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PRODUCTION
Transformation of I/Ps or resources into O/P of goods and services. The creation of any good or service that has economic value to either consumers or other producers.
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Production Function
Relates to the maximum quantity of output that can be produced from given amounts of various inputs for a given technology. This can be expressed in the form of a mathematical model, Schedule (table) , or graph Mathematical model: Q = f (X,Y)
The function f incorporates the existing state of technology in producing Q from X and Y.
The general function f can take may different forms. e.g. Q = L1K2, where L is the amount of labor and K is the amount of capital used in the production process (,1, and 2 are constants).
29 29 13 24 16 16 16 10 16 4 6 4 2 16 29 29
2,000 1,750 6 1,500 1,000 750 500 Capital input Y 250 (horsepower)
6 3 1
10
Production Function
Classification of inputs (X and Y): 1. Fixed input one required in the production process but whose quantity employed in the process is constant over a given period of time regardless of the quantity of output produced. 2. Variable input one whose quantity employed in the process changes, depending on the desired quantity of output to be produced.
Production Function
Short
run the period of time in which one (or more) of the inputs is fixed or incapable of being varied; Long run period of time in which all inputs or resources employed in a production process are variable or can be varied
Marginal Product Average Product of Labor, MPx of Labor, APx --(Q X) (Q X) +6 6 +10 +13 +15 +11 +5 +2 0 - 1 - 2 11 11 10 8.86 7.75 6.78 5.90 8 9.67
Elasticity, Ex -(MPx APx) 1.0 1.25 1.34 1.36 1.0 .50 .23 0.0 - .15 - .34
Production Elasticity
The percentage change in output Q resulting from a given percentage change in the amount of the variable input X employed in the production process with Y remaining constant Indicates the responsiveness of output to changes in the given input Ex= %Q = Q/Q = Q/X %X X/X Q/X Since MPx= Q/X and APx = Q/X: Ex = MPx APx
Also known as the diminishing marginal productivity law or law of variable options; Given that the amount of all other productive factors remains unchanged, the use of increasing amounts of a variable factor in the production process beyond some point will eventually result in diminishing marginal increases in total output.
Marginal Product Average Product of Labor, MPx of Labor, APx --(Q X) (Q X) +6 6 +10 +13 +15 +11 +5 +2 0 - 1 - 2 11 11 10 8.86 7.75 6.78 5.90 8 9.67
Elasticity, Ex -(MPx APx) 1.0 1.25 1.34 1.36 1.0 .50 .23 0.0 - .15 - .34
O ut pu t Q (u nit s)
Ep = 0
TP
Negative returns
AP X1 X2 X3 MP
The amount that an additional unit of the variable input adds to total cost: MFCx = TC
X where TC is the change in cost associated with the given change (X) in the variable input
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