PRODUCTION

ECONOMICS
BELOY, JESSA Q.
 What is
PRODUCTION THEORY?
- It examines the physical
relationships between inputs and
outputs
 PRODUCTION ANALYSIS

5.2
5.3 5.4
Basic Terms
The Short The Long
and
Definitions Run Run
 5.2 Basic Terms and Definitions

Factors of Input-Output
Fixed Factors The Short run Scale
production Table

Production Variable The Long

Functions factors Efficiency
run
 Factors of production
- refer to inputs or resources; refer to anything used in the
production and distribution of goods and services

LAND LABOR

ENTREPRENEURSHIP

CAPITAL
 Production Functions
-these represent the relationships between
inputs and outputs in symbolic or mathematical
form. In general terms we can say that any
production function can be expressed as:

Q = f (X1 , X2 , X3 ….)
1 1 1

Q = output of a product
X1 , X2 , X3 …. = various inputs
1 1 1

Q = f (L, K)
L = Labor Input
K = Capital Input
 Inputs : Fixed inputs and Variable inputs

 The factors of production that is carry out the

production is called inputs.
 Land, Labour, Capital, Entrepreneurship are the
example of inputs

Inputs Factors

Variable inputs Fixed Inputs

 Inputs : Fixed inputs and Variable inputs
Fixed inputs
 Remain the same in the
short period .
 At any level of output, the
amount is remain the same.
 The cost of these inputs are
called Fixed Cost
 Examples:- Building, Land
etc
 ( In the long run fixed inputs are
become varies)
Variable inputs
 In the long run all factors
of production are varies
according to the volume of
outputs.
 The cost of variable inputs
is called Variable Cost
 Example:- Raw materials,
labour, etc
 The Short Run
• The short run is a time period in which the quantity of some
inputs, called fixed factors, cannot be increased. So, it does
not correspond to a specific number of months or years
• A fixed factor is usually an element of capital (such as plant
and equipment). Therefore, in our production function capital
is taken to be the fixed factor and labor the variable one
• Period during which at least one factor input is FIXED
while other inputs are VARIABLE

Q = f (L,K)
The Long Run
• The long run is a time period in which all inputs may be varied
but in which the basic technology of production cannot be
changed
• The long run corresponds to a situation that the firm faces
when is planning to go into business (to expand the scale of its
operations)
• Like the short run, the long run does not correspond to a
specific length of time
• The period during which ALL factors are VARIABLE

Q = f (L,K)
 Scale
- Relates to the amount of fixed factors that a
firm has
- Maximum output that a firm can produce in the
short run
 Efficiency
A. TECHNICAL EFFICIENCY

- This means that a firm a producing the

maximum output from given quantities of
inputs

B. ECONOMIC EFFICIENCY

- This involve producing a given output at

least cost
Production Economics

The Production Function in the

Short Run
Total, Average and Marginal Products
• Total product (TP) is the total product that is
produced during a given period of time
• Total product will change as more or less of the
variable factor is used in conjunction with the given
amount of the fixed factor
• Average product (AP) is the total product divided by
the number of units of the variable factor used to
produce it
• Marginal product (MP) is the change in total product
resulting from the use of one additional unit of the
variable factor
Output with Fixed Capital and Variable
Labor
Quantity of labor Total product (TP) Marginal product Average product (AP)
(L) (MP)
0 0
1 50 50 50.00
2 110 60 55.00
3 390 280 130.00
4 520 130 130.00
5 580 60 116.00
6 630 50 105.00
7 650 20 92.86
8 650 0 81.25
9 640 -10 71.11
Total Product, Average Product and
Marginal Product Curves

700 300
280
Total product (units per timeperiod) 600 TP 260

AP and MP (units per time period)

240
220
500
200
180
400 160
140
300 120
100 APL
200 80
60
40
100
20 MPL
0
0 -20 0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8 9 -40
Quantity of labor pertime period, L
Quantity of labor per time period,L
Relationships among Total, Marginal and
Average Products of Labor
C
TP B • With labor time continuously
Total
product divisible, we can smooth TP, MPL
and APL curves

A • The TP curve increases at an

A = inflection point increasing rate up to point A;
past this point, the TP curve
rises at a decreasing rate up to
Labor point C (and declines thereafter)
APL
A • The MPL rises up to point A,
MPL
becomes zero at C, and is
Marginal product B negative thereafter
• The APL raises up to point B
Average product
and declines thereafter (but
remains positive as long TP is
C Labor positive)
LA LB
Law of Diminishing Returns
C
•This law states that as
TP B
Total additional units of an input are
product
used in a production process,
while holding all other inputs
A constant, the resulting
increments to output (or total
product) begin to diminish
beyond some point (after A, in
Labor the bottom graph)
APL
MPL A • As the firm uses more and more
units of the variable input with the
Marginal product B same amount of the fixed input,
each additional unit of the variable
input has less and less of the fixed
Average product input to work and, after this point,
the marginal product of the variable
C Labor input declines
LA LB
Stages of Production
C
B The relationship between the MP L
TP
Total and APL curves can be used to
product define three stages of production
of labor (the variable input)
A Stage I of labor
Is the range of production for which
increases in the use of a variable input
cause increases in its average product

Labor Stage II of labor

APL Is the range for which increases in the

MPL A use of a variable input causes decreases
in its average product, while values of its
B associated marginal product remain
Marginal product
nonnegative

Stage III of labor

Average product Is the range for which the use of a
variable input corresponds to negative
C Labor
values for its marginal product
3 4 8
Output with Fixed Capital and Variable
Labor
Quantity of labor Total product (TP) Marginal product Average product (AP)
(L) (MP)
0 0
1 50 50 Stage I 50.00
2 110 60 55.00
3 390 280 130.00
4 520 130 130.00
5 580 60 Stage II 116.00
6 630 50 105.00
7 650 20 92.86
8 650 0 Stage III 81.25
9 640 -10 71.11
Production Economics

The Production Function in the

Long Run
Production Isoquants
K An isoquant is a set of input combinations that can
be used to produce a given level of output

This curve indicates that a firm can produce the

Units per time period

K1 a specified level of output from input combinations

(L1, K1), (L2, K2), (L3, K3), …

As we move down from one point on an

isoquant to another, we are substituting
K2 b one factor for another while holding
output constant

K3 c
Q = f (L,K)

L
L1 L2 L3
Units per time period
Marginal Rate Technical Substitute(MRTS)

Isoquants or equal product curve

Capital

100 unit output

Labour

The slope of isoquant is known as Marginal Rate of Technical Substitution (MRTS). It is the rate at
which one factors of production is substitute with other factor so that the level of the out put
remain the same.
MRTS = Changes in Labour / changes in capital
Law of return to scales: Long run Production Function
Labour Capital TP MP

2 1 8 8
4 2 18 10 Increasing returns to scale

6 3 30 12
8 4 40 10
10 5 50 10 Constant returns to scale
12 6 60 10
14 7 68 8
16 8 74 6 Decreasing returns to scale
18 9 78 4
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