Production

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لحعجصمح() عا با ‎Vopios‏ )ان راما ۱ 8 ی 9 5) ‏ل ی‎ ® Produntiog wi ‏ری‎ Ourtuble Iaputs # Retuce to Grote 9 Oke S 

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حصلاص ۹ # Our Poos is the suppl sick. © Whe theory OF ‏له ار ما سا‎ 0 ow ‏مسر وی وا مزا هن‎ ‏ول‎ ‎© |] ‏ناور‎ vost varies wi ‏انا‎ ‏نسم مل) و‎ oP warket supply ‏تا و‎ OP ‏مان وا‎ 9 Oke SD 

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re Tevkwlow ve Produciiod ‎Phe Produntion Provess‏ "ا ‎Cowhbictag faputs or Pastors oP productos to‏ © ان مه ‎uphieve‏ ‎9 OCoteqories oP ۱ (Factors oP productos) ‏سرا و‎ © Outericks ‏اون و‎ ‎9 Oke ‎ 

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re Tevkwlow ve Produciiod ® Produntiog Pucrtion: ‏با | و‎ highest vutput thot-o Pie pos produce the state oP ‏یه‎ ‎© Ghows what is techuicdly Peasible whea the Pray 9 Oke S 

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re Tevkwlow ve Produciiod ‎ke productive Puortiod Por tu tapas:‏ "ا ‎Q=€(KL)‏ ‎GQ =Oupu, © = Cupid, L = Labor‏ ‎® ory qed techuwbyp ‎۱ ‎9 Oke Oo ‎ 

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spqucnis ® @ssnvpiow prooducer kus tiv inputs bor (L) & Cupital (0) 6 © Pood اورام 

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spqucnis © Observatives: ‎Por uy bevel oP, vuput tereuses‏ الك ‎wits wore b.‏ ‎©) (Por cay level oP L, vulput isoreuses wits wore (K. ‏دسر له اه ‎Ounous vowbicaivas‏ )9 ان و وا ‎9 Oke O ‎ 

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spqucnis # 4soqucnts © Curves showiery oll possible cowwbicaivas oP faputs thot pied the suwe vulput 9 Oke SO 

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0 Aor 09 ads deo ۵ 0 20 dood doo 10 09 ads 

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roductiva wit ‏میب"‎ Ourtuble Taputs (L,<) Ovptta 

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spqucnis eput Pendle ® De isoquocts ewophosize how ‏او موسج نال‎ ‏ههام‎ ooo be used to produce the 2117۶ ۲۳/۳۵۰ 9 Dhis inPorevutivd ulowws the producer tv respon BP Piciedly to chooges ia the wurkets | Por iaputs. 

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spqucnis Thre Ghort Qua versus the Loo Qua ® Shorten: © @enod oP tive to Wwhick quocties oP poe pr wore productive Pastors vacant be choorged. © Dhese inpuis ue volled Pied inputs. 

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spqucnis Thre Ghort Qua versus the Loo Qua ٩ Loon © Oowoudt oP tee ceeded ty woke of procuction 

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@rodunitivg wits Ove Orteble Input (Lubor) Own Cw Tord ‏یوت عمو‎ oP Lebo (L) 22 ‏ص0‎ () Oupu(Q) ‏میت سب‎ 00 02 _ 0 0 do edo 906 ‏هوه‎ odo 6090 0 040 9090 eo 90 996 © 40 105۹5 6 40 6۹6 © 90 00606: oO 940 0261 & 9 Oke IS 

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@rodunitivg wits Ove Orteble Input (Lubor) © Observetiog: 0) Oik oddiiccdl workers, vutput (Q) له رو و ‎reaches‏ رحس 

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@rodunitivg wits © Observetiog: ©) The were product oF ‏وه‎ (@@), pr pupal per worker, noreuses un thea derreuses. Apa Output _Q | LaborInput L ع0 عبت 9 

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@rodunitivg wits _Ovw Ocrbe Feri (bor) ‏و‎ © Observetiog: 9( Phe worded product oP babor (DP), pr vulput oF the oddificcal worker, AOutput _AQ ۸ ۱ ae ALaborInput AL 9 ۵۷» 0 

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14 rocket 80} ©: sbope oF tangent = DP (OO) ©: sbppe oP O® = OP (CO) O: sbpe oR OO= OP & OP سس © © و و 9 ۵ 9 1 ۵ Oke 1S 

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Ow ‏بو‎ Taput we Coe re Lei oP @: OP > WP & PC is tereusieny ess Rak oF G: OP < BP & BP te ‏سس‎ ‎6: 06 < 06 8 06 ‏سس هت‎ 980} | ‏0ك‎ Procket @ eo vera Product 1 oa 2 mo 7 ۳ 0 ۱ io ۱ مهجم هما ون 09109080700 ۵ 60 

