Behind The Supply Curve- Production Function I.pptVIP

Behind The Supply Curve: Production Function I 1. Production - short run Productive efficiency The Law of diminishing marginal returns 2. Production - long run isoquants isocosts least cost method of production Background Firms seek to maximise profit (?) ? = R - C How do firms produce output and minimise costs (C)? What is production? “…production is simply the process of transforming inputs and outputs.” inputs = capital (K) and labour (L) A production function Functional relationship Q = f(K, L , T) T changes over time At a point in time T is fixed Productive efficiency “A method of production is efficient if, for a given level of factor inputs, it is impossible to obtain a higher level of output, given the existing state of technology.” The short run Period of time over which one factor is fixed Capital - machines, factory, etc. Total and Marginal Physical Product “…marginal product is the additional output produced by an additional unit of labour MPP = ?TPP / ?L See Figure Wheat production per year from a particular farm Wheat production per year from a particular farm Law of Diminishing Returns Definition “…as units of one input are added (with all other inputs held constant), a point will be reached where the resulting additions to output will begin to decrease; that is marginal product will decline.” On figure - between 2 and 3 workers 2. The Long Run All factors are variable Decisions Scale Location Technique Choice of technique Isoquants Isocosts Isoquants An isoquant “…is a contour line which joins together the different combinations of two factors of production that are just physically able to produce a given quantity of a good.” Construction, slope and maps An isoquant Diminishing marginal rate of factor substitution An isoquant map Isocosts Actual output also depends on costs isocosts join combinations of K L - same cost assuming constant factor prices Construction, slope map An isocost Finding the least-cost method of production Least