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Production Function I
1. Production - short run
– Productive efficiency
– The Law of diminishing marginal returns
2. Production - long run
– isoquants & isocosts
– least cost method of production
Background
Functional relationship
Q = f(K, L , T)
T changes over time
Productive efficiency
“Amethod of production is efficient if, for a
given level of factor inputs, it is impossible
to obtain a higher level of output, given the
existing state of technology.”
The short run
See Figure
Wheat production per year from a particular
farm
40
TPP
Tonnes of wheat produced per year
30
20
10
0
0 1 2 3 4 5 6 7 8
fig
Number of farm workers
Wheat production per year from a particular
farm 40
20
10
0
0 1 2 3 4 5 6 7 8
Number of
farm workers (L)
14
Tonnes of wheat per year
12
10
0
0 1 2 3 4 5 6 7 8
-2
Number of
farm workers (L)
fig MPP
Law of Diminishing Returns
Definition
“…asunits of one input are added (with all
other inputs held constant), a point will be
reached where the resulting additions to
output will begin to decrease; that is
marginal product will decline.”
All
factors are variable
Decisions
Scale
Location
Technique
Choice of technique
Isoquants
Isocosts
Isoquants
An isoquant
“…is a contour line which joins together the
different combinations of two factors of
production that are just physically able to
produce a given quantity of a good.”
Construction, slope and maps
45
An isoquant
40
Units Units
35 of K of L
40 5
30
20 12
Units of capital (K)
25 10 20
6 30
20 4 50
15
10
0
0 5 10 15 20 25 30 35 40 45 50
fig
Units of labour (L)
Diminishing marginal rate of factor substitution
14
12 g
10 ∆ K = 2
MRS = 2 MRS = ∆ K / ∆ L
Units of capital (K)
h
8
∆ L=1
6
0
0 2 4 6 8 10 12 14 16 18 20 22
isoquant
fig
Units of labour (L)
An isoquant map
30
20
Units of capital (K)
10
I5
0
I4
0 10 20 I3
I2
I1
fig
Units of labour (L)
Isocosts
25 Assumptions
20 PK = £20 000
W = £10 000
Units of capital (K)
TC = £300 000
15
10
0
0 5 10 15 20 25 30 3 5= £300
TC 4 0 000
fig
Units of labour (L)
Finding the least-cost method of production
35
30 Assumptions
PK = £20 000
25
W = £10 000
Units of capital (K)
20
TC = £200
15
000
TC = £300 000
10
TC = £400 000
5
TC = £500 000
0
0 10 20 30 40 50
fig
Units of labour (L)
Finding the least-cost method of production
35
30
25
Units of capital (K)
20
15
10
0 TPP1
0 10 20 30 40 50
fig
Units of labour (L)
Least cost method of production
Where:
Slope of isoquant = slope of isocost