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@rodunitivg wits Ove Orteble Input (Lubor) © Observetiog: © Okeu OP =O, PP is its wort © Dkeu OP > PP, OP is ooreusiay © Dkeu OP < PP, OE is deoresicny © Oke OP = BP, CP is tits wort 9 Oke Od 

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جک بط وا ,70۳ مت لا و سا پات ‎@O = shove oP bee Prow‏ ۰ص را ‎he TP‏ مه نوم پوت تا مج و 2۴ سول < 00 نک 0۳ 60 1666 0 ‎=O‏ ۳ و) و و و و ع و 

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@rodunitivg wits Ove Orteble Input (Lubor) Dre baw of Otcorishiagy Darga Rete © Os the use oP oo ‏امه و و لح‎ ‏روز‎ u pid wil be reached ot whiok ‏وا له تلو وا‎ vulpul decreuses (i.e. OP tees). وه ی 9 

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@rodunitivg wits Ove Orteble Input (Lubor) Dre baw of Otcorishiagy Darga Rete ® ken the ‏اه‎ input ip sxocll, OOP iwreuses due to spevicizatios. © Oke the hobor input ip bop, OP derreuses due to ioePPicieories. 9 Obde OF 

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@rodunitivg wits Ove Orteble Input (Lubor) Dre baw of Otcorishiagy Darga Rete ® Con be used Por loop devisious tv ‏لا ماهر‎ trade-pPPs oP diPPerect phat ۱ ® Qssuves the quoliy oP the variable iaput is ۱ 9 Obte OS 

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@rodunitivg wits Ove Orteble Input (Lubor) Dre baw of Otcorishiagy Darga Rete ® Gxphics u device OP, ot vevessurily ‏د‎ ‎Ve tive por ® Qseanves ‏د‎ boost echo ی 9 

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QOulkus und the Pood Crise ® Quthes predicted wass hugger ond starvativd und ‏.ننصي صا لجن حدصت جصلادا حرصم هذا‎ a ‏وا‎ did Dal” predictioa Pat? ۱ 9 Oke CO 

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edex DP 0۷ Pood _Oounnopiva Per 9 ‏عع‎ ‎‘Year redex 190 doo 4990 as 490 9 4960 «cee 4990 ‏و‎ ‏روگ‎ ۰ 999 0 9 Obte SS 

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QOulkus und the Pood Crise OD ke dato show thot produntiog teoreuses hove # Odlhus did ont tohe toto cousidercaiiva the ‏اه موم متام‎ teckouloyy whick kas lowed the supply oP Pood to wow Puster tho ۱ ۵» 0 

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QOulkus und the Pood Crise 9 Deck hes created surpluses urd dived the prive dowd. # Qvestivd O1P Pood surpluses exist, why ts there huoer? ۱ 9 Oke Od 

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QOulkus und the Pood Crise ® @uswer ۰ ۱ vost oP ‏سید‎ Pood Pros productive reqives ty woproduciive neyioos ocd the fw fopowe levels oP the wowproduciive ‏.عومجم‎ 9 Obte SE 

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8 Labor Productivity 9 ی وه 

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@rodunitivg wits Ove Orteble Input (Lubor) ® Labor Productivity ood the Gtocdard oF ‏داشا‎ ‏و مه ول و‎ poly iP productivity ‎(Productivity‏ ان ام( و ‎capital‏ ان ‎Stock‏ * ‎chore‏ ای ‎9 Obde OE ‎ 

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bubor Procuviuiiy ta Qevebped Covwniries Ovted = Outed هه مب سول ‎Crave Ceraxxy‏ Oupu per Bopbyed Person (ISO?) $SF SOPTESS OF F$PO OFOS$FO, OOO $OO,O0G und Rute oF Brows: oP Labor Prockuctty (%) 499016196786, ۰ ۰.0۵ 6.69 8.99 496-49888900 99 ۰ 0 199 020 19900 0.66 06 4.09 ی 9 

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@rodunitivg wits ‎Dodds it Productivity‏ "ا له حاحص ‎O.6. produniiviy is‏ )0 امن ‎slower roe thoa viher‏ ‎9 ‏ی‎ SO ‎ 

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@rodunitivg wits Ove Orteble Input (Lubor) ۰ Cxplacaivas Por Productivity Crowth Glouxdowa ©( Growth io the stock oP capital is the prisvory detercviccat oP the ‏جا اس‎ productivity. 9 Ore 0 

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@rodunitivg wits Ove Orteble Input (Lubor) ۰ Cxplacaivas Por Productivity Crowth Glouxdowa ©) Rate oP capital ‏جا وصلاكان دص صصه‎ the OG. wos slower tho ‏اه‎ 9 Ore SO 

