Lecture9 - Lecture #9 PRODUCTION PRODUCTION 1. The...

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Unformatted text preview: Lecture #9 PRODUCTION PRODUCTION 1. The Production Function for a Single Product We define a production function for a single product (y) as a relationship that We define a production function for a single product (y) as a relationship that shows the maximum output that can be produced using all possible combinations of inputs on the basis of a given technology. This production function relates the physical quantities of inputs to physical quantities of output. We will find it convenient to express a production function in the following manner Y Labou Capita Technology (to be defined manner Y Labour Capital Technology (to be defined) Output = f (L, K, land, raw materials, efficiency parameter, returns to scale) In our analysis, we will usually assume that technology is constant. That is, we will investigate production relationships for a given state of technology we will investigate production relationships for a given state of technology. To simplify our analysis, we will assume that land and raw materials are absorbed into the input we call capital (K), so we can treat capital as a it it th t i l d ll th i t th th l b composite unit that includes all other inputs other than labour. Based on these simplifying assumptions, we will use the following general form of the production function y = f (L, K) The key concept in the definition of the production function is the idea that it represents the maximum output. The function TP L tells us that with L 1 units of labour an efficien firm can produce a efficient firm can produce a maximum output of L 1 A A less efficient firm that wastes inputs or uses inefficient technology may only produce L B using L units of labour The production function TP is thus the produce L 1 B using L 1 units of labour. The production function, TP L , is thus the boundary between the attainable and the unattainable possibilities. Only along TP L is production efficient. Notice that a change in L (the variable input) leads to a movement along the TP L curve, while an increase in K or an improvement in technology will lead to a shift in the TP L curve. So the firm would be able to produce more y with the same amount of labour ! ) the same amount of y with less labour ( " ) or a combination of the of labour ( ! ), the same amount of y with less labour ( " ), or a combination of the two ( ). Production usually occurs within constraints related to the firms ability to vary input quantities and technology We will find it important to vary input quantities and technology. We will find it important to distinguish the firms ability to do this within the following time frames Inputs Technology Very Short Run all fixed fixed Short Run (SR) at least one fixed fixed Long Run (LR) all variable fixed We deal mostly with these two....
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Lecture9 - Lecture #9 PRODUCTION PRODUCTION 1. The...

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