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Module 5 Production Theory

The document defines key concepts in production theory including the production function, factors and outputs of production, and law of diminishing marginal returns. It describes how inputs like capital and labor can be combined using an isoquant curve to show different output levels and how efficiency is maximized at the point of tangency between the isoquant and isocost curves, where the marginal rates of technical substitution and input prices are equal. The summary provides the essential information about the relationships between inputs and outputs in production.

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Charice Anne Villamarin
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367 views

Module 5 Production Theory

The document defines key concepts in production theory including the production function, factors and outputs of production, and law of diminishing marginal returns. It describes how inputs like capital and labor can be combined using an isoquant curve to show different output levels and how efficiency is maximized at the point of tangency between the isoquant and isocost curves, where the marginal rates of technical substitution and input prices are equal. The summary provides the essential information about the relationships between inputs and outputs in production.

Uploaded by

Charice Anne Villamarin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PRODUCTION

THEORY
Objectives

o Define the production function


o Explain the law of diminishing marginal
returns
o Describe the inputs and outputs in a
generalized production function
o Relate Isocosts and Isoquant
Production is the transformation of inputs into outputs

The factors of production are the inputs and the result that has
been created are the outputs.

2 types of outputs:
o Goods
o Services

Technology is the process by which inputs


are turned into outputs.
Ultimate objective
of production
to create goods and services that will
yield utility to consumers
Classification of factors of production:

Fixed Factor Variable Factor


▪ remains constant ▪ changes in
regardless of the accordance with the
volume of production volume of production
The Production Function

shows the relationship between quantities of various


inputs used and the maximum output that can be
produced with those inputs used per unit of time
expressed in a table, graph or an equation
Types of Analysis

Short-run analysis Long-run analysis


▪ using one variable factor of ▪ connotes that all
production that can be factors can be
changed and employing changed.
fixed inputs.
The Law of Diminishing
Marginal Returns
states that adding more of one factor of
production will at some point yield lower
the number of outputs
Returns to Scale

doubling all inputs doubling all inputs doubling all inputs


causes output to causes doubling of result to less than
increase more than output double output
double 2Q=F(2K,2L) 2Q<F(2K,2L)
2Q>F(2K,2L)
The IS OC OS T shows the
different combinations of capital
(K) and labor (L) that a producer
can purchase or hire give his
total outlay and the factor prices.
https://www.businesstopia.net/economics/micro/concept-isocost-line
https://www.businesstopia.net/economics/micro/concept-isocost-line https://www.economicshelp.org/blog/glossary/isoquant-and-isocosts/
An ISOQU A N T is a curve which shows the different combination
of capital (K) and labor (L) which yield the sale level of output.
Characteristics
of Isoquant

o Negatively sloped
o Convex to the Origin
o Do not intersect
Marginal Rate of Technical Substitutions(MRTS)

The amount of capital that a producer is willing to give up in exchange of labor


and still lie on the same isoquant. MRTS is the slope of isoquant.

MRTS = -ΔK
ΔL

MRTS= MPL
MPK
Producer’s Equilibrium

A producer is in equilibrium graphically when given his total outlay


and the factor prices, the producer maximizes the production. This
is shown by the point of tangency between isocost and isoquant.

At the points of tangency, the absolute slopes of the isoquant and


isocost are equal

MRTS = PL
Pk

At Equilibrium:
MPL = PL
MPK PK
An expansion path shows the
collection of producer’s equilibrium
caused by varying total outlay while
keeping factor prices unchanged.
https://econ101help.com/economic-expansion-path/
The Dynamics of Resource Efficiency

Productivity is the efficiency and therefore the power of inputs to produce.

Productivity = Output
Input

Marginal Product is the efficiency of additional inputs and is measured as their marginal output

Marginal Product= Change in the number of output


Change in the number of input
Basic Ways to Improve Efficiency

1.Change the nature of resource through innovation


2.Advancement in hardware technology for the electronic information industry
3.Change external condition of resources
4.More balance resource combination
5.Use resource-saving technology
References:

https://courses.lumenlearning.com/boundless-economics/chapter/the-production-function/

https://www.economicshelp.org/blog/glossary/isoquant-and-isocosts/

https://econ101help.com/economic-expansion-path/

Pagoso, C. M., Dinio, R. P., Villasis, G. A., Meneses, P. P., & Veloso, P. P. (2014). Introductory
Microeconomics (Fourth Edition). Manila, Philippines: REX Bookstore.

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