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@rodunitivg wits Ove Orteble Input (Lubor) ® @xphooations Por Procuntivity Brow Glouxdowa ۱ 9 ی 9 

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@rodunitivg wits ® Observativa °O.G. produnivity kes iuoreused ia reped peas ® Oka Ov You Thich? مرها تیوه و وه سوه ‎04s ta skorttersn‏ ۲ ۱ وه ۵ FO 

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Croduciiva wits Two Outuble ‏عنصا“‎ ‎Phere is u rehtivoship betwee productiva‏ "ا ‎Loop production KE Lave variuble.‏ § ‎8 4soquects usdyae ond powpare the ‏مسد نال‎ ۱ ‏داوس‎ DP K & b acd vuput ‎9 9 0 ‎ 

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Croduciiva wits Two Outuble ‏عنصا“‎ ‎Gubsttutos‏ هم جزد) أدونرسه (1) بدا عدا( ‎a Reudicgy the Isoquact Model‏ ‎0) ۱ vupita is O aed labor noreues Pow Oo di CO. ‏سم رو ره‎ eee te ee (SS, SO, (S) thistraticg dicvicishiag ‏سا‎ ‎Pros fabor ta the shortroo ood tracert. ‎9 Obde PS ‎ ‎ ‎ 

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Croduciiva wits Two Outuble ‏عنصا“‎ Ororchiay Oardgcd Rute oP Gubsthuioc a Reudicry the spquact Ovdel ©) Ossunve labor is O used capital iuoreuses Pow O t ۳0 9 0 ۰ POupu dsv i ‏صاصر صوصل د أن ب‎ (6S, SO, IS) due to dievicishicy returcs © ی 9 

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Croduciiva wits Two Outuble ‏عنصا“‎ a Gubstituticrsy Ovpvrry opus © Ooeners weet to detercoiae ‏خلا اوه مار‎ ‏وا از‎ usr. ۱ witk the trade-pPP beter inputs. 9 Obde PS 

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Croduciiva wits Two Outuble ‏عنصا“‎ a Gubstituticrsy Ovpvrry opus © Dhe slope oP ‏موه ات‎ diver the trade-pPP betuvers tivo toputs while Keepiocy output ‏.دوعوم‎ 9 Obde FO 

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Croduciiva wits Two Ourtble Toputs a Gubstituticrsy worry aputs © The warded rote oP teckeiod substitutioa equals: MRTS = - Change in capital/Change in labor input MRTS- AK/ | (forafixedevebf Q) ع دی وه 

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Labor per month owe a 

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Croduciiva wits Two Outuble ‏عنصا“‎ " 0 ‏:ماكر سحو‎ qd) eoreusiay fabor ia vee weit ‏اه هن‎ Brow (to GS results ita devreusiay ORTG Prow 0 ‏ص‎ ۰ 9( Oixvicishicry ORVG vows bevawse Ure DOWPXx. 9 Obde FO 

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Croduciiva wits Two Ourtble Toputs © Observatiow: 9) 02031۵ acd )1( ‏مجه‎ Produciiviyy OD ke chocye ia pulpal Poo ‏رما و‎ fo hobo equ: MP)(AL \ (MP:)(AL) 9 ۵» 0 

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Croduciiva wits Two Ourtble Toputs © Observatiow: Q) DRPE od Oargicd Produniiviy ‎ic vupital‏ موی و وا تون ‎io‏ موی پا تعامج ‎(MPk)(AK) ‎\ (MPx)(AK, ‎9 Oke 0 ‎ ‎ ‎ ‎ ‎ 

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Croduciiva wits Two Ourtble Toputs © Observatiow: 9) 02031۵ acd )1( ‏مجه‎ Produciiviyy ۵ tat ie pete ced bobo te paced, het (MP)(AL)+ (MPx)(A K) =0 \ (MP1)(MPx) = - (A K/AL) = MRTS 9 Obte SO 

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“| ‏جعدورجوو‎ Okeu Tapus are PerPeviy Gubstttutable ۱ a 9 Obte SO 

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Croduciiva wits Two Outuble ‏عنصا“‎ PerPect Gubsttutes: ® Obseniniogs wheu toputs ure perPevtly substitutable: 0( Dke ORDNG és coveted ot ll poidts va the ispquect. ۱ ی 9 

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Croduciiva wits Two Outuble ‏عنصا“‎ @erPert Gubsttes ® Obseniniogs wheu toputs ure perPevtly substitutable: ©) Cor ‏چاه نموه بو رنه مش و‎ fuputs von be chosen (@, , or C) to youre the save bevel oP ouput (ex. 9 Obte SS 

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Croduciiva wits Two Outuble ‏عنصا“‎ redt-Proportioes Production ucrtiod ® Obseniniogs wheu toputs wust be fo Pred Pproporiios: 0) Ov substitutioa is possible. Buck DuIpUl requires ‏ه‎ Sspevitic aeoudt oF euch faput (ex. ‏سوه‎ werd 9 Ore SP 

