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					Production

  Chapter 9
Production
   Defined as any activity that creates
    present or future utility

   The chapter describes the production
    possibilities available to us with a given
    state of technology and resources
The Input-Output Relationship

   Production function
The Production Function
   A means of describing the technically
    efficient quantities of outputs corresponding
    to all possible combinations of inputs
Technical Efficiency &
Economic Efficiency
   Technical Efficiency is the attainment of
    the maximum possible output from a given
    combination of inputs

   Economic efficiency occurs when we
    produce the given level of output at the
    minimum cost
Intermediate Products
   Products that are transformed by a
    production process into products of
    greater value (value added)

   For simplification, ignore intermediate
    goods in this chapter
Fixed & Variable Inputs
   Long Run: the shortest period of time
    required to alter the amounts of all inputs
    used in production

   Short Run: the longest period of time
    during which at least one of the inputs
    used in a production process cannot be
    varied
Short Run Production

   Capital levels are fixed
Law of Diminishing Returns

   If other inputs are fixed, the increase in
    output resultant from an increase in the
    variable input must eventually decline
Total, Marginal & Average Products


   The total product curve shows the amount
    of output as a function of the amount of
    variable input
Total, Marginal & Average Products

   Marginal product is a change in total
    product due to a one-unit change in the
    variable input

   The average product is the total output
    divided by the quantity of the variable input
The Relationships Between Curves
   When the marginal product curve lies
    above the average product curve, the
    average product curve must be rising
   When the marginal product curve lies
    below the average product curve, the
    average product curve must be falling
   The two curves intersect at the maximum
    value of the average product curve
Rules for resource allocation
Rule for non-perfectly divisible inputs
 Where marginal product of an input is
 higher in one activity, allocate each unit of
 the input to the activity with the highest
 marginal product.
Rule for perfectly divisible inputs
 Where marginal product of an input is not
 always higher in one activity, allocate each
 unit of the input so that marginal product is
 the same in every activity.
Production in the Long Run
   All factors are variable

   Isoquants are the set of all technically
    efficient input combinations that yield a
    given level of output
The Marginal Rate of Technical
Substitution (MRTS)


   The rate at which one input can be
    exchanged for another without altering the
    total level of output
Returns to Scale
   Tells us what happens to output when all
    inputs are increased by exactly the same
    proportion

   The concept of returns to scale is a long-
    run concept
Returns to Scale: Increasing

   Increasing returns to scale occur when a
    proportional increase in every input yields
    a more than proportional increase in
    output
Returns to Scale
   Constant returns to scale occur when a
    proportional increase in every input yields
    an equal proportion increase in output

   Decreasing returns to scale occur when a
    proportional increase in every input yields
    a less than proportional increase in output
Returns to Scale: The Distinction

   Decreasing returns to scale have nothing
    to do with the law of diminishing returns

   Decreasing returns to scale mean all
    inputs are varied

				
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posted:8/11/2012
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