unit 5 business economics
TRANSCRIPT
-
8/13/2019 Unit 5 Business Economics
1/20
Unit-5
Theory of
Production
-
8/13/2019 Unit 5 Business Economics
2/20
Syllabus content
Rent: Concepts of Differential Rent and Scarcity Rent,Economic and Contract Rent, Quasi Rent and Pure Rent
Wages: Concepts of Time Wages, Piece Wages, andMoney wages, real Wages and factors determining realWages.
Production: Meaning and Concept of Production,Factors of Production and Production function, Fixedand Variable Factors, Law of Variable Proportion (ShortRun Production Analysis), Law of Returns to a Scale(Long Run Production Analysis) through the use of ISOQUANTS.
-
8/13/2019 Unit 5 Business Economics
3/20
Some Basic Concepts
1. Production: It is a process where inputs areconverted into output.
2. Input : It is anything which is used to producegoods or service.
3. Output: It is final goods or services producedafter process on input
4. Fixed Factors: The supply of the factors is
constant in short run. Those factors are called asfixed factors
5. Variable Factors: The supply of the factorschanges in long run. Those factors are called asvariable factors.
-
8/13/2019 Unit 5 Business Economics
4/20
Factors of Production
-
8/13/2019 Unit 5 Business Economics
5/20
What Is Production Function ?
The relationship between the inputs and the
resulting output is described as production
function in Economics.
A production function shows the relationship
between the amounts of factors used and the
amount of output generated per period of
time.
-
8/13/2019 Unit 5 Business Economics
6/20
-
8/13/2019 Unit 5 Business Economics
7/20
Production Function
For convenience production function is
written as follows
X=f (L,K)
Here L= Labour
K= Capital
-
8/13/2019 Unit 5 Business Economics
8/20
Production Function
Short term: Time when one input (say, capital)
remains constant and an addition to output
can be obtained only by using more labour.
Long run: Both inputs become variable.
-
8/13/2019 Unit 5 Business Economics
9/20
Law of Variable Proportions
Law of Variable Proportions (Short run Law ofProduction)
Assumptions:
One factor (say, L) is variable and the other factor(say, K) is constant
Labour is homogeneous
Technology remains constant Input prices are constant in the time under
consideration
-
8/13/2019 Unit 5 Business Economics
10/20
Law of Variable Proportions
No of Workers
L
Total Product
(TPl)Marginal
Product (MPl)Average
Product (APl)Stages ofReturns
1 24 24 24 I)
Increasing
Returns2 72 48 36
3 138 66 46
4 216 78 54
5 300 84 60
6 384 84 64
7 462 78 66 II)
DiminishingReturns8 528 66 669 576 48 64
10 600 24 60
11 594 -6 54 III) Negative
Returns12 552 -42 46
-
8/13/2019 Unit 5 Business Economics
11/20
Law of Variable Proportions
-
8/13/2019 Unit 5 Business Economics
12/20
Law of Returns to a Scale
Also called as production function in long run
X=f (L,K)
In long run L and K are variable
This law shows various combinations of L and K
The graph is called as isoquants
Assumptions:
There are only two factors of production
Technology does not change
Continuity in production
-
8/13/2019 Unit 5 Business Economics
13/20
Isoquant Map
More than one isoquants depicted in onegraph is called isoquant map
-
8/13/2019 Unit 5 Business Economics
14/20
Characteristics of Isoquants
Isoquant slope downward to the right
Isoquant are always convex to the origin
Isoquant can never intersect each other
-
8/13/2019 Unit 5 Business Economics
15/20
Differential Rent And Scarcity rent
Differential Rent means that the investor who
produces wheat on the more productive lands
reaps an extra-profit or rent on that land.
Scarcity rent is the cost of "using up" a finite
resource because benefits of the extracted
resource are unavailable to future
generations.
-
8/13/2019 Unit 5 Business Economics
16/20
Economic and Contract Rent
Economic rentis the difference between what
an owner of a factor of production (such as
land, capital or labor) receives and the
opportunity cost for that owner.
Contract Rent is the amount of total
contractual payment made by the tenant to
the landlord according to the agreement
-
8/13/2019 Unit 5 Business Economics
17/20
Quasi Rent and Pure Rent
Quasi rent means when one makesan investment and pays for it, and then earnsincome from it without needing to make further
investment. Pure Rent means income received from the use
of a resource whose supply, in the long run, istotally unresponsive to its price because it can
neither be produced nor destroyed byits consumers.
-
8/13/2019 Unit 5 Business Economics
18/20
Wages
The Wage = "price of labor
Time Wages: The wages paid according to the
hours of working.
Piece Wages: The wages paid according to
number of products produced.
Money Wages: The wages received in terms of
money.
Real Wages: The wages with real value.
-
8/13/2019 Unit 5 Business Economics
19/20
Factors determining Real Wages
Price level:Money wage remaining constant, Real wage = Money Wagedivided by Price level. Higher the price level, lower will bethe real wage and vice versa.
Money wages:If the price level remains constant and the money wagesincrease then real wage also increases. But if the rise inprice level is higher than the rise in money income, thenthe real income would fall.
Fringe benefits:Cash-in-kind or fringe benefits or perks like freeaccommodation facilities, free transport, medicalreimbursement, subsidized food from canteen etc. increasethe real wage of a worker.
-
8/13/2019 Unit 5 Business Economics
20/20
Factors determining Real Wages
Nature of job:In a risky and dangerous jobs, money wage may behigher but real wages are low. For example workers inmines. The real wage of workers in a regular job is
higher than those in an irregular job. Scope for extra earnings:
In jobs where there is a possibility of extra earnings thereal wage would be high.
Future prospects:
In jobs if future prospects like quick promotion andhigher earnings are possible then the real wage wouldbe high.