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Croduciiva wits Two Outuble ‏عنصا“‎ redt-Proportioes Production ucrtiod ® Obseniuiods whee opus wust be io Pixed-proportion: S) Dp oreuse vulpul resuines wore fabor ocd capital (ie. copie Prow )© to @ to CO whivk is tevhuivaly مه \ 9 Ore SO 

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!)۲ مشسی(<۳) مشیل۳۷۵ ظ) وم ه مورا موه اون حجس ]) " ‎production.‏ 9 Obte SO 

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Pont Oe wore wept, od Ov wore khorkiewir. AL=26d Out = 0,000 bobo per peor م ل ‎Le et‏ مرچ یس 00000 ‎POO‏ 6000© 660 ۵» 0 

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‎the‏ بجسوو() ممسمجسی» ‎Okeut‏ ان ‎@rodwiva‏ ‎® Observutiows: ‏۰ ۱ رسیم )0 ‎* b =SOO hows ond 6 < 0 ‏نطو‎ kours. ‎9 Oke Od ‎ 

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‎the‏ بجسوو() ممسمجسی» ‎Okeut‏ ان ‎@rodwiva‏ ‎Observutives:‏ © ‎Operctticrey 0‏ )© 0 ۱۳ ) موی لمه 290 صا را وم ‎the DRANG > 0:‏ ‎١ ۸/5۰۵1) <- 10/260 24 ‎ ‎ ‎9 605-68 ‎ ‎ ‎ 

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4svquent Oesoribiar the @rodwiva ‏ان‎ Okeut © Observutiow: 9) ORME <4, therefore the vst oP babor wouet be less thao vapital iat order Por #) AP habor is ۳۲۲۲ ‏لالب و( وا‎ NSP Wore ‏سا‎ (ex. O.G.). ی 9 

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4svquent Oesoribiar the @roductiog oF Okeut © Observutiow: S) »۱۳ habor is icexpeusive, the Purser wold NSP W0Ire ‏یاه‎ (ex. ‏.إل‎ ۱ 9 Obde OF 

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Qeturss to Gouke ® Qecsunogy the ‏مرو مشاه‎ the scote (size) oP a Piece oer ‏احص‎ وموم الجانجه :جأدمد صا جمس داجما عوأووجهم ]| “ )4 ‎are doubled‏ جتنجذ له مانب ال مب ‎post (cutee)‏ نوا کت تیه نت وراه ‎© Ove Pinw is wore ePPiciedt tho ‏رودب‎ (utltiess) ‎© Phe toques yet closer toyether ‎9 ‏لب‎ OS ‎ 

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Ixbor (howe) Obte SO 

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Qeturss to Gouke ® Dees the rebtioaship betwee the scute (size) oP a Pirey ood vutput One does wt oPPent productivity ‏اه ما و رما رو(‎ of producers ‏ی‎ عه ل 9 

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Oke OO Tabor (howe) 9 Qeturss to Gouke 

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Qeturss to Gouke © Oeasuntay the relaivaship betwee the soul (size) ‏اون لت ما و اه‎ 9( Oevreusiey retures ty sve! vulput less thao doubles wheo ull iaputs une doubled ‏ها ات ره رس(‎ size ‏ج اه ام ره‎ ‏و تا ره‎ 9 Obte OS 

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Qeturss to Gouke 

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QReturee to Goole ta the Carpet Industry 8 OD ke ‏رل وی‎ ۲ yo Prow u scout ‏صا مص لوز‎ 0 barge iedusiry wits sowe very forge Pires. 9 ۷» 0 

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Retures to God ta the Carpet Techstry ® Qvuestioa ® Can the youth be exploiced by the preseue oP Poo wies ty sre? 9 Oke TO 

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۱۳ 6.86. ‏اون‎ Terdhusiry ‎Gkpweus, (O90‏ ون ‎(Ole oP Ovkers per Yew) d. Ghaw ‏۵و عون 6۷ .89,609 هل‎ ©. Ookawk ‏هل هب6 4۳۶299۶۰ هل‎ ۰60 9. @Cradeu oP ‏م۲ 6 0 .4,009 سیب‎ eae 6 ‏و1 لوطله0) ,60006 سس و1۲‎ 2560 ‏6960 و۷ 0۱ 2۵۵۵۰ عون ات ‎ 

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QReturee to Goole ta the Carpet Industry © Ore there ‏موه‎ oP sve? © Costs (pervect oP vel) + Cupid —- ۵ *Lubor -- CO% ی 9 

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QReturee to Goole ta the Carpet Industry 8 Lone OanPacturers ‏مسب‎ ft warkicerpy & babor © Ovubliag ‏نم‎ has wore thoa doubled vulput ® Coowwies oP sue exist Por hoy producers 9 Oe 7S 

