2. PRODUCTION AND BUSINESS ORGANIZATION Chapter 1 Matakuliah: F0882 - Economic Analysis Tahun: 2009

3. Bina Nusantara University 3 Learning Outcomes Theory of Production and Marginal Products Return To Scale Short Run and Long Run Technological Change Business Organizations

4. Theory of Production and Marginal Products BASIC CONCEPT : 1. The Production Function The Production Function specifies the maximum output that can be produced with a given quantity of inputs. It is defined for a given state of engineering and technical knowledge. 2. Total, Average, and Marginal Product The marginal product of an input is the extra output produced by 1 additional unit of that input while other inputs are held constant. Bina Nusantara University 4

5. 5 3. The Law of Diminishing Returns The law of diminishing returns holds that we will get less and less extra output when we add additional doses of an input while holding other inputs fixed. In other words, the marginal product of each unit of input will decline as the amount of that input increases, holding all other inputs constant.

6. Marginal Product Is Derived from Total Product

8. Diminishing Returns in Corn Production

9. RETURN TO SCALE Three important cases should be distinguished : Constant returns to scale Increasing returns to scale (Economies of Scale) Decreasing returns to scale Production shows increasing, decreasing, or constant returns to scale when a balanced increase in all inputs leads to a more-than-proportional, less-than-proportional, or just-proportional increase in output. Bina Nusantara University 9

10. 10 SHORT RUN AND LONG RUN Efficient production requires time as well as conventional inputs like labor. We therefore distinguish between two different time periods in production and cost analysis. The short run is the period of time in which only some inputs, the variable inputs, can be adjusted. In the short run, fixed factors, such as plant and equipment, cannot be fully modified or adjusted. The Long run is the period in which all factors employed by the firm, including capital, can be changed.

11. Technological Change Shifts Production Function Upward Chapter 6 Figure 6-3

12. Value of Networking Increases as Membership Rises Chapter 6 Figure 6-4

13. Bina Nusantara University 13 BUSINESS ORGANIZATIONS 1.The Nature of The Firm Business firms are specialized organizations devoted to managing the process of production. Production is organized in firms because efficiency generally requires large-scale production the raising of significant financial resources and careful management and monitoring of ongoing activities. 2.Big, Small and Infinitesimal Business - The Individual Proprietorship - The Partnership - The Corporation