Effect of the Production on economics.pptx

Describe the effect of production on economics

1. Production Presentation on IBA-JU

2. Defining Production

3. Alfred Marshall : Marshall , a prominent economist from the late 19th and early 20th centuries, defined production as - “The process by which existing natural resources are so combined as to result in the creation of utilities .” Paul Samuelson : Samuelson , a Nobel laureate in Economics, defined production as – “The transformation of factors into goods .” In Economics' production component looks at how inputs are changed into outputs to meet the needs and desires of people.

4. Production in Micro-economics Understanding production is crucial because it directly impacts factors like : Costs: The cost of production determines how competitive a firm can be in the market . Pricing Decisions: Firms consider production costs when setting prices for their outputs . Efficiency: Efficient production allows firms to minimize costs and maximize profits.

5. F actors of Production

6. The Production Function General Form of the Production Function Q = f (L, C) The Cobb-Douglas Production Function Q = A * L^α * K^β

7. Cost M inimization Cost minimization in production is a fundamental strategy for firms in microeconomics. It involves identifying the most efficient combination of inputs (resources) that allows them to produce a desired level of output at the minimum possible cost.

8. The Short Run VS The Long Run Production

9. Average and Marginal Products Average product The overall output produced per unit of input is referred to as the average product Average product of labor (AP) = Output/ Labor input = Q/L Marginal product Marginal product referred to as the additional output produced as an input is increased by one unit Marginal product of labor (MP) = Change in output/change in labor input = ∆ Q/ ∆ L

10. Capital (K) Labor (L) Total Output (Q) Average Product (AP) [Q/L] Marginal Product (MP) [∆ Q/ ∆ L] 12 1 20 20 20 12 2 50 25 30 12 3 75 25 25 12 4 95 24 20 12 5 105 21 10 12 6 117 20 12 12 7 117 17 12 8 105 13 -12 12 9 90 10 -15 12 10 70 7 -20 The Slopes of the Product Curve Table-: Production with One Variable Input (Labor)

11. Three Stages of Production

12. Relationship Between AP and MP As long as MPL is increasing, APL is also increasing ,then MPL is above of APL. This is happening in stage 1 . When the MP curve intersects the AP curve, the AP reaches its maximum level. Where APL = MPL; APL is optimum. This is happening at point B in the graph. This is happening in stages 2 . When MPL is decreasing, APL also starts decreasing, then APL is above of MPL. This is happening in stages 2 and 3.

13. Isoquant Curve Isoquant Curve represents all those combinations of two inputs which are capable of producing the same level of output .

14. Isoquant map An Iso-product map shows a set of iso-product curves. They are just like contour lines which show the different levels of output.

15. Isoquant is downward sloping . Isoquant is convex to the origin . Two Isoquants can not intereect . Higher Isoquant is better than lower Isoquant. Characteristics of Isoquant

16. 1. Iso -quant is downward sloping 2. Two Isoquants can not intersect Two curves which represent two levels of output cannot intersect each other They slope downward because MTRS of labour for capital diminishes. When we increase labour , we have to decrease capital to produce a given level of output.

17. 3. Isoquant is convex to the origin The marginal rate of technical substitution between L and K is defined as the quantity of K which can be given up in exchange for an additional unit of L. It can also be defined as the slope of an isoquant . 4. Higher Isoquant is better than lower Isoquant. The higher Isoquant which is produce 200 units it's better than 100 unit of production.

18. Diminishing Marginal Returns This theory says if we hold an input fixed (Capital) and increase a variable input (Labor), then the output will eventually decrease.

19. Marginal Rate of Technical Substitution (MRTS) MRTS implies the rate at which one input should be decreased so that the productivity level remains the same when another input increases. MRTS = MRTS =  

20. Here when labor increased from 1 to 2, to maintain the output 75 we have to decrease capital from 5 to 2. Thus, MRTS will be -2. =  

21. Production Functions - Two Special Cases 1. MRTS will be equal at each point of the iso-quant if inputs are perfect substitutes. 2. The factors of production will be used in fixed (technologically pre-determined) proportions, as there is no substitutability between factors. It is called the Leontief Production Function.

22. Three Important Relationships 1. Substitutability between Factors: To produce same output variables can be replaced with one another. Example, + = + =

23. Three Important Relationships 2. Return to Scale: If input rates are doubled, the output rate also doubles. Example, + = + =

24. Three Important Relationships 3. Return to Factor: The changes in output rate due to one input changes while the other remains fixed is called return to factor. Example, + = + = Here, Changes in Labor is 1 and changes in output is 2. MPL = = = 2  

25. Return to Scale Returns to scale is the rate at which output increases as inputs are increased proportionately There are 3 types of Returns to Scale: 1. Increasing Returns to Scale 2. Constant Returns to Scale 3. Decreasing Returns to Scale

26. 3 types of Returns to Scale Increasing Returns to Scale (IRS ): If output more than doubles when inputs are doubled . 2. Constant Returns to Scale ( CRS): If output doubles when inputs are doubled. 3. Decreasing Returns to Scale (DRS ): If output less than doubles when inputs are doubled.