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QReturee to Goole ta the Carpet Industry " Gol OanPucturers © )8 ‏صذ امج‎ os iu sod have lithe or op inppuct ‏مم‎ ‎Dut ® Qroporivad teoreuses in opus oreuse vulput ‏اهر‎ حطس ای ‎Por‏ امود صا جسداصم یل و 9 Ore TO 

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060 موی مكلا جوجامووصلك وصادون ]| وصاص عصوم ) ظ ‎puiput a Pires ooo produce Por euck spevitied‏ ‎pow bicative oF ieputs.‏ 5 ‏وم و)‎ a murve thot skows ‏لاه‎ ‎vow bicaives oF iaputs that yield o given level bP ۱ 6 ۶ 

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060 a Quercy product of tabor wesasunes the productivity oP the average worker, wheres wargicd product oF kabor wessures the productivity oP the hast worker udded. 9 ۵ TO 

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060 © OD ke Aw oP ‏وونل‎ retures exphics thot divivishes us its quontiiy is ‏لسوت‎ 9 Oke TS 

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085 ‏ووو‎ ‎§ 4soquects ulus slope towed bese the warqicd product oF ull iaputs is positive. # Dke stoodard oP fivieg thot poetry ooo uttcict Por its vitzeus is closely related to its bevel vP ‏رطع‎ 9 Ore OO 

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3 ‎Poous vo the‏ وا له جرب ,راو متا ی "ا ‎its soule pr stze oP ppercivc.‏ ان اه عون ‎9 9۷» 0 ‎ 

