PRODUCTION ECONOMICS AND LABOR ECONOMICS

Group No: 02

PRODUCTION ECONOMICS

Production Economics• Production economics is the application of the principles of microeconomics in production.

• Production economics, thus provides a framework for decision making at the level of a firm for increasing efficiency and profits.

Agricultural Production Economics• Agricultural Production Economics is a sub-discipline within the broad subject of agricultural economics

• It may be defined as an applied field of science where in principles of economic choice are applied to the use of resources of land, labor, capital and management in the farming industry

Nature of Agricultural Production Economics• Agriculture is no more confined to production at the farm level.

• The storage, processing and distribution of agricultural products involve an array of agribusiness industries.

• Both microeconomics and macroeconomics have applications in agriculture.

• The production problems on individual farms are important.

• But agriculture is not independent of other sectors of the economy.

Production• The process through which some goods and services called inputs are transformed into other goods called products or output.

Relationships1. Input-Output Relationship2. Input-Input Relationship3. Output-Output Relationship

Input-Output Relationship (factor-product relationship )

• use to determine the amount of variable input, that will be used in combination with the fixed inputs

• Use to take decisions on, Ex: -How much fertilizer to apply per acre? -How much irrigation water to use?

-How many hens in a hen house of a given size?

Production Functions

• Letting q represent the output of a particular good during a period, K represent capital use, L represent labor input, and M represent raw materials, the following equation represents a production function.

),,( MLKfq

MARGINAL PHYSICAL PRODUCT AND AVERAGE PHYSICAL PRODUCT

ELASTICITY OF PRODUCTION

STAGE 1• MPP > APP• APP is increasing throughout stage I• Variable input is transformed into product,

increases until APP reached its maximum• Fixed inputs are under utilized• All inputs are not used• Out put is increasing in increasing rate

STAGE11• APP>MPP>0• MPP is decreasing• TPP at its maximum• Physical efficiency of variable input reaches a

peak• The efficiency of fixed input is greatest at the

end of stage II• Profit will be maximized

STAGE111• MPP is negative• TPP begins to decrease(excessive amounts

of variable input are combine with fixed input)• Efficiency of variable inputs are declining

PROFIT MAXIMIZATION

INPUT-INPUT RELATIONSHIP

• Relationships among one output and two or more variable inputs

• Substitution possibilities among inputs create what is called input-input relationship

• In here the basic problem is to finding the right combination of inputs

PRODUCTION FUNCTION• Shows the maximum amount of output (Q) that can be produced within a given time period with each combination of (L) and (K)

• This can be defined as follows:Q= f (L,K)

ISO QUANT• An isoquant is set of all possible bundles of productive inputs exactly sufficient to produce a given quantity of output

• Determine the optimum factor combination to produce certain units of a commodity at the least cost

ISO QUANT SCHEDULE

Combinations of Labor and

CapitalUnits of

Labor (L)Units of

Capital (K)Output of

Cloth (meters)

A 5 9 100

B 10 6 100

C 15 4 100

D 20 3 100

ISO QUANT CURVE

ISOQUANT MAP

• An isoquant map is a set of isoquants that shows the maximum attainable output from any given combination inputs.

PROPERTIES OF ISOQUANT CURVE• An isoquant curve slopes downward, or is negatively

sloped. • An isoquant curve is convex to its origin.• Isoquant curves cannot be tangent or intersect one

another.• Isoquant curves in the upper portions of the chart yield

higher outputs. • An isoquant curve should not touch the X or Y axis on the

graph• Isoquant curves do not have to be parallel to one another• Isoquant curves are oval shaped.

ISO COST LINE

ISOCOST CURVE• Shows various combinations of labor and capital that the

firm can buy for a given factor prices (budget line or budget constraint line )

• C= wL + rK• Where ;

w= wage rate r=rental rate (price of the capital) C=cost

LEAST COST FACTOR COMBINATION (OPTIMAL COMBINATION OF INPUTS)

• The firm can achieve maximum profits by choosing that combination of factors which will cost it the least

• The least cost factor combination can be determined by imposing the isoquant map on iso -cost line

MARGINAL RATE OF TECHNICAL SUBSTITUTION

Essential condition is that the slope of the iso cost line must equal the slope of the isoquant

PRODUCTION EXPANSION PATH

Joins the tangency points of isoquant curves and isocost lines. =

RETURNS TO SCALE• Returns to scale describes what happens to total output

as all of the inputs are changed by the same proportion

OUTPUT-OUTPUT RELATIONSHIP• OUTPUT-OUTPUT RELATIONSHIP

• What combination of products (Y1,Y2) should be produced from a given bundle of fixed and variable inputs

PRODUCTION POSSIBILITY FRONTIER

• A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed

LAW OF INCREASING OPPORTUNITY COST

OPPORTUNITY COST AND THE PPF

• Reallocating scarce resources from one product to another involves an opportunity cost

• If the law of diminishing returns holds true then the opportunity cost of expanding output of X measured in terms of lost units of Y is increasing. 

•  the law of diminishing returns occurs because not all factor inputs are equally suited to producing items

• The maximum revenue combination of output on a production possibility curve can be determined using,

ΔY2 = PY1ΔY1 PY2

MRT=slope of production slope of isorevenue possibility curve line

MARGINAL RATE OF TRANSPORTATION

• The slope of the production–possibility frontier (PPF) at any given point is called the marginal rate of transformation (MRT).

• The slope defines the rate at which production of one good can be redirected (by reallocation of productive resources) into production of the other.

• It is also called the (marginal) "opportunity cost" of a commodity, that is, it is the opportunity cost of X in terms of Y at the margin.

• Thus, MRT increases in absolute size as one moves from the top left of the PPF to the bottom right of the PPF.[8]

LABOR ECONOMICS

LABOR ECONOMICS• Labor economics studies how labor markets work

• Labour Economics can be defined as a study of the organization, institutions and behavior of the labour market in an industries or industrial economy

LABOR DEMAND• The relation between the price of labor and how many

workers firms are willing to hire is summarized by the downward-sloping labor demand curve

SHIFT IN LABOR DEMAND

LABOR SUPPLY

SHIFTS IN MARKET LABOR SUPPLY CURVE

LABOR SUPPLY TO INDIVIDUAL FIRMS

LABOR MARKET EQUILIBRIUM

EQUILIBRIUM IN A COMPETITIVE LABOR MARKET

MARGINAL REVENUE PRODUCTION

MPR is the additional revenue that results from the use of an additional unit of labor

MRP = TR L

MARGINAL FACTOR COST (MFC) • MFC is the additional cost associated with the use of an additional unit of labor

MFC = TC L

Slope of MRP curve

• MRP = MR x MP• MR is constant if the output market is perfectly

competitive and decreasing if the output market is imperfectly competitive.

Marginal factor cost

Short-run labor demand in a perfectly competitive labor market

Theory of Labour supply

• Households are suppliers of labour• Workers maximize their utility• Worker’s utility is determined by the choice between income 

and leisure 

(Y)

W=wage rate b= benefit from leisure time (as a good)