Frank_MB_2024_Release_PPT_Ch08_ACCESS(1).pptx

Economics

1. Chapter 8 Production © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

2. Learning Objectives 1 L O1: Explain how the relationship between output and the factors of production employed to produce it can be summarized in the form of a production function. L O2: Describe the law of diminishing returns and explain how it is often rooted in bottlenecks that occur when some factors of production are fixed. L O3: Describe how technical progress shifts the production function over time. 2

3. Learning Objectives 2 L O4: Explain how the average and marginal product of a variable input are related and explain why optimal allocation of a factor of production across multiple activities requires that its marginal product be the same in each. L O5: Describe the formal difference between production in the short run and production in the long run. L O6: Define a production isoquant and show how an isoquant map can be used to describe the production function in the long run. L O7: Distinguish between decreasing, constant, and increasing returns in the long run. 3

4. Chapter Outline The Input-Output Relationship, or Production Function Production in the Short Run Total, Marginal, and Average Products Production in the Long Run Returns to Scale Appendix 8A: Mathematical Extensions of Production Theory 4

5. The Input-Output Relationship, or Production Function Production can be defined as a process that transforms inputs (factors of production) into outputs. Inputs include land, labor, capital, entrepreneurship, knowledge, technology, organization, and energy. Entrepreneurship: creating, maintaining, and assuming responsibility for a business enterprise. Production function: the relationship that describes how inputs like capital and labor are transformed into output. Mathematically, Q = F open paren ( K , L ) close paren K = Capital L = Labor 5

6. Figure 8.1: The Production Function Access the text alternative for slide images. 6

7. Fixed and Variable Inputs Long run: the shortest period of time required to alter the amounts of all inputs used in a production process. Short run: the longest period of time during which at least one of the inputs used in a production process cannot be varied. Variable input: an input that can be varied in the short run. Fixed input: an input that cannot vary in the short run. 7

8. Production in the Short Run Three properties of short-run production functions: It passes through the origin. Initially, the addition of variable inputs augments output an increasing rate. Beyond some point, additional units of the variable input give rise to smaller and smaller increments in output. Law of diminishing returns: if other inputs are fixed, the increase in output from an increase in the variable input must eventually decline. 8

9. Figure 8.2: A Specific Short-Run Production Function Access the text alternative for slide images. 9

10. Figure 8.3: Another Short-Run Production Function Access the text alternative for slide images. 10

11. Figure 8.4: The Effect of Technological Progress in Food Production Access the text alternative for slide images. 11

12. Total, Marginal, and Average Products Total product curve: a curve showing the amount of output as a function of the amount of variable input. Marginal product: change in total product due to a 1-unit change in the variable input. Average product: total output divided by the quantity of the variable input. 12

13. Figure 8.5: The Marginal Product of a Variable Input Access the text alternative for slide images. 13

14. The Relationships among Total, Marginal and Average Product Curves When the marginal product curve lies above the average product curve, the average product curve must be rising. When the marginal product curve lies below the average product curve, the average product curve must be falling. The two curves intersect at the maximum value of the average product curve. 14

15. Figure 8.6: Total, Marginal, and Average Product Curves Access the text alternative for slide images. 15

16. The Practical Significance of the Average-Marginal Distinction 1 Suppose you own a fishing fleet consisting of a given number of boats, and you can send your boats in whatever numbers you wish to either of two ends of an extremely wide lake, east or west. Under your current allocation of boats, the ones fishing at the east end return daily with 100 pounds of fish each, while those in the west return daily with 120 pounds each. The fish populations at each end of the lake are completely independent, and your current yields can be sustained indefinitely. Should you alter your current allocation of boats? 16

17. The Practical Significance of the Average-Marginal Distinction 2 The general rule for allocating an input efficiently in such cases is to allocate the next unit of the input to the production activity where its marginal product is highest . For a resource that is perfectly divisible, and for activities for which the marginal product of the resource is not always higher in one than in the others, the rule is to allocate the resource so that its marginal product is the same in every activity. 17

18. Production in the Long Run Isoquant: the set of all input combinations that yield a given level of output. Marginal rate of technical substitution (MRTS): the rate at which one input can be exchanged for another without altering the total level of output. 18

19. Figure 8.7: Part of an Isoquant Map for the Production Function Q = 2 KL Access the text alternative for slide images. 19

20. Figure 8.8: The Marginal Rate of Technical Substitution 20

21. Figure 8.9: Isoquant Maps for Perfect Substitutes and Perfect Complements 21 Access the text alternative for slide images.

22. Returns to Scale Increasing returns to scale: the property of a production process whereby a proportional increase in every input yields a more than proportional increase in output. Constant returns to scale: the property of a production process whereby a proportional increase in every input yields an equal proportional increase in output. Decreasing returns to scale: the property of a production process whereby a proportional increase in every input yields a less than proportional increase in output. 22

23. Figure 8.10: Returns to Scale Shown on the Isoquant Map Access the text alternative for slide images. 23

24. Appendix 8A: Mathematical Extensions of Production Theory Application of the average-marginal distinction to tennis Isoquant maps and the production mountain 24

25. Figure 8A.1: Effectiveness vs. Use: Lobs and Passing Shots Access the text alternative for slide images. 25

26. Figure 8A2: The Optimal Proportion of Lobs 26

27. Figure 8A.3: At the Optimizing Point, the Likelihood of Winning with a Lob Is Much Greater Than of Winning with a Passing Shot Access the text alternative for slide images. 27

28. Figure 8A.4: The Production Mountain Access the text alternative for slide images. 28

29. Figure 8A.5: The Isoquant Map Derived from the Production Mountain 29

30. The Cobb-Douglas Production Functions For the two-input case, it takes the form where α and β are numbers between zero and 1, and m can be any positive number. To generate an equation for the isoquant, we fix Q at and then solve for K in terms of L: For , the isoquant will be 30

31. Figure 8A6: Isoquant Map for the Cobb-Douglas Production Function Q = K ½ L ½ Access the text alternative for slide images. 31

32. The Leontief, or Fixed-Proportions, Production Function For the two-input case, it is given by Q = min open paren ( aK , bL ) close paren 32

33. Figure 8A.7: Isoquant Map for the Leontief Production Function Q = min Open Paren (2 K , 3 L ) Close paren Access the text alternative for slide images. 33

34. A Mathematical Definition of Returns to Scale When we multiply each input by c we get Increasing returns: Constant returns: Decreasing returns: 34

35. End of Main Content © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.