Theory of Production and cost

Theory of Production and cost - Microeconomics for managers...

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Unformatted text preview: Microeconomics for managers PGP I Production technology (constraint) Cost of inputs Input choices Objective: Cost minimization Production set: Technological feasibility Production function q=F(K,L): Maximum possible output from a given level of input combination. Inputs are also called ‘Factors of production’ Land, labour, capital (physical), raw materials, entrepreneurship etc. Short run vs. Long run ◦ Fixed inputs ◦ Variable inputs q= F(L) Average product(AP): q/L Marginal product (MP): Δ q/ Δ L Labour(L) Total output AP MP-- 1 10 10 10 2 30 15 20 3 60 20 30 4 80 20 20 5 95 19 15 6 108 18 13 7 112 16 4 8 112 14 9 108 12-4 10 110 10-8 A B C D Labour Output Labour AP, MP 112 60 2 4 8 E Stage I Stage II Stage III Labour Output A B C K L A B C Slope=- Δ K/ Δ L = MRTS q 2 =75 q 1 =55 q 3 =90 1 2 3 1 3 5 D E F K L K L Perfect substitutes Fixed proportion Change in the output resulting from proportionate change in all inputs 1 1 t L K tf tL tK f t L K tf tL tK f L K tf tL tK f all for ) , ( ) , ( Scale to Returns Decreasing all for ) , ( ) , ( Scale to Returns Increasing ) , ( ) , ( Scale to Returns Constant K L L L K K CRS IRS DRS q=10 q=20 q=30 q=30 q=20 q=10 q=10 q=20 q=30...
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This note was uploaded on 03/01/2012 for the course STRATEGY Om121 taught by Professor Abhinavdhar during the Spring '12 term at Harvard.

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Theory of Production and cost - Microeconomics for managers...

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