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PPT MANA PRODUCTION THEORY

# PPT MANA PRODUCTION THEORY - Chapter4 ProductionTheory...

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Production Theory Production Theory Chapter 4 Professor K. S. Salmasi Professor K. S. Salmasi

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OBJECTIVES Explain how managers should determine the optimal  method of production by applying an understanding  of production processes Understand the linkages between production  processes and costs
Production Theory Managers must decide not only what to produce for the market, but also how to produce it in the most efficient or least cost manner. The basic production theory is simply an application of the constrained optimization: the firm attempts either to minimize the cost of producing a given level of output or to maximize the output attainable with a given level of cost.

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Production and Production Function Production and Production Function Production is the process by which inputs are combined, transformed, and turned into outputs… Production function is a table, a graph, or an equation showing the highest output that a firm can produce for every specified combination of inputs given the state of technology   Alternative Input Combinations Different Quantities of Output Production Process
Production  With Two Inputs Discrete Production Surface Q = f (K,L) Q = Output  K = Capital  L = Labour

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Average and Marginal product  of an input Average product of an input = total production (output) divided by the amount of input used Marginal product of an input = the addition to total output resulting from the addition of the last unit of the input, holding constant the amounts of other inputs m a r g i n a l p r o d u c t o f l a b o r = c h a n g e i n t o t a l p r o d u c t c h a n g e i n u n i t s o f l a b o r u s e d a v e r a g e p r o d u c t o f l a b o r = t o t a l p r o d u c t t o t a l u n i t s o f l a b o r
Production function Production function Thomas Machine Company Thomas Machine Company Amount of Labour Output of Parts AP Labour MP Labour (annual # of units) (hundreds/year) (hundreds of parts) (hundreds of parts) 1 12 12.0 12 2 27 13.5 15 3 42 14.0 15 4 56 14.0 14 5 68 13.6 12 6 76 12.7 8 7 76 10.9 0 8 74 9.3 -2

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Total, Average, and Marginal  Product Marginal product is the slope of the total product function . At point C, total product is maximum, the slope of the total product function is zero, and marginal product intersects the horizontal axis. At point A, the slope of the total product function is highest; thus, marginal product is highest.
Production Function Average and Marginal Product Curves for Labour When MP > AP, AP is increasing When MP < AP, AP is decreasing When MP = AP, AP is at its maximum

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Relation between the average and  marginal product of an input When average product (Q/x) is a maximum, marginal product (dQ/dx) equals average product If x is the amount of variable input that is used, and Q is the output rate, then the Average Product of the variable input is Q/x and the Marginal Product of the variable input is dQ/dx
Relation between the average and  marginal product of an input (2) the

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PPT MANA PRODUCTION THEORY - Chapter4 ProductionTheory...

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