4. Production_ MBA lecture for aast diploma

Production lecture

1. Lecture 4
Economic Analysis
of Production

2. 2of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
Short Run versus Long Run
In studying producer behavior, we need to distinguish
between short-run (SR) and long-run (LR).
Short run refers to any time period that is not long
enough to change all inputs. Therefore, at least
one input is fixed in the SR.
In SR, some inputs are fixed and others are variable.
Typically, labor is the variable input in the SR, while land
and capital are the fixed inputs.
In the long run, all inputs are variable.

3. 3of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Short Run and the Long Run
in Economics
Short run The period of time
during which at least one of a
firm’s inputs is fixed.
Long runThe period of time in which a
firm can vary all its inputs, adopt new
technology, and increase or decrease
the size of its physical plant.
Distinguish between the economic
short run and the economic long run.
10.2 LEARNING OBJECTIVE

4. 4of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
Producer Objective:
The main objective of any producer is to
maximize profit
To reach to the maximum profit, the following
calculations should be recorded;
1.Production
2.Cost
3.Revenue
4.Profit

5. 5of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Short Run and the Long Run
in Economics
The Production Function
Production function (PF)
The relationship between the inputs employed by a firm
and the maximum output it can produce with those inputs.
PF in SR= f (L) while K and T are fixed
PF in LR= f (L, K, T)
L= Labor,K= Capital,T= Technology
Distinguish between the economic
short run and the economic long run.
10.2 LEARNING OBJECTIVE

6. 6of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Production Function
There are 3 indicators to measure Production:
1.Total Production (TP)
2.Marginal Production (MP)
3.Average Production (AP)

7. 7of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Production Function
1. Total Productis the total amount of output
produced, in physical units, using a given amount
of inputs.
Assuming that labor is the only variable factor of
production, the total product is the total amount of
output produced by a given amount of labor.

8. 8of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Production Function
2. The marginal productof labor is the extra output produced
by one additional unit of labor, while other inputs are held
constant.
It is calculated as,the change in total product divided by the
change in the number of labor units.
3. The average productof labor is output per unit of labor. It is
calculated as total product divided by the number of labor
units.

9. 9of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Production Function

10. 10of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Law of Diminishing Returns
Law of diminishing returns The principle that, at
some point, adding more of a variable input, such as
labor, to the same amount of a fixed input, such as
capital, will cause the marginal product of the variable
input (labor) to decline.
The (possible) initial increase in the marginal product of
labor results from the benefits of specializationand
division of labor.
The decline in the marginal product of labor as more
workers are hired is due to the fact that the amounts of
other inputs, such as capital, are kept constant in the
short run. So because of less access to capital and
work space.
The Marginal Product of Labor and
the Average Product of Labor
Understand the relationship between
the marginal product of labor and the
average product of labor.
10.3 LEARNING OBJECTIVE

11. 11of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Marginal Product of Labor and
the Average Product of Labor
Marginal product of labor The additional output a
firm produces as a result of hiring one more worker.
QUANTITY
OF WORKERS
(L)
QUANTITY
OF PIZZA
OVENS (K)
QUANTITY
OF PIZZAS (Q)
MARGINALPRO
DUCT OF
LABOR = ∆Q/∆L
Average
PRODUCT OF
LABOR = Q/L
0 2 0 —
1 2 200
2 2 450
3 2 550
4 2 600
5 2 625
6 2 640
Table 10-3
The Marginal Product of Labor at Jill Johnson’s Restaurant
Understand the relationship between
the marginal product of labor and the
average product of labor.
10.3 LEARNING OBJECTIVE

12. 12of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
The Marginal Product of Labor and
the Average Product of Labor
Marginal product of labor The additional output a
firm produces as a result of hiring one more worker.
QUANTITY
OF WORKERS
(L)
QUANTITY
OF PIZZA
OVENS (K)
QUANTITY
OF PIZZAS (Q)
MARGINALPRO
DUCT OF
LABOR = ∆Q/∆L
Average
PRODUCT OF
LABOR = Q/L
0 2 0 —
1 2 200 200 200
2 2 450 250 225
3 2 550 100 183
4 2 600 50 150
5 2 625 25 125
6 2 640 15 106
Table 10-3
The Marginal Product of Labor at Jill Johnson’s Restaurant
Understand the relationship between
the marginal product of labor and the
average product of labor.
10.3 LEARNING OBJECTIVE

13. 13of 47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapter 10: Technology, Production, and Costs
Production Curves and Analysis
Stage 1 Stage 2 Stage 3
TP ↑ at ↑ rates
(convex)
↑ at ↓ rates
(concave)
Max ↓
MP ↑ Max ↓ zero -ve
AP ↑ ↑ Max ↓ ↓

When MP = AP
AP is Max
st. 1 st.2 st.3