production function with 2 variable inputs return to scale

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1. Production function with 2 variable inputs return to scale

2. Production function with 2 variable inputs return to scale

3. Production function Isoquant and shape of isoquants Return to scale Properties of isoquant curves Isoquants Map Refrences Thank you CONTENT

4. WHAT IS PRODUCTION FUNCTION Production means transforming inputs (labour, capital, raw materials, time etc.)into an output. This concept of production is however limited to only ‘manufacturing’. In other words , a process by which men, material, capital and time are converted into value added product is called production.

5. It is a mathematical presentation of input output relationship. The production function represent the technology of a firm, of an industry or the economy as a whole. A production function may take the form of a schedule or a table, a graphed line or curve or a mathematical model. Production Function

6. A real life production function is generally very complex. It includes a wide range of input they are:- Land and Building Labour Capital R aw M aterial Time Technology It is expressed by :- Q = f(LB, L, K, M, T, t)

7. There is a relationship between production and productivity. Long-run production K& L are variable. Isoquants analyze and compare the different combinations of K & L and output Production with Two Variable Inputs

8. Isoquant and shape of isoquant

9. ISOQUANT It is derived from Greek word iso, meaning equal. The isoquant mapping deals with the cost-minimization problem of producers. Adding one input while holding the other constant eventually leads to decreasing marginal output, and this is reflected in the shape of the isoquant. Isoquant And Shape Of Isoquant

10. Isoquant are also called equal product curves. As with indifference curves, two isoquant can never cross. Every possible combination of inputs is on isoquant. An isoquant map can also indicate decreasing or increasing returns to scale based on increasing or decreasing distances between the isoquant pairs of fixed output increment, as output increases.

11. INPUT X Q 1 Q 2 Q 3 I N P U T Y An isoquant map where Q3>Q2>Q1. Typically inputs X and Y would refer to labour and capital respectively. More of input X, and Y, or both is required to move from isoquant Q1 to Q2, or from Q2 to Q3.

12. Shape Of Isoquants Example of an isoquant map with two inputs that are substitute I N P U T X I N P U T Y Q 1 Q 2 Q 3

13. Return to scale

14. Measuring the relationship between the scale (size) of a firm and output 1) Increasing returns to scale : output more than doubles when all inputs are doubled Larger output associated with lower cost (autos) One firm is more efficient than many (utilities) The isoquants get closer together Returns to Scale

15. Returns to Scale Labor (hours) Capital (machine hours) 10 20 30 5 10 2 4 A Increasing returns to scale

16. Measuring the relationship between the scale (size) of a firm and output 2) Constant returns to scale : output doubles when all inputs are doubled Size does not affect productivity May have a large number of producers Isoquants are equidistant apart Returns to Scale

17. Returns to Scale Labor (hours) Capital (machine hours) Constant Returns: Isoquants are equally spaced 10 20 30 15 5 10 2 4 A 6

18. Measuring the relationship between the scale (size) of a firm and output 3) Decreasing returns to scale : output less than doubles when all inputs are doubled Decreasing efficiency with large size Reduction of entrepreneurial abilities Isoquants become farther apa rt Returns to Scale

19. Returns to Scale Labor (hours) Capital (machine hours) Decreasing Returns: Isoquants get further apart 10 20 30 5 10 2 4 A

20. Properties Of Isoquants

21. Isoquants have a negative slope - An isoquant has a negative slope in the economic region and in the economic range of isoquant. The negative slope of isoquant implies substitutability between the input. It means that if one of the input is reduced, the other input has to be increased that the total output remains unaffected. Properties Of Isoquant curves

22. 2 . Isoquant are convex to origin- convexity of isoquant implies two things: substitution between two inputs Diminishing marginal rate of technical substitution (MRTS) The MRTS is defined as: MRTS= -K\-L= slope of the isoquant

23. 3 . Isoquant are non-intersecting and non-tangential- The intersection or tangency between any two isoquant implies that a given quantity of a commodity can be produced with a smaller as well as larger input-combination.

24. 4 . Upper isoquant represent higher level of output- Between any two isoquant, the upper one represent higher level of output than the lower one. The reason is upper isoquant has larger input combination which in general produce larger output.

25. QUANTITY L Q 1= 100 Q 2= 200 Q U A N T I T Y K B C D A X Y In this fig Q2 will always indicate high level of output than Q1. Q2 consist of more of either capital or labour or both. Consider point a on Q1 and compare it with any point at Q2. The point on Q2 consider more capital (a b). Point d more of labour (a d) and point c more of both, capital and labour. Therefore Q2 represent higher level of output(200 units) than Q1 indicating 100 units.

26. Isoquant Map

27. Isoquant Map Q1 Q2 CAPITAL (K) LABOUR (L) An isoquant map is a set of isoquant presented on a two- dimensional plane as shown by isoquant Q1, Q2, Q3. Each isoquant shows various combination of two input that can be used to produce a given quantity of output. Q3

28. In isoquant map, upper isoquant is formed by a greater quantity of one or both the inputs than the input combination indicated by lower isoquant. For example:- Isoquant Q3 indicates a greater input combination than that shown by isoquant Q2 and so on.

29. In the isoquant map, each upper isoquant indicates a larger input combination than the lower ones and each successive upper isoquant indicates a higher level of output than lower ones. This is one of the properties of isoquants. For example:- If isoquant Q1 represent an output equal to 100 units, isoquant Q2 represent an output greater than 100 units. No isoquant can intersect or be tangent to one another.

30. References:- D.N Dwivedi (Managerial Economics) H.L Ahuja (Micro Economics) GOOGLE Wikipedia

31. Thank you...