Theory of Production

Theory of Production - Transcript

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 1

1

The Organization of Production
Inputs
Labor Capital Land

Fixed Inputs Variable Inputs Short Run
At least one input is fixed

Long Run
All inputs are variable
PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 2

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 3

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 4

Production Function with One Variable Input
Total Product Marginal Product Average Product Production or Output Elasticity
PowerPoint Slides Prepared by Robert F Brooker Ph D

TP Q f L TP MPL L TP APL L MPL EL APL
Copyright 2007 by Oxford University Press Inc
Slide 5

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 6

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 7

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 8

Optimal Use of the Variable Input
Marginal Revenue Product of Labor MRPL MPL MR Where MR Price Marginal Resource Cost of Labor i e wage rate TC MRCL L

Optimal Use of Labor MRPL MRCL
PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 9

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 10

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 11

Production with Two Variable Inputs
Isoquants show combinations of two inputs that can produce the same level of output Firms will only use combinations of two inputs that are in the economic region of production which is defined by the portion of each isoquant that is negatively sloped

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 12

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 13

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 14

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 15

Production with Two Variable Inputs
Marginal Rate of Technical Substitution MRTS K L Or MRTS MPL MPK

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 16

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 17

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 18

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 19

Optimal Combination of Inputs
Isocost lines represent all combinations of two inputs that a firm can purchase with the same total cost
C wL rK
C Total Cost w Wage Rate of Labor L

Cw K L rr
PowerPoint Slides Prepared by Robert F Brooker Ph D

r Cost of Capital K
Copyright 2007 by Oxford University Press Inc
Slide 20

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 21

Returns to Scale
Production Function Q f L K Q f hL hK If h then f has constant returns to scale If h then f has increasing returns to scale If h then f has decreasing returns to scale
PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 22

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 23

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 24

Empirical Production Functions
Cobb Douglas Production Function Q AKaLb Estimated Using Natural Logarithms ln Q ln A a ln K b ln L

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 25

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 26