Production

Production

اسلاید 1: Chapter 6Production

اسلاید 2: Chapter 6Slide 2Topics to be DiscussedThe Technology of ProductionIsoquantsProduction with One Variable Input (Labor)Production with Two Variable InputsReturns to Scale

اسلاید 3: Chapter 6Slide 3IntroductionOur focus is the supply side.The theory of the firm will address:How a firm makes cost-minimizing production decisionsHow cost varies with outputCharacteristics of market supplyIssues of business regulation

اسلاید 4: Chapter 6Slide 4The Technology of ProductionThe Production ProcessCombining inputs or factors of production to achieve an outputCategories of Inputs (factors of production)LaborMaterialsCapital

اسلاید 5: Chapter 6Slide 5The Technology of ProductionProduction Function:Indicates the highest output that a firm can produce for every specified combination of inputs given the state of technology.Shows what is technically feasible when the firm operates efficiently.

اسلاید 6: Chapter 6Slide 6The Technology of ProductionThe production function for two inputs:Q = F(K,L) Q = Output, K = Capital, L = LaborFor a given technology

اسلاید 7: Chapter 6Slide 7IsoquantsAssumptionsFood producer has two inputsLabor (L) & Capital (K)

اسلاید 8: Chapter 6Slide 8IsoquantsObservations: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 produce the same output.

اسلاید 9: Chapter 6Slide 9IsoquantsIsoquantsCurves showing all possible combinations of inputs that yield the same output

اسلاید 10: Chapter 6Slide 10Production Function for Food120405565752406075859035575901001054658510011011557590105115120Capital Input12345Labor Input

اسلاید 11: Chapter 6Slide 11Production with Two Variable Inputs (L,K)Labor per year1234123455Q1 = 55The isoquants are derivedfrom the productionfunction for output ofof 55, 75, and 90.ADBQ2 = 75Q3 = 90CECapitalper yearThe Isoquant Map

اسلاید 12: Chapter 6Slide 12IsoquantsThe 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.Input Flexibility

اسلاید 13: Chapter 6Slide 13IsoquantsShort-run:Period of time in which quantities of one or more production factors cannot be changed.These inputs are called fixed inputs.The Short Run versus the Long Run

اسلاید 14: Chapter 6Slide 14IsoquantsLong-runAmount of time needed to make all production inputs variable.The Short Run versus the Long Run

اسلاید 15: Chapter 6Slide 15AmountAmountTotalAverage Marginalof Labor (L)of Capital (K)Output (Q)ProductProductProduction with One Variable Input (Labor)0100------110101010210301520310602030410802020510951915610108181371011216481011214091010812-4101010010-8

اسلاید 16: Chapter 6Slide 16Observations:1) With additional workers, output (Q) increases, reaches a maximum, and then decreases.Production with One Variable Input (Labor)

اسلاید 17: Chapter 6Slide 17Observations:2) The average product of labor (AP), or output per worker, increases and thendecreases.Production with One Variable Input (Labor)

اسلاید 18: Chapter 6Slide 18Observations:3) The marginal product of labor (MP), or output of the additional worker, increases rapidly initially and then decreases and becomes negative..Production with One Variable Input (Labor)

اسلاید 19: Chapter 6Slide 19Total ProductA: slope of tangent = MP (20)B: slope of OB = AP (20)C: slope of OC= MP & APLabor per MonthOutputper Month60112023456789101ABCDProduction with One Variable Input (Labor)

اسلاید 20: Chapter 6Slide 20Average ProductProduction with One Variable Input (Labor)81020Outputper Month02345679101Labor per Month30EMarginal ProductObservations:Left of E: MP > AP & AP is increasingRight of E: MP < AP & AP is decreasingE: MP = AP & AP is at its maximum

اسلاید 21: Chapter 6Slide 21Observations:When MP = 0, TP is at its maximumWhen MP > AP, AP is increasingWhen MP < AP, AP is decreasingWhen MP = AP, AP is at its maximumProduction with One Variable Input (Labor)

اسلاید 22: Production with One Variable Input (Labor)Laborper MonthOutputper Month60112023456789101ABCD81020E0234567910130Outputper MonthLaborper MonthAP = 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.