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Gud oP Ckupter © Produtos 

Chapter 6 Production Topics to be Discussed  The Technology of Production  Isoquants  Production with One Variable Input (Labor)  Production with Two Variable Inputs  Returns to Scale Chapter 6 Slide 2 Introduction  Our focus is the supply side.  The theory of the firm will address: How a firm makes cost-minimizing production decisions How cost varies with output Characteristics Issues Chapter 6 of market supply of business regulation Slide 3 The Technology of Production  The Production Process  Combining inputs or factors of production to achieve an output  Categories of Inputs (factors of production)  Labor  Materials  Capital Chapter 6 Slide 4 The Technology of Production  Production Function: Indicates the highest output that a firm can produce for every specified combination of inputs given the state of technology. what is technically feasible when the firm operates efficiently.  Shows Chapter 6 Slide 5 The Technology of Production  The production function for two inputs: Q = F(K,L) Q = Output, K = Capital, L = Labor  For a given technology Chapter 6 Slide 6 Isoquants  Assumptions Food  Chapter 6 producer has two inputs Labor (L) & Capital (K) Slide 7 Isoquants  Observations: 1) For any level of K, output increases with more L. 2) For any level of L, output increases with more K. 3) Various combinations of inputs the same output. Chapter 6 produce Slide 8 Isoquants  Isoquants Curves showing all possible combinations of inputs that yield the same output Chapter 6 Slide 9 Production Function for Food Labor Input Capital Input 1 2 3 4 5 1 20 40 55 65 75 2 40 60 75 85 90 3 55 75 90 100 105 4 65 85 100 110 115 5 75 90 105 115 120 Chapter 6 Slide 10 Production with Two Variable Inputs (L,K) Capital per year The The Isoquant Isoquant Map Map E 5 4 3 A B The isoquants are derived from the production function for output of of 55, 75, and 90. C 2 Q3 = 90 D 1 Q2 = 75 Q1 = 55 1 Chapter 6 2 3 4 5 Labor per year Slide 11 Isoquants Input Input Flexibility Flexibility  The isoquants emphasize how different input combinations can be used to produce the same output.  This information allows the producer to respond efficiently to changes in the markets for inputs. Chapter 6 Slide 12 Isoquants The The Short Short Run Run versus versus the the Long Long Run Run  Short-run:  Period of time in which quantities of one or more production factors cannot be changed.  These Chapter 6 inputs are called fixed inputs. Slide 13 Isoquants The The Short Short Run Run versus versus the the Long Long Run Run  Long-run  Amount of time needed to make all production inputs variable. Chapter 6 Slide 14 Production with One Variable Input (Labor) Amount of Labor (L) Amount of Capital (K) Total Output (Q) 010 0--- --- 110 1010 10 210 3015 20 310 6020 30 410 8020 20 510 9519 15 610 10818 13 710 11216 4 810 11214 0 910 10812 -4 1010 10010 -8 Chapter 6 Average Product Marginal Product Slide 15 Production with One Variable Input (Labor)  Observations: 1) Chapter 6 With additional workers, output (Q) increases, reaches a maximum, and then decreases. Slide 16 Production with One Variable Input (Labor)  Observations: The average product of labor (AP), or output per worker, increases and then decreases. 2) Output Q AP   LaborInput L Chapter 6 Slide 17 Production with One Variable Input (Labor)  Observations: 3) The marginal product of labor (MP), or output of the additional worker, increases rapidly initially and then decreases and becomes negative..  Output Q MPL    LaborInput  L Chapter 6 Slide 18 Production with One Variable Input (Labor) Output per Month D 112 C 60 B Total Product A: slope of tangent = MP (20) B: slope of OB = AP (20) C: slope of OC= MP & AP A 0 1 2 3 4 5 6 7 8 9 10 Labor per Month Chapter 6 Slide 19 Production with One Variable Input (Labor) Output per Month Observations: Left of E: MP > AP & AP is increasing Right of E: MP < AP & AP is decreasing E: MP = AP & AP is at its maximum 30 Marginal Product 20 E Average Product 10 0 1 2 3 4 5 6 7 8 9 10 Labor per Month Chapter 6 Slide 20 Production with One Variable Input (Labor)  Observations:  When MP = 0, TP is at its maximum  When MP > AP, AP is increasing  When MP < AP, AP is decreasing  When MP = AP, AP is at its maximum Chapter 6 Slide 21 Production with One Variable Input (Labor) AP = slope of line from origin to a point on TP, lines b, & c. MP = slope of a tangent to any point on the TP line, lines a & c. Output per Month 112 D Output per Month 30 C 60 20 B 10 A 0 1 2 3 4 5 6 7 8 9 10 E Labor per Month Labor 0 1 2 3 4 5 6 7 8 9 10 per Month Production with One Variable Input (Labor) The The Law Law of of Diminishing Diminishing Marginal Marginal Returns Returns  As the use of an input increases in equal increments, a point will be reached at which the resulting additions to output decreases (i.e. MP declines). Chapter 6 Slide 23 Production with One Variable Input (Labor) The The Law Law of of Diminishing Diminishing Marginal Marginal Returns Returns  When the labor input is small, MP increases due to specialization.  When the labor input is large, MP decreases due to inefficiencies. Chapter 6 Slide 24 Production with One Variable Input (Labor) The The Law Law of of Diminishing Diminishing Marginal Marginal Returns Returns  Can be used for long-run decisions to evaluate the trade-offs of different plant configurations  Assumes the quality of the variable input is constant Chapter 6 Slide 25 Production with One Variable Input (Labor) The The Law Law of of Diminishing Diminishing Marginal Marginal Returns Returns  Explains a declining MP, not necessarily a negative one  Assumes a constant technology Chapter 6 Slide 26 The Effect of Technological Improvement Output per time period C 100 B O3 Labor productivity can increase if there are improvements in technology, even though any given production process exhibits diminishing returns to labor. A 50 O2 O1 0 1 2 3 4 5 6 7 8 9 10 Chapter 6 Labor per time period Slide 27 Malthus and the Food Crisis  Malthus predicted mass hunger and starvation as diminishing returns limited agricultural output and the population continued to grow.  