production managerial economics

PRODUCTION, PRODUCTION FUNCTION

PRODUCTION IN THE SHORT RUN

PRODUCTION Production process involves the

transformation of inputs into output. The inputs could be land, labour, capital, entrepreneurship etc. and the output could be goods or services.

An entrepreneur must put together resources -- land, labour, capital -- and produce a product people will be willing and able to purchase

In a production process managers take four types of decisions:

(a) whether to produce or not, (b) how much output to produce, (c) what input combination to use, (d) what type of technology to use.

PRODUCTION FUNCTION

States the relationship between inputs and outputs

A production function is the functional relationship between inputs and output. It shows the maximum output which can be obtained for a given combination of inputs.

It expresses the technological relationship between inputs and output of a product

In general, we can represent the production function for a firm as:Q = f (x1, x2, ….,xn)

Where Q is the maximum quantity of output, x1, x2, ….,xn are the quantities of various inputs, and f stands for functional relationship between inputs and output. For the sake of clarity, let us restrict our attention to only one product produced using either one input or two inputs. If there are only two inputs, capital (K) and labour (L), we write the production function as = f (L, K)

Inputs – the factors of production classified as: Land – all natural resources of the earth

Price paid to acquire land = Rent

Labour – all physical and mental human effort involved in production

Price paid to labour = Wages

Capital – buildings, machinery and equipment not used for its own sake but for the contribution it makes to production

Price paid for capital = Interest

Inputs Process

Land

Labour

Capital

Product or service

generated– value added

Output

PRODUCTION IN THE SHORT RUN

Short run is a period just short enough that at least one resource (input-industrial plant, machines) cannot be changed -- is fixed or inelastic. thus in the short run production of a commodity can be increased by increasing the use of only variable inputs like labour and raw materials.

Plant size is fixed, labor is variable

Short Run

DEFINITION OF SHORT RUN

Short run is a period of time over which at least one

factor must remain fixed. For most of the firms, the fixed

resource or factors which cannot be increased to meet

the rising demand of the good is capital i.e., plant and

machinery.

Short run, then, is a period of time over which output can be

changed by adjusting the quantities of resources such as labour,

raw material, fuel but the size or scale of the firm remains fixed.

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

PRODUCTION FUNCTION SHORT RUN

In times of rising sales (demand) firms can increase labour and capital but only up to a certain level – they will be limited by the amount of space. In this example, land is the fixed factor which cannot be altered in the short run.

PRODUCTION FUNCTION SHORT RUN

If demand slows down, the firm can reduce its variable factors – in this example it reduces its labour and capital but again, land is the factor which stays fixed.

PRODUCTION FUNCTION SHORT RUN

If demand slows down, the firm can reduce its variable factors – in this example, it reduces its labour and capital but again, land is the factor which stays fixed.

PRODUCTION FUNCTION SHORT RUN

PRODUCTION FUNCTION SHORT RUN

Unit of capital No Of labours Total out put AP MP

1 1 3 3 3

1 2 8 4 5

1 3 12 4 4

1 4 14 3.5 2

1 5 14 2.8 0

1 6 12 2 -2