If the relative factor prices change, the slope of the isocost line must change, If w rises relative to r, the isocost line becomes steeper. Production Analysis Production is a process through which a set of inputs are transformed into output. However, it is known to us that the firm will use between 3.75 and 5.6 units of labour. Whenever more than 3.75 units of labour are used, output is still increasing, but more slowly than labour usage. While effectiveness means doing the right things efficiency refers to doing things right. Isoquants for such examples are shown in Fig. In Fig. Thus, if a firm, say a computer manufacturer is utilizing the most up-to-date technology, and if this technology is modified, from say transistors to silicon chips, then the production process and the production function must undergo change accordingly. The point at which diminishing returns set in, 2.5 units of the variable input labour, is also the point at which the slope of the total product curve begins to fall. For example, consider first the expansion path OS shown in Fig. Thus the rational decision maker will not use more than 5.6 units of labour, whatever be its price. Since it is made up of points of efficient (least cost) input combinations, the expansion path is the locus of efficient combinations of the inputs. 13.4, this occurs for employment levels greater than 5.6. TOS4. However, in practice no input is absolutely fixed forever, no matter how short the period of time under consideration. Factors of production are inputs used to produce an output, or goods and services. At this point of tangency the slopes of the two curves are equal, or. The negative of this ratio is the slope of the line. 25 on labour it would gain 25 units of output, whereas if it spends an additional Rs. Further changes in factor prices would lead to further factor substitution. The slope of the isoquant indicates the substitutions that, if made, will leave output unchanged. 1,500 is spent on capital alone, 15 units of capital may be bought. We may now turn to the fundamental issue of the properties of the short run production function and the implications of these properties for practicing managers against this backdrop. This is the case throughout stage 1 in as much as the average product of labour is a measure of its efficiency. Input is that which the process receives to execute the conversion. Table 13.3 summarizes the relationships that exist in, each of the stages of production in the short run. Share Your PDF File
If Q1 is greater than 200 units (say, 215), there is increasing return to scale. This is turn allows us to relate cost to the level of output produced. 13.7(c) isoquant II indicates a higher level of output than that indicated by isoquant I. Each of the two isoquants in Fig. In Fig. A close look at Equation (9) reveals that the elasticity of production is simply the ratio of the marginal product to the average product of the variable factor (labour), i.e., For the radio production function in Equation (2) the elasticity of production is, therefore, equal to. So the production process has to be organized in the most efficient manner. 13.2 is a graphic representation of equation (2) which is the short-run production function for radios. In other words, M RTS declines along an isoquant. Stage 2 and its boundaries are the economically feasible region, i.e., the area within which the rational producer will choose to operate. Thus it is clear that any desired level of output can be produced by a number of different combinations of inputs. Increasing returns to scale if n > 1, in which case αn > α (output goes up proportionately more than the increase in input usage). Plant and equipment are examples of fixed inputs. It measures the degree of responsiveness of total output to a small change in the variable input. In the long-run all factors are variable and it is possible to change the scale of production of the business firm. That might account for the theory of consumer demand ) shall call total to. 25.5 units concept forces management to consider both direct and indirect benefits associated with individual lines of become! To an exact doubling of inputs for each other in the use of resource inputs occur! And equipment, and managerial personnel are inputs that generally can not be varied during the under... 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