اسلاید 23: Chapter 6Slide 23As 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).Production with One Variable Input (Labor)The Law of Diminishing Marginal Returns

اسلاید 24: Chapter 6Slide 24When the labor input is small, MP increases due to specialization.When the labor input is large, MP decreases due to inefficiencies.The Law of Diminishing Marginal ReturnsProduction with One Variable Input (Labor)

اسلاید 25: Chapter 6Slide 25Can be used for long-run decisions to evaluate the trade-offs of different plant configurationsAssumes the quality of the variable input is constantThe Law of Diminishing Marginal ReturnsProduction with One Variable Input (Labor)

اسلاید 26: Chapter 6Slide 26Explains a declining MP, not necessarily a negative oneAssumes a constant technologyThe Law of Diminishing Marginal ReturnsProduction with One Variable Input (Labor)

اسلاید 27: Chapter 6Slide 27The Effect of Technological ImprovementLabor pertime periodOutputper timeperiod50100023456789101AO1CO3O2BLabor productivitycan increase if there are improvements intechnology, even thoughany given productionprocess exhibitsdiminishing returns tolabor.

اسلاید 28: Chapter 6Slide 28Malthus predicted mass hunger and starvation as diminishing returns limited agricultural output and the population continued to grow.Why did Malthus’ prediction fail?Malthus and the Food Crisis

اسلاید 29: Chapter 6Slide 29Index of World Food Consumption Per Capita1948-1952100196011519701231980128199013719951351998140Year Index

اسلاید 30: Chapter 6Slide 30Malthus and the Food CrisisThe 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.

اسلاید 31: Chapter 6Slide 31Malthus and the Food CrisisTechnology has created surpluses and driven the price down.QuestionIf food surpluses exist, why is there hunger?

اسلاید 32: Chapter 6Slide 32Malthus and the Food CrisisAnswerThe cost of distributing food from productive regions to unproductive regions and the low income levels of the non-productive regions.

اسلاید 33: Chapter 6Slide 33Labor Productivity Production with One Variable Input (Labor)

اسلاید 34: Chapter 6Slide 34Labor Productivity and the Standard of LivingConsumption can increase only if productivity increases.Determinants of ProductivityStock of capitalTechnological changeProduction with One Variable Input (Labor)

اسلاید 35: Chapter 6Slide 35Labor Productivity in Developed Countries1960-19734.754.048.302.892.361974-19862.101.852.501.690.711987-19971.482.001.941.021.09UnitedUnitedFranceGermanyJapanKingdomStatesAnnual Rate of Growth of Labor Productivity (%)$54,507$55,644$46,048$42,630$60,915Output per Employed Person (1997)

اسلاید 36: Chapter 6Slide 36Trends in Productivity1) U.S. productivity is growing at a slower rate than other countries.2)Productivity growth in developed countries has been decreasing.Production with One Variable Input (Labor)

اسلاید 37: Chapter 6Slide 37Explanations for Productivity Growth Slowdown1)Growth in the stock of capital is the primary determinant of the growth in productivity.Production with One Variable Input (Labor)

اسلاید 38: Chapter 6Slide 38Explanations for Productivity Growth Slowdown2)Rate of capital accumulation in the U.S. was slower than other developed countries because the others were rebuilding after WWII.Production with One Variable Input (Labor)

اسلاید 39: Chapter 6Slide 39Explanations for Productivity Growth Slowdown3)Depletion of natural resources4) Environment regulationsProduction with One Variable Input (Labor)

اسلاید 40: Chapter 6Slide 40ObservationU.S. productivity has increased in recent yearsWhat Do You Think?Is it a short-term aberration or a new long-run trend?Production with One Variable Input (Labor)

