IMPORTANT ConceptsProductionProduction function InputsClassification of inputsShort run :The time period during which at least one input is fied!"ong run:The time period during which all inputs are #aria$le!PRO%&CTION 'unction Production functions demonstrate the relationship between the amounts of inputs and the quantities of output that a firm produces.Q=f(a,b,c.)"ong Run #s! Short RunIn the long run, the quantities of all inputs may be changed.ll inputs are !ariable"#he long run is sometimes referred to as the planning hori$on.In the short run, at least one input is fi%ed.&apital is usually assumed to be fi%ed in the short run.Production ta'es place in the short run.Product S(ORT R&N) * Total+ Marginal+ and A#erageo#otal product refers to the total output produced!o,hen la$or is com$ined witha fied amount of capital+ the additional output gained from additional units of la$or is termed the marginal product of labor.o!erage productis the -uantit. of output per wor/er!Product* Total+ Marginal+ and A#erageMarginal Product = output/ laborMarginal Product = output/ laborAverage Product = Total Product/Total LaborAverage Product = Total Product/Total Labor0Total Product+ A#erage Product and Marginal ProductNo! of "a$ors 1mplo.ed 2")Total Product 2TP")A#erage Product 2AP")Marginal Product 2MP")34567809:;35383;3453473483488488483*535863635:58554;!69849*53637363534383*5oA#erage product willect to the law of diminishing returns which states that, when additional units of labor or any other variable input are added to a fixed input, the marginal product of the variable input must eventually decrease.;Assumptions to "aw of %iminishing Returns2a) State of technolog. should remainconstant2$) Onl. one factor should $e #aria$le2c) Inputs should not $e used in a fied proportion43A?@?L1L3L1 L2 L3ANo. of labor employedTPLMPLAPLIncreasing marginal returnsiminis!ingmarginal returns Negati"e marginal returnsNo. of labor employedA"erageProduct and marginal productTotal Product@Increasing marginal productDecreasingmarginal productNegativemarginal productLaborQuantity ofoutput"aw of %iminishing Returns45Points to Remem$er,hen MP A AP+ AP will $e maimum,hen MP A 3+ TP will $e maimum#tages of Marginal $eturns%Increasing marginal returns( 'rom the starting point of MP until MP reaches its maimum point!)iminishing marginal returns( 'rom the maimum point of MP until MP A 3!*egati!e marginal returns( 'rom the point where MP A 3 46Prof! Cassels? Three Stages of ProductionITPLMPLAPLLTotal Product, A"erageProduct and marginal productIIIIIThree Stages of ProductionIst Stage:Thereis increasing a#erage returns to the factor of production!The AP" is increasing $ut MP" is first increasing and then decreasing $ut MP is more than AP! IIN% Stage of ProductionThe AP" as well as MP" is decreasing $ut marginal product is positi#e!III Stage of productionTotal product is decreasing and marginal product is negati#e!1ntrepreneur will operate in the second stage onl.!MRP AN% MRC 24)&nits of "a$or25)Marginal Product26) Marginal re#enue AP27)A25) 26)MRP28)MRCAw5 7 43 73 536 6 43 63 534 2 10 20 208 4 43 43 530 3 43 3 53Optimal use of =aria$le inputMRPA MRCMRPA Marginal Re#enue product MRCA Marginal Resource Cost "ONB R&N : R1T&RNS TOSCA"1The word scale refers to the long run situation where all inputs are changed in the same proportion!53"aw of Returns to ScaleConstant returns to scale 2CRS)%ecreasing returns to scale 2%RS)Increasing returns to scale 2IRS)54T.pes of Returns to ScaleTypes of $eturns to #cale escriptionConstant Returns to scale 2CRS)C D A CIIncreasing Returns to Scale 2IRS)C D E CI%ecreasing Returns to Scale 2%RS)C D F CI55&'A(T)$# )' P$)*(TI)N $#I$#($#Types of Returns to ScaleA:'ill in the missing num$ers@:Comment on the relation $etween AplandCapital2G)"a$our2") Total Product AP" MP"4 3 3 H H4 4 5 5 H4 5 8 H 64 6 H 6 74 7 45 6 H4 8 47 H H4 0 H 5!8 44 9 48 5!8 H4 : 47 H H4 ; H 4 4I6 *5"ONB R&N : R1T&RNS TOSCA"1The word scale refers to the long run situation where all inputs are changed in the same proportion!T.pes of returns to scaleConstant returns to scaleIncreasing returns to scale%ecreasing returns to scaleTerms Along the ,a. * Continuedproduction functionlong*runshort runtotal productmarginal producta#erage productproduction functionlong*runshort runtotal productmarginal producta#erage productTest Jourself0! In the long run+a! all inputs are fied!$! all inputs are #aria$le!c! at least one input is fied!d! one input is #aria$le+ while others are fied!Test Jourself8! The short run is the a! time period in which all inputs are #aria$le!$! time period in which all inputs are fied!c! time period in which at least one+ $ut not all+ inputs are fied!d! planning horiKon!8! The short run is the a! time period in which all inputs are #aria$le!$! time period in which all inputs are fied!c! time period in which at least one+ $ut not all+ inputs are fied!d! planning horiKon!The following ta$le gi#es the -uantities of output that can $e produced with different amounts of capital and la$or used $. a firm nits of ! nits of "utput#$% &'((''()% '(&'%%')%&** (('($+ (,%''% '$*')%(**(%'()&'** ''%'%%+)(''($*()& (,%'(&)((**(''(%' ($+()%$*)(+)(** (('(''* (' & % $# nits of L