27. Returns to Scale Input Increases = Output Increases Returns to Scale 1% [K,L] = 1% Constant Returns to Scale 1% [K,L] > 1% Increasing Returns to Scale 1% [K,L] < 1% Decreasing Returns to Scale

28. Mathematical Exercises

29. Q = 18L 2 – 0.6L 3 For a manufacturing company we find at what labor average product is highest. APL= Q/L =18L-0.6L 2 MPL= dQ / dL = 36L-1.8L 2 Now, APL = MPL 18L-0.6L 2 = 36L-1.8L 2 1.2L 2 = 18L 1.2L 2 - 18L = 0 L(1.2L-18) = 0 [L=0, 1.2L-18=0, L=15] L= 0 ; 15 L* = 15 At L=15, MPL= 36L-1.8L 2 = (36x15)-(1.8x15 2 ) = 135 APL= Q/L =18L-0.6L 2 = (18x15)-(0.6x15 2 ) = 135 If we add one more labor say 16, APL and MPL both start decreasing. Say if we use 16 labor, MPL and APL both would decrease. APL & MPL math example :

30. MPL =   MPK = Using Cobb-Douglas: Q K L LNQ LNK LNL Q = AK α L β (A = Technology Parameter) LnQ = LnA + α Lnk + β LnL = 2.8 + 0.23LnK + 0.85LnL = 16.45 K 0.23 L 0.85 Put a value of L=22 and K=7; we get, MPL = Marginal product of labor = dQ / dL = 16.45 x 0.85 x K 0.23 L 0.85-1 = 16.45 x 0.85 x 7 0.23 22 0.85-1 = 13.76 MPK = Marginal product of capital = dQ / dk = 16.45 x 0.23 x K 0.23-1 L 0.85 = 16.45 x 0.23 x 7 0.23 -1 22 0.85 = 11.70 [α+β = 0.23+0.85 = 1.08; IRS(Increasing Returns to scale); if we increase capital and labor by 1%, output increases by more than 1% (1.08%)] MPL & MPK math example:

31. Q = 3L+4K [Let, L=K=2] then Q = 14 [Let, L=K=4] then Q = 28 Inputs are double and output is also double, so its Constant returns to scale. …………………………………………………….. Q = 3L+4K MPL = dQ / dL = 3 [Capital is fixed] MPK = dQ / dK = 4 [Labor is fixed] Q = (3L+3K) 1/2 [Let, L=K=2] then Q = 3.46 [Let, L=K=4] then Q = 4.90 Inputs are double but output is below the double, so its decreasing returns to scale. …………………………………………………….. Q = (3L+3K) 1/2 MPL = dQ / dL = 1/(3L+3K) 3/4 (As labor is increased MPL is decreased) MPK = dQ / dK = 1/(3L+3K) 3/4 (As capital is increased MPK is decreased) Returns to Scale math example:

32. Q = 4LK 2 [Let, L=K=2] then Q = 32 [Let, L=K=4] then Q = 256 Inputs are double but output is above the double, so its increasing returns to scale. …………………………………………………….. Q = 4LK 2 MPL = dQ / dL = 4K 2 MPK = dQ / dK = 8LK Continued…….

33. Manufacturer- 1 follow the production function Q 1 = 10K 0.5 L 0.5 (regular car) & manufacturer –2 follow the production function Q 2 = 10K 0.7 L 0.3 (hybrid car); where Q is the number of cars produced per day, K is hours of machine time, and L is hours of labor input. We assume the capital is limited to 10 machines hours but labor is unlimited to supply. So now we can find out the manufacturing company which is the marginal product of labor is greater. With capital limited to 10 machine units, the production functions become, Q1 = 10K 0.5 L 0.5 = 10x10 0.5 L 0.5 =31.62L 0.5 Q2 = 10K 0.7 L 0.3 = 10x10 0.7 L 0.3 = 50.12L 0.3 Through the below table we find out the decision, Q1 = 31.62 x L 0.5 Q2 = 50.12 x L 0.3 Returns to Scale math example:

34. For each unit of labor above Manufacturer- 1 the marginal productivity of labor is greater for the first Manufacturer. So the production function of manufacturer- 1 is more effective. Continued……. L Q 1 Manufacturer- 1 MP L Manufacturer- 1 Q 2 Manufacturer- 2 MP L Manufacturer- 2 0.0 --- 0.0 --- 1 31.62 31.62 50.12 50.12 2 44.72 13.10 61.70 11.58 3 54.77 10.05 69.68 7.98

35. Any Queries!

36. Group Members & ID Utsash Kumar Sarker- 202202031 Kazi Muhammad Tanzimul Islam- 202301072 Mahfuzur Rahman Akash- 202302019 Mahia Musfique- 202303003 Abida Sultana- 202303026