Theory of Production and cost

Theory of Production and cost - Theoryofproductionandcost...

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Theory of production and cost Microeconomics for  managers PGP I
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Production technology (constraint) Cost of inputs Input choices Objective: Cost minimization Production decision of a firm
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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.  Production technology
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q= F(L) Average product(AP): q/L Marginal product (MP): Δq/ΔL Production with one variable  input
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Production with one variable  input Labour(L) Total output AP MP 0 0 - - 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 0 9 108 12 -4 10 110 10 -8
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Product curve A B C D Labour Output Labour AP, MP 112 60 2 4 8 E Stage I Stage II Stage III
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Technology improvement Labour Output A B C
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           Production with two variable  inputs-Isoquants K L A B C Slope=-ΔK/ ΔL = MRTS q2=75             q1=55     q3=90  1 2 3 1 3 5 D E F
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Production function: Special  cases  K  L  K  L Perfect substitutes Fixed proportion
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Change in the output resulting from proportionate  change in all inputs Returns to scale 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
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Returns to scale 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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Opportunity cost-different dimension as time,  money, satisfaction etc
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Theory of Production and cost - Theoryofproductionandcost...

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