Production & its Process

Production = Transformation [Input Output]

Process Production Management

CONTROL

INPUT

OUTPUT

Transformation

Process

Natural

Labour

Capital

Pollution

Goods & Services

Machines

Production Functiono Relation between Input & Maximum Output

Produced– (given period of time)– (given level of technology)

o Stated as Table, Schedule, Mathematical Eqn

– The production function for manufactures is given by QM = QM (K, LM)

where:• QM is the economy’s output of manufactures• K is the economy’s capital stock• LM is the labor force employed in manufactures

– The production function for food is given by QF = QF (T, LF)

where:• QF is the economy’s output of food• T is the economy’s supply of land• LF is the labor force employed in food

Production Function

Time Periods

o To Analyse relationship between o Input & Output Factors

o Classifiedo SHORT RUNSo LONG RUNS

• Short run: Some inputs are fixed (e.g., factories, land).

• Long run: All inputs are variable (e.g., firms can build more factories, or sell existing ones

Analysis of Production Function:Short Run

• In the short run at least one factor fixed in supply but all other factors capable of being changed

• Reflects ways in which firms respond to changes in output (demand)

• Can increase or decrease output using more or less of some factors but some likely to be easier to change than others

• Increase in total capacity only possible in the long run

Analysing the Production Function: Long Run

• The long run is defined as the period of time taken to vary all factors of production– By doing this, the firm is able to increase its total capacity – not just short

term capacity– Associated with a change in the scale of production– The period of time varies according to the firm

and the industry– In electricity supply, the time taken to build new capacity could be many

years; for a market stall holder, the ‘long run’ could be as little as a few weeks or months!

ISO Quants

Characteristics of isoquants

• Downward sloping• A higher isoquant represents a higher output• Isoquants do not intersect• Convex to the origin

ISO Quant Schedule

The Isoquant Curve

Isoquants and indifference curves

• have most of the same properties • biggest difference:– isoquant holds something measurable, quantity,

constant– indifference curve holds something that is

unmeasurable, utility, constant

Isoquant Curves• The slope and the shape of the isoquant

curves depend on the degree of substitutability between the two inputs.

• The degree of substitutability is a measure of the ease with which one input can be used in place of the other in producing a given amount of output.

• Marginal rate of substitution – the rate at which one factor must be added to compensate for the loss of another factor, to keep output constant.

The Isoquant Map

• Isoquant map – a set of isoquant curves that show technically efficient combinations of inputs that can produce different levels of output.

An Isoquant Map

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MRTSIsoquantsMarginal Rate of Technical Substitution (MRTS)• Marginal Rate of Technical Substitution — The rate at which one

input can be substituted for another input while still producing the same level of output.

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• Perfect Substitutes — In production, two inputs are perfect substitutes if they can always be substituted for one another at a fixed rate.

• Perfect Complements — In production, two inputs are perfect complements if they can be used only in fixed proportions.

MRTS

IsoquantsMarginal Rate of Technical Substitution (MRTS)

Special shapes of Isoquants

• Linear Isoquant• Right Angled Isoquant

The Isocost Line

• Isocost line – a line that represents alternative combinations of factors of production that have the same costs.

The Isocost Line