Professional Documents
Culture Documents
ANALYSIS
PRODUCTION ANALYSIS
P r o d u c t io n M a n a g e m e n t
L a b o u r FO RM AT P o l lu t io n O
I NS
U
IO
N
A
TR
N
P N a t u r a l
U R e s o u r c e s , L a n d P
T U
S C a p it a l, E q u ip m e n t G o o d s & S Te r v i c e s
M a c h i n e s PRO C ESS S
C O N T R O L S
PRODUCTION ANALYSIS
'A production function defines the relationship between inputs and the
maximum amount that can be produced within a given period of time with a
given level of technology'.
Two special features of a production function are:
a. Labour and capital are both inevitable inputs to produce any quantity of
a good, and
b. Labour and capital are substitutes to each other in production.
PRODUCTION ANALYSIS
Short Run and Long Run Production Function
0 1 2 3 4 5 6 7 8 9 10
0 0 0 0 0 0 0 0 0 0 0 0
1 0 5 15 35 47 55 62 61 59 56 52
2 0 12 31 49 58 66 72 77 72 74 71
3 0 35 48 59 68 75 82 87 91 89 87
4 0 48 59 68 72 84 91 96 99 102 101
5 0 56 68 76 85 92 99 104 108 111 113
6 0 55 72 83 91 99 107 112 117 120 122
7 0 53 73 89 97 104 111 117 122 125 127
8 0 50 72 91 100 107 114 120 124 127 129
9 0 46 70 90 102 109 116 121 125 128 130
10 0 40 67 89 103 110 117 122 126 129 131
Capital is constant
Labour (L) 0 1 2 3 4 5 6 7 8 9 10
Output (Q) 0 15 31 48 59 68 72 73 72 70 67
Stage I
Increases at an increasing Increases and reaches its Increases (but slower than
rate maximum MPP)
Stage II
Increases at a diminishing Starts diminishing and Starts diminishing
rate and becomes maximum becomes equal to zero
Stage III
Reaches its maximum, Keeps on declining and continues to diminish but
becomes constant and then becomes negative must always be greater than
starts declining zero
Production with one variable
input/law of diminishing marginal
returns
One input increasing with other input fixed, total
output increases at an increasing rate, then
increases at a decreasing rate, then reaches
maximum and then falls and ultimately reaches
zero.
Thus short run production function shows the
maximum output a firm can produce when only
one input can be varied, other inputs remain
fixed.
Total product, average product, marginal product
and their shapes. Three regions of production
and the efficient zone of production.
Total PhysicalMarginal Average
PRODUCTION ANALYSIS
Physical Physical
Product Product Product
Stage I
Increases at an Increases and Increases (but
increasing rate reaches its slower than
maximum MPP)
Stage II
Increases at a Starts Starts
Fixed inputs grossly Specialisation Fixed inputs diminishing rate diminishing and diminishing
under utilised, and teamwork capacity is reached, and becomes becomes equal
specialisation and team continue and additional X causes maximum to zero
work cause APP to result in greater output to fall
increase when additional output when
X is used additional X is
used, fixed Stage III
input is being
Reaches its Keeps on continues to
properly utilised.
maximum, declining and diminish but
becomes becomes must always be
constant and negative greater than
then starts zero
declining
PRODUCTION ANALYSIS
Isoquants
Characteristics of Isoquants
Isoquants show the following characteristics:
a. They slope downward to the right/ they are
negatively sloped.
b. It is convex to origin.
c. It is smooth and continuous.
d. Two isoquants do not intersect
e. Isoquants further from origin shows higher
level of output.
PRODUCTION ANALYSIS
L
PRODUCTION ANALYSIS
Constrained Optimisation
There are two alternative ways of determining optimal input combinations, the
prices of which are given as (a) a problem of maximising output subject to
cost constraint or (b) a problem of minimising cost subject to output constraint
(i.e., minimising the total cost of producing a specified level of output).
PRODUCTION ANALYSIS
Producer’s equilibrium
Returns to Scale: if both the inputs change in same proportion ,in what
Proportion the output changes.
ii. Managers must understand the marginal benefits and cost of each
decision involving the allocation of scarce resources.
Expansion path