Professional Documents
Culture Documents
Production Techniques
Topics to be Discussed
The Technology of Production
Production with One Variable Input
(Labor)
Isoquants
Production with Two Variable Inputs
Returns to Scale
2005 Pearson Education, Inc.
Chapter 6
Introduction
Our study of consumer behavior was
broken down into 3 steps
Describing consumer preferences
Consumers face budget constraints
Consumers choose to maximize utility
Chapter 6
Chapter 6
Chapter 6
Chapter 6
Chapter 6
Chapter 6
Chapter 6
Chapter 6
10
Long-run
Amount of time needed to make all
production inputs variable.
Chapter 6
11
Chapter 6
12
Chapter 6
13
Chapter 6
14
Chapter 6
15
Output
q
AP
Labor Input L
2005 Pearson Education, Inc.
Chapter 6
16
Output
q
MPL
Labor Input L
2005 Pearson Education, Inc.
Chapter 6
17
Chapter 6
18
Chapter 6
19
112
Total Product
C
60
At point D, output is
maximized.
B
A
0 1
2 3
5 6
7 8
Chapter 6
30
Marginal Product
20
Average Product
10
0 1
2 3
5 6
7 8
Chapter 6
Chapter 6
22
Product Curves
We can show a geometric relationship
between the total product and the
average and marginal product curves
Slope of line from origin to any point on the
total product curve is the average product
At point B, AP = 60/3 = 20 which is the same
as the slope of the line from the origin to
point B on the total product curve
Chapter 6
23
Product Curves
q
q/L
112
30
C
60
20
10
0 1 2 3 4 5 6 7 8 9 10
Labor
2005 Pearson Education, Inc.
Chapter 6
0 1 2 3 4 5 6 7 8 9 10
Labor
24
Product Curves
Geometric relationship between total
product and marginal product
The marginal product is the slope of the line
tangent to any corresponding point on the
total product curve
For 2 units of labor, MP = 30/2 = 15 which is
slope of total product curve at point A
Chapter 6
25
Product Curves
q
112
30
60
30
15
10
A
0 1 2 3 4 5 6 7 8 9 10
Labor
Chapter 6
0 1 2 3 4 5 6 7 8 9 10
Labor
26
Chapter 6
27
Chapter 6
28
Chapter 6
29
Chapter 6
30
Chapter 6
31
The Effect of
Technological Improvement
Output
As move from A to B to
C labor productivity is
increasing over time
100
O3
O2
50
O1
0 1
2 3
5 6
7 8
Chapter 6
10
Labor per
time period
32
Chapter 6
33
Chapter 6
34
Chapter 6
35
Isoquant Map
E
Capital 5
per year
4
3
q3 = 90
D
q2 = 75
q1 = 55
1
2005 Pearson Education, Inc.
3
Chapter 6
Chapter 6
37
Chapter 6
38
Diminishing Returns
Capital 5
per year
Increasing labor
holding capital
constant (A, B, C)
OR
Increasing capital
holding labor constant
(E, D, C
4
3
C
D
q3 = 90
E
q2 = 75
q1 = 55
1
2005 Pearson Education, Inc.
3
Chapter 6
Chapter 6
40
Chapter 6
41
42
Chapter 6
43
Marginal Rate of
Technical Substitution
Capital
per year
1
1
2/3
Q3 =90
1
1/3
1
2005 Pearson Education, Inc.
3
Chapter 6
Q2 =75
Q1 =55
5
Chapter 6
45
( MPL )(L)
2005 Pearson Education, Inc.
Chapter 6
46
( MPK )(K )
2005 Pearson Education, Inc.
Chapter 6
47
(MPL)( L) (MPK)( K) 0
2005 Pearson Education, Inc.
Chapter 6
48
(MPL)( L) (MPK)( K) 0
(MPL )(L) - (MPK)( K)
(MPL )
L
MRTS
( MPK )
K
2005 Pearson Education, Inc.
Chapter 6
49
Chapter 6
50
Perfect Substitutes
Capital
per
month
C
Q1
Chapter 6
Q2
Q3
Labor
per month
51
Chapter 6
52
Fixed-Proportions
Production Function
Capital
per
month
Same output
can only be
produced with
one set of
inputs.
Q3
C
Q2
B
K1
Q1
Labor
per month
2005 Pearson Education, Inc.
L1
Chapter 6
53
Chapter 6
54
Chapter 6
55
Capital
120
100
90
80
A
B
K - 10
L 260
40
250
2005 Pearson Education, Inc.
500
760
Chapter 6
1000
Labor
56
MRTS - K
Chapter 6
57
Returns to Scale
In addition to discussing the tradeoff
between inputs to keep production the
same
How does a firm decide, in the long run,
the best way to increase output
Can change the scale of production by
increasing all inputs in proportion
If double inputs, output will most likely
increase but by how much?
2005 Pearson Education, Inc.
Chapter 6
58
Returns to Scale
Rate at which output increases as inputs
are increased proportionately
Increasing returns to scale
Constant returns to scale
Decreasing returns to scale
Chapter 6
59
Returns to Scale
Increasing returns to scale: output more
than doubles when all inputs are doubled
Larger output associated with lower cost
(cars)
One firm is more efficient than many (utilities)
The isoquants get closer together
Chapter 6
60
The isoquants
move closer
together
4
30
20
2
10
5
2005 Pearson Education, Inc.
10
Chapter 6
Labor (hours)
61
Returns to Scale
Constant returns to scale: output doubles
when all inputs are doubled
Size
May
Isoquants
Chapter 6
62
Returns to Scale
Capital
(machine
hours)
A
6
30
4
2
0
2
Constant
Returns:
Isoquants are
equally spaced
10
5
2005 Pearson Education, Inc.
10
Chapter 6
15
Labor (hours)
63
Returns to Scale
Decreasing returns to scale: output less
than doubles when all inputs are doubled
Decreasing
Reduction
of entrepreneurial abilities
Isoquants
Chapter 6
64
Returns to Scale
Capital
(machine
hours)
Decreasing Returns:
Isoquants get further
apart
30
2
10
5
2005 Pearson Education, Inc.
10
Chapter 6
20
Labor (hours)
65