BUSINESS ECONOMICS

Session 5: PRODUCTION ANALYSIS - II

1. 1.1 Pre-Work Introduction In determining the profit maximizing output level, a business firm has to take important long run and short run supply decisions. The long run decisions relate to the choices the firms make with respect to technology, scale of operation, location etc. Having decided on the

technology/technique/process, the firm enters the short run where the decisions relate to identifying efficient output level. In the earlier analysis, it was discussed how a firm can take the decision of how much to produce based on the behaviour of TP, AP, and MP curves. The TP curve defines the changes in total output as variable input increases. The AP curve defines the changes in average productivity of variable input (

Q ) as output increases. The MP curve defines the changes L

Q ) as output increases. L

in marginal productivity of the variable input (

The decision on input use and the profit maximizing output, is based on the input productivity and the associated input cost i.e. MRPL = PL. Another dimension of profit maximizing production decision is that of input choices/input combination. The economic basis of input

combination, therefore, becomes important to understand. This session aims to develop a framework for understanding efficient combination of inputs besides exploring the implications of varying demand conditions on firm level production decisions.

1.2

Learning Activity Read the case study The Early Bird-Electric Power Load Despatching and analyze the following for class discussion

(i)

How is operating efficiency of the generating unit defined? Why does it vary between units?

(ii)

How do shifts in production function affect the operating efficiency of the generating unit?

(iii)

Why do input costs vary between units? How do they affect the production efficiency?