اسلاید 41: Chapter 6Slide 41Production with Two Variable InputsThere 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

اسلاید 42: Chapter 6Slide 42The Shape of IsoquantsLabor per year1234123455In the long run both labor and capital arevariable and bothexperience diminishingreturns.Q1 = 55Q2 = 75Q3 = 90Capitalper yearADBCE

اسلاید 43: Chapter 6Slide 43Reading the Isoquant Model1)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.Production with Two Variable InputsDiminishing Marginal Rate of Substitution

اسلاید 44: Chapter 6Slide 44Reading the Isoquant Model2)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.Diminishing Marginal Rate of SubstitutionProduction with Two Variable Inputs

اسلاید 45: Chapter 6Slide 45Substituting Among InputsManagers want to determine what combination if inputs to use. They must deal with the trade-off between inputs.Production with Two Variable Inputs

اسلاید 46: Chapter 6Slide 46Substituting Among InputsThe slope of each isoquant gives the trade-off between two inputs while keeping output constant.Production with Two Variable Inputs

اسلاید 47: Chapter 6Slide 47Substituting Among InputsThe marginal rate of technical substitution equals:Production with Two Variable Inputs

اسلاید 48: Chapter 6Slide 48Marginal Rate of Technical SubstitutionLabor per month1234123455Capital per yearIsoquants are downwardsloping and convexlike indifferencecurves.1111212/31/3Q1 =55Q2 =75Q3 =90

اسلاید 49: Chapter 6Slide 49Observations: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.Production with Two Variable Inputs

اسلاید 50: Chapter 6Slide 50Observations:3)MRTS and Marginal ProductivityThe change in output from a change in labor equals:Production with Two Variable Inputs

اسلاید 51: Chapter 6Slide 51Observations:3)MRTS and Marginal ProductivityThe change in output from a change in capital equals:Production with Two Variable Inputs

اسلاید 52: Chapter 6Slide 52Observations:3)MRTS and Marginal ProductivityIf output is constant and labor is increased, then:Production with Two Variable Inputs

اسلاید 53: Chapter 6Slide 53Isoquants When Inputs are Perfectly SubstitutableLaborper monthCapitalper monthQ1Q2Q3ABC

اسلاید 54: Chapter 6Slide 54Observations when inputs are perfectly substitutable:1)The MRTS is constant at all points on the isoquant.Production with Two Variable InputsPerfect Substitutes

اسلاید 55: Chapter 6Slide 55Observations 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)Production with Two Variable InputsPerfect Substitutes

اسلاید 56: Chapter 6Slide 56Fixed-Proportions Production FunctionLabor per monthCapitalpermonthL1K1Q1Q2Q3ABC

اسلاید 57: Chapter 6Slide 57Observations when inputs must be in a fixed-proportion:1)No substitution is possible.Each output requires a specific amount of each input (e.g. labor and jackhammers).Fixed-Proportions Production FunctionProduction with Two Variable Inputs

اسلاید 58: Chapter 6Slide 58Observations when inputs must be in a fixed-proportion:2) To increase output requires more labor and capital (i.e. moving from A to B to C which is technically efficient).Fixed-Proportions Production FunctionProduction with Two Variable Inputs

اسلاید 59: Chapter 6Slide 59A Production Function for WheatFarmers must choose between a capital intensive or labor intensive technique of production.

اسلاید 60: Chapter 6Slide 60Isoquant Describing the Production of WheatLabor(hours per year)Capital(machinehour peryear)2505007601000408012010090Output = 13,800 bushels per yearABPoint A is more capital-intensive, andB is more labor-intensive.