Why did Malthus’ prediction fail? Chapter 6 Slide 28 Index of World Food Consumption Per Capita Year 1948-1952 1960 115 1970 123 1980 128 1990 137 1995 135 1998 140 Chapter 6 Index 100 Slide 29 Malthus and the Food Crisis  The data show that production increases have exceeded population growth.  Malthus did not take into consideration the potential impact of technology which has allowed the supply of food to grow faster than demand. Chapter 6 Slide 30 Malthus and the Food Crisis  Technology has created surpluses and driven the price down.  Question If Chapter 6 food surpluses exist, why is there hunger? Slide 31 Malthus and the Food Crisis  Answer  The cost of distributing food from productive regions to unproductive regions and the low income levels of the non-productive regions. Chapter 6 Slide 32 Production with One Variable Input (Labor)  Labor Productivity Total Output Average Productivi ty  Total Labor Input Chapter 6 Slide 33 Production with One Variable Input (Labor)  Labor Productivity and the Standard of Living Consumption can increase only if productivity increases. Determinants Chapter 6 of Productivity  Stock of capital  Technological change Slide 34 Labor Productivity in Developed Countries France Germany Japan United Kingdom United States Output per Employed Person (1997) $54,507$55,644$46,048$42,630 $60,915 Annual Rate of Growth of Labor Productivity (%) 1960-19734.754.04 8.30 2.89 2.36 1974-19862.10 1.85 2.50 1.69 0.71 1987-19971.482.00 1.94 1.02 1.09 Chapter 6 Slide 35 Production with One Variable Input (Labor)  Trends in Productivity 1) U.S. productivity is growing at a slower rate than other countries. 2) Productivity growth in developed countries has been decreasing. Chapter 6 Slide 36 Production with One Variable Input (Labor)  Explanations for Productivity Growth Slowdown 1) Chapter 6 Growth in the stock of capital is the primary determinant of the growth in productivity. Slide 37 Production with One Variable Input (Labor)  Explanations for Productivity Growth Slowdown 2) Rate of capital accumulation in the U.S. was slower than other developed countries because the others were rebuilding after WWII. Chapter 6 Slide 38 Production with One Variable Input (Labor)  Explanations for Productivity Growth Slowdown 3) Depletion of natural resources 4) Environment regulations Chapter 6 Slide 39 Production with One Variable Input (Labor)  Observation U.S.  productivity has increased in recent years What Do You Think? Is it a short-term aberration or a new long-run trend? Chapter 6 Slide 40 Production with Two Variable Inputs  There is a relationship between production and productivity.  Long-run production K& L are variable.  Isoquants analyze and compare the different combinations of K & L and output Chapter 6 Slide 41 The Shape of Isoquants Capital per year E 5 4 3 A B In the long run both labor and capital are variable and both experience diminishing returns. C 2 Q3 = 90 D 1 Q2 = 75 Q1 = 55 1 Chapter 6 2 3 4 5 Labor per year Slide 42 Production with Two Variable Inputs Diminishing Diminishing Marginal Marginal Rate Rate of of Substitution Substitution  Reading the Isoquant Model 1) Assume capital is 3 and labor increases from 0 to 1 to 2 to 3. Notice output increases at a decreasing rate (55, 20, 15) illustrating diminishing returns from labor in the short-run and long-run. Chapter 6 Slide 43 Production with Two Variable Inputs Diminishing Diminishing Marginal Marginal Rate Rate of of Substitution Substitution  Reading the Isoquant Model 2) Assume labor is 3 and capital increases from 0 to 1 to 2 to 3. Output also increases at a decreasing rate (55, 20, 15) due to diminishing returns from capital. Chapter 6 Slide 44 Production with Two Variable Inputs  Substituting Among Inputs  Managers want to determine what combination if inputs to use.  They Chapter 6 must deal with the trade-off between inputs. Slide 45 Production with Two Variable Inputs  Substituting Among Inputs  The slope of each isoquant gives the trade-off between two inputs while keeping output constant. Chapter 6 Slide 46 Production with Two Variable Inputs  Substituting Among Inputs  The marginal rate of technical substitution equals: MRTS  - Change in capital/Ch ange in labor input MRTS K Chapter 6 L (fora fixedlevelof Q) Slide 47 Marginal Rate of Technical Substitution Capital per year 5 4 Isoquants are downward sloping and convex like indifference curves. 2 1 3 1 1 2 Q3 =90 2/3 1 1/3 1 1 1 Chapter 6 2 3 4 Q2 =75 Q1 =55 5 Labor per month Slide 48 Production with Two Variable Inputs  Observations: 1) Increasing labor in one unit increments from 1 to 5 results in a decreasing MRTS from 1 to 1/2. 