M.E 4 5.pptx - MANAGERIAL ECONOMICS IV V PRODUCTION AND...

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MANAGERIAL ECONOMICS –IV& V PRODUCTION AND COST ANALYSIS
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PRODUCTION ANALYSIS Production Function Laws of production Isoquants
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PRODUCTION FUNCTION Meaning : P.f refers to the technical relationship which reveals the maximum amount of the output capable of being produced by each and every set of inputs. Q = f ( N,L,K,O,……T ) Factors of production …… Land, Labour, Capital and Organization
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P.f Short Run P.f Long Run P.f Two Factor Model: S.R P.f…..Q = f ( L, K ) L.R P.f…..Q = f ( L, K )
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Cobb-Douglas P.f Q = a (L b K 1-b )
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LAWS OF PRODUCTION Law of Variable Proportions Laws of Returns to Scale
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Law of variable Proportion S.R P.f Statement Assumptions Explanation with Total Product, Average product & Marginal Product… Illustration and Diagram ( TP, AP,& MP curves ) Stages… 27/11
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It’s a short run production law. With a given two-factor model, Q= f ( L, K ) Statement: “When more & more units of a variable factor are combined with fixed factor the output may increase at an increasing rate initially, then remains constant or increase at constant rate and later it increases at diminishing rate”. Assumptions : Only one factor is variable All the units of variable factors are homogeneous Scale of operation is unchanged Constant state of technology To understand input & output relationship there are 3 measurements of product: T P A P M P
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Total Product ( T P ): It refers to the total quantity of output produced per unit of time by all the factors of production. V F T P Average Product ( A P ): It refers to the quantity of output per unit of variable factor. A P= T P Q V F = T P Q L
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Marginal Product ( M P ): It refers to the additional rise in the output due to the additional unit of the variable factor. It refers to the proportional change in the total product due to the proportional change in the variable factor. M P = T P Q V F = T P Q L M Pn = TPn – TPn-1
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Explanation : In the short run, given the state of technology & given fixed factor, when the units of variable factor (labour) are increased in order to increase the production of the output, the TP will increase initially at an increasing rate, it will increase at the same (constant) rate for some time and after a point of time it tends to increase at a diminishing rate because , in the beginning the MP of variable factor may tend to increase and eventually it diminishes.
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VF(units) TP AP MP 0 0 _ _ 1 10 10 10 stage- I 2 22 11 12 3 33 11 11 4 40 10 07 5 45 09 05 stage -II 6 48 08 03 7 48 6.85 0 8 45 5.62 -03 stage -III Stage-I : stage of Increasing returns where all the products, TP, AP & MP are increasing. Stage-II: stage of decreasing returns where TP is ng, but AP & MP are both ng. when TP is max. MP is zero. Stage-III: stage of negative returns where TP & AP are ng and MP is negative.
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Diagram Al the three curves, TP, AP & MP
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Large scale production : Scale of production refers to the size of production or output.
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