Business Economics (ECO 341) Lecture 5

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Presentation transcript:

Business Economics (ECO 341) Lecture 5 Spring: 2012 Semester 3 Credit Hours Timings: 1800 – 2100 Hrs (Friday) Room: LR 2 Khurrum S. Mughal 1 1

Theme of the Lecture Production Function Returns to Scale Technology Change Networks 2

Production Production refers to the transformation of inputs or resources into outputs of goods and services

Production INPUTS CAPITAL LABOR Land & Natural Entrepreneur Structures Resources Entrepreneur Workers Machinery plant & equipment

Production Function Labor Output (TPL) MPL APL 1 2000 ? 2 3000 3 3500 1 2000 ? 2 3000 3 3500 4 3800 5 3900

Total Product TP = Q = f(L) Marginal Product MPL = TP L Production Function Q = f (L) Total Product TP = Q = f(L) Marginal Product MPL = TP L Average Product APL = TP L

Production Function Labor Output (TPL) MPL APL 1 2000 2 3000 1000 1500 1 2000 2 3000 1000 1500 3 3500 500 1167 4 3800 300 950 5 3900 100 780

Production Function

Law of Diminishing Returns All productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns

Time Scale in Production Short Run- At least one input is fixed Long Run - All inputs are variable The length of long run depends on industry.

Level and Scale of Production Level of production can be altered changing the proportion of variable inputs Output = Fixed inputs + Variable inputs Scale of production can be altered by changing the supply of all the inputs only in the long run Output = Total inputs(variable inputs)

Theme of the Lecture Production Function Returns to Scale Technology Change Networks 2

Returns to Scale As inputs double, if output doubles, constant returns to scale e.g. a traditional garment tailoring factory more than doubles, production function exhibits increasing returns to scale (Economies of scale) e.g. Specialization in firms less than doubles, decreasing returns to scale Large scale organization with geographical distances and higher agency costs

Theme of the Lecture Production Function Returns to Scale Technology Change Networks 2

Technological Change Product Innovation Process Innovation

Theme of the Lecture Production Function Returns to Scale Technology Change Networks 2

Networks Effect Adoption Externality Tippy network markets Role of history

Networks Effect positive network externalities demand-side economies of scale