Managerial Economics-Charles W. Upton Properties of Production Functions.

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Presentation transcript:

Managerial Economics-Charles W. Upton Properties of Production Functions

A Tabular Presentation

Properties of Production Functions A Production Isoquant

Properties of Production Functions Second Production Isoquant

Properties of Production Functions Third Production Isoquant

Properties of Production Functions Some Points on Isoquants

Properties of Production Functions Constant Returns to Scale Diminishing Marginal Rate of Technical Substitution (MRTS) Diminishing Returns to Proportion

Properties of Production Functions Constant Returns to Scale

Properties of Production Functions Constant Returns to Scale

Properties of Production Functions Constant Returns to Scale

Properties of Production Functions Constant Returns to Scale Double inputs; double outputs

Properties of Production Functions Constant Returns to Scale Not always true

Properties of Production Functions Diminishing Marginal Rate of Technical Substitution (MRTS)

Properties of Production Functions Diminishing MRTS I replace the first worker with one machine.

Properties of Production Functions Diminishing MRTS Two machines are required to replace the second.

Properties of Production Functions Diminishing MRTS Two machines are required to replace the second. The fourth machine substitutes for one worker; the fifth substitutes for half a worker

Properties of Production Functions Diminishing MRTS This is diminishing marginal rate of technical substitution (MRTS ).

Properties of Production Functions Diminishing MRTS MRTS is like MRS.

Properties of Production Functions Diminishing Returns to Proportion Two machines

Properties of Production Functions Diminishing Returns to Proportion One factor fixed, one variable. A short run production function

Properties of Production Functions Diminishing Returns to Proportion

Properties of Production Functions Diminishing Returns to Proportion

Properties of Production Functions Diminishing Returns to Proportion

Properties of Production Functions Diminishing Returns to Proportion Average product (AP) and marginal product (MP) are not the same.

Properties of Production Functions Diminishing Returns to Proportion MP and AP are declining.

Properties of Production Functions Diminishing Returns to Proportion They may initially rise but must eventually decline.

Properties of Production Functions Diminishing Returns to Proportion Marginal product can be zero but not negative

Properties of Production Functions Summary Constant Returns to Scale –Sometimes, but not always

Properties of Production Functions Summary Constant Returns to Scale –Sometimes, but not always Diminishing MRTS –Always

Properties of Production Functions Summary Constant Returns to Scale –Sometimes, but not always Diminishing MRTS –Always Diminishing Returns to Proportion –AP and MP eventually must decline.

Properties of Production Functions The Final Word K L Q1Q1 QoQo Our production isoquants are very smooth; substitution is easy (but diminishing MRTS). While substitution may not always be that smooth, economists would always stress the possibilities of substitution.

Properties of Production Functions The Final Word K L Q1Q1 QoQo Substitution possibilities abound There is more than one way to Skin a cat Bake a cake Make a widget

Properties of Production Functions End ©2003 Charles W. Upton

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