اسلاید 61: Chapter 6Slide 61Observations:1)Operating at A: L = 500 hours and K = 100 machine hours.Isoquant Describing the Production of Wheat

اسلاید 62: Chapter 6Slide 62Observations:2)Operating at BIncrease L to 760 and decrease K to 90 the MRTS < 1:Isoquant Describing the Production of Wheat

اسلاید 63: Chapter 6Slide 63Observations:3)MRTS < 1, therefore the cost of labor must be less than capital in order for the farmer substitute labor for capital.4)If labor is expensive, the farmer would use more capital (e.g. U.S.).Isoquant Describing the Production of Wheat

اسلاید 64: Chapter 6Slide 64Observations:5) If labor is inexpensive, the farmer would use more labor (e.g. India).Isoquant Describing the Production of Wheat

اسلاید 65: Chapter 6Slide 65Returns to ScaleMeasuring the relationship between the scale (size) of a firm and output1)Increasing returns to scale: output more than doubles when all inputs are doubledLarger output associated with lower cost (autos)One firm is more efficient than many (utilities)The isoquants get closer together

اسلاید 66: Chapter 6Slide 66Returns to ScaleLabor (hours)Capital(machinehours)102030Increasing Returns:The isoquants move closer together510240A

اسلاید 67: Chapter 6Slide 67Returns to ScaleMeasuring the relationship between the scale (size) of a firm and output2)Constant returns to scale: output doubles when all inputs are doubledSize does not affect productivityMay have a large number of producersIsoquants are equidistant apart

اسلاید 68: Chapter 6Slide 68Returns to ScaleLabor (hours)Capital(machinehours)Constant Returns:Isoquants are equally spaced 10203015510240A6

اسلاید 69: Chapter 6Slide 69Returns to ScaleMeasuring the relationship between the scale (size) of a firm and output3)Decreasing returns to scale: output less than doubles when all inputs are doubledDecreasing efficiency with large sizeReduction of entrepreneurial abilitiesIsoquants become farther apart

اسلاید 70: Chapter 6Slide 70Returns to ScaleLabor (hours)Capital(machinehours)Decreasing Returns:Isoquants get further apart102030510240A

اسلاید 71: Chapter 6Slide 71Returns to Scale in the Carpet IndustryThe carpet industry has grown from a small industry to a large industry with some very large firms.

اسلاید 72: Chapter 6Slide 72Returns to Scale in the Carpet IndustryQuestionCan the growth be explained by the presence of economies to scale?

اسلاید 73: Carpet Shipments, 1996(Millions of Dollars per Year)The U.S. Carpet Industry1. Shaw Industries$3,2026. World Carpets$4752. Mohawk Industries1,7957. Burlington Industries4503. Beaulieu of America1,0068. Collins & Aikman4184. Interface Flooring8209. Masland Industries3805. Queen Carpet77510. Dixied Yarns280

اسلاید 74: Chapter 6Slide 74Returns to Scale in the Carpet IndustryAre there economies of scale?Costs (percent of cost)Capital -- 77%Labor -- 23%

اسلاید 75: Chapter 6Slide 75Returns to Scale in the Carpet IndustryLarge ManufacturersIncreased in machinery & laborDoubling inputs has more than doubled outputEconomies of scale exist for large producers

اسلاید 76: Chapter 6Slide 76Returns to Scale in the Carpet IndustrySmall ManufacturersSmall increases in scale have little or no impact on outputProportional increases in inputs increase output proportionallyConstant returns to scale for small producers

اسلاید 77: Chapter 6Slide 77SummaryA 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.

اسلاید 78: Chapter 6Slide 78SummaryAverage product of labor measures the productivity of the average worker, whereas marginal product of labor measures the productivity of the last worker added.

اسلاید 79: Chapter 6Slide 79SummaryThe law of diminishing returns explains that the marginal product of an input eventually diminishes as its quantity is increased.

اسلاید 80: Chapter 6Slide 80SummaryIsoquants 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.

اسلاید 81: Chapter 6Slide 81SummaryIn long-run analysis, we tend to focus on the firm’s choice of its scale or size of operation.

اسلاید 82: End of Chapter 6Productio