2) Diminishing MRTS occurs because of diminishing returns and implies isoquants are convex. Chapter 6 Slide 49 Production with Two Variable Inputs  Observations: 3) MRTS and Marginal Productivity The change in output from a change in labor equals: (MPL)(  L) Chapter 6 Slide 50 Production with Two Variable Inputs  Observations: MRTS and Marginal Productivity 3)  The change in output from a change in capital equals: (MPK)(  K) Chapter 6 Slide 51 Production with Two Variable Inputs  Observations: 3) MRTS and Marginal Productivity If output is constant and labor is increased, then: (MPL)(  L)  (MPK)(  K)  0 (MPL)(MPK)  - (  K/  L)  MRTS Chapter 6 Slide 52 Isoquants When Inputs are Perfectly Substitutable Capital per month A B C Q1 Chapter 6 Q2 Q3 Labor per month Slide 53 Production with Two Variable Inputs Perfect Perfect Substitutes Substitutes  Observations when inputs are perfectly substitutable: 1) The MRTS is constant at all points on the isoquant. Chapter 6 Slide 54 Production with Two Variable Inputs Perfect Perfect Substitutes Substitutes  Observations when inputs are perfectly substitutable: 2) For a given output, any combination of inputs can be chosen (A, B, or C) to generate the same level of output (e.g. toll booths & musical instruments) Chapter 6 Slide 55 Fixed-Proportions Production Function Capital per month Q3 C Q2 B K1 A L1 Chapter 6 Q1 Labor per month Slide 56 Production with Two Variable Inputs Fixed-Proportions Fixed-Proportions Production Production Function Function  Observations when inputs must be in a fixedproportion: 1) No substitution is possible.Each output requires a specific amount of input (e.g. labor and jackhammers). Chapter 6 each Slide 57 Production with Two Variable Inputs Fixed-Proportions Fixed-Proportions Production Production Function Function  Observations when inputs must be in a fixed-proportion: 2) Chapter 6 To increase output requires more labor and capital (i.e. moving from A to B to C which is technically efficient). Slide 58 A Production Function for Wheat  Farmers must choose between a capital intensive or labor intensive technique of production. Chapter 6 Slide 59 Isoquant Describing the Production of Wheat Capital (machine hour per year) Point A is more capital-intensive, and B is more labor-intensive. 120 100 90 80 A B  K  - 10  L  260 Output = 13,800 bushels per year 40 250 Chapter 6 500 760 1000 Labor (hours per year) Slide 60 Isoquant Describing the Production of Wheat  Observations: Operating at A: 1)  Chapter 6 L = 500 hours and K = 100 machine hours. Slide 61 Isoquant Describing the Production of Wheat  Observations: 2) Operating at B  Increase L to 760 and decrease K to 90 the MRTS < 1: MRTS  -  K Chapter 6 L   (10/ 260)  0.04 Slide 62 Isoquant Describing the Production of Wheat  Observations: MRTS < 1, therefore the cost of labor must be less than capital in order for the farmer substitute labor for capital. 3) 4) Chapter 6 If labor is expensive, the farmer would use more capital (e.g. U.S.). Slide 63 Isoquant Describing the Production of Wheat  Observations: 5) If labor is inexpensive, the farmer would use more labor (e.g. India). Chapter 6 Slide 64 Returns to Scale  Measuring the relationship between the scale (size) of a firm and output 1) Increasing returns to scale: output more than doubles when all inputs are doubled  Larger Chapter 6 output associated with lower cost (autos)  One firm is more efficient than many (utilities)  The isoquants get closer together Slide 65 Returns to Scale Increasing Returns: The isoquants move closer together Capital (machine hours) A 4 30 20 2 10 0 Chapter 6 5 10 Labor (hours) Slide 66 Returns to Scale  Measuring the relationship between the scale (size) of a firm and output 2) Constant returns to scale: output doubles when all inputs are doubled Size does not affect productivity May have a large number of producers Isoquants Chapter 6 are equidistant apart Slide 67 Returns to Scale Capital (machine hours) A 6 30 Constant Returns: Isoquants are 20 equally spaced 4 2 10 0 Chapter 6 5 10 15 Labor (hours) Slide 68 Returns to Scale  Measuring the relationship between the scale (size) of a firm and output 3) Decreasing returns to scale: output less than doubles when all inputs are doubled Decreasing Chapter 6 efficiency with large size Reduction of entrepreneurial abilities Isoquants become farther apart Slide 69 Returns to Scale Capital (machine hours) A Decreasing Returns: Isoquants get further apart 4 30 2 20 10 0 Chapter 6 5 10 Labor (hours) Slide 70 Returns to Scale in the Carpet Industry  The carpet industry has grown from a small industry to a large industry with some very large firms. Chapter 6 Slide 71 Returns to Scale in the Carpet Industry  Question Can the growth be explained by the presence of economies to scale? Chapter 6 Slide 72 The U.S. Carpet Industry Carpet Shipments, 1996 (Millions of Dollars per Year) 1. Shaw Industries $3,2026. World Carpets 2. Mohawk Industries 1,7957. Burlington Industries 3. Beaulieu of America 1,0068. Collins & Aikman $475 450 418 4. Interface Flooring 8209. Masland Industries 380 5. Queen Carpet 77510. Dixied Yarns 280 Returns to Scale in the Carpet Industry  Are there economies of scale? Costs Chapter 6 (percent of cost)  Capital -- 77%  Labor -- 23% Slide 74 Returns to Scale in the Carpet Industry  Large Manufacturers Increased Doubling in machinery & labor inputs has more than doubled output Economies Chapter 6 of scale exist for large producers Slide 75 Returns to Scale in the Carpet Industry  Small Manufacturers Small increases in scale have little or no impact on output Proportional increases in inputs increase output proportionally Constant Chapter 6 returns to scale for small producers Slide 76 Summary  A production function describes the maximum output a firm can produce for each specified combination of inputs.  An isoquant is a curve that shows all combinations of inputs that yield a given level of output. Chapter 6 Slide 77 Summary  Average product of labor measures the productivity of the average worker, whereas marginal product of labor measures the productivity of the last worker added. Chapter 6 Slide 78 Summary  The law of diminishing returns explains that the marginal product of an input eventually diminishes as its quantity is increased. Chapter 6 Slide 79 Summary  Isoquants always slope downward because the marginal product of all inputs is positive.  The standard of living that a country can attain for its citizens is closely related to its level of productivity. Chapter 6 Slide 80 Summary  In long-run analysis, we tend to focus on the firm’s choice of its scale or size of operation. Chapter 6 Slide 81 End of Chapter 6 Production