an
d A
vera
ge
Pro
duct
APL
MPL
