1. and production technologies
Production processes
and production technologies

2. Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov; 3 hrs)
1. Introduction. Decision making process and its elements. The scope of economic decision making. Application of marginal analysis
Chs. 1-2
2 (25 Nov; 3 hrs)
2. Demand analysis and demand elasticities
Ch. 3
3 (26 Nov; 3 hrs)
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing decisions
Ch. 4
4 (27 Nov; 2 hrs)
4. Production/transformation process. Production technologies and input-output structure
Ch. 5
5 (28 Nov; 2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production scale and scope.
Chs. 5 and 7
6 (1 Dec; 3 hrs)
6. Structure-conduct-performance. Market structures: competition and contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3 hrs)
7. Market structures: monopoly/monopsony. monopolistic competition and oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3 hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2 hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries and risk management
Ch. 12
10 (5 Dec; 2 hrs)
10. Market research and market analysis. Auction and rings. Strategic behaviour
Ch. 13
11 (8 Dec; 2 hrs )
11. Public sector perspective
Ch. 14
12 (9 Dec; 2 hrs)
12. Revision
13. Examination
13 (11 Dec; 2 hrs)
Examination

3. Topic 4: Production process, production technologies and input-output structure Topic Contents
4.1 Managerial perspective
4.2 Production decision
4.3 Production process
4.4 Short and long runs
4.5 Production decision in the short run
4.6 Production decision in the long run 4.7 Scale and scope 4.8 Linking prices to production 4.9 Short run costs 4.10 Long run costs 4.11 Returns to scale and scope 4.12 Further reading

4. 4.1 Managerial Perspective: Definitions
We now turn to suppliers and how the supply side of market exchange is determined. The supplier must determine:
output specification, including product range (scope) and volume (scale)
types and volumes of inputs to be used (e.g., size of facility)
production technologies
production scheduling
distribution chain and logistic support
Suppliers are defined as organisations that combine inputs such as labour, knowledge, land, materials, and equipment for the purpose of producing outputs. These supplying organisations are called firms
We assume that firms are motivated by the desire to maximise profits, i.e., they maximise the difference between revenue and cost

5. 4.2 Production Decision The basic production decision:
what to produce
how much to produce
when to produce
how much input to use to produce output at least cost
The supplier must consider the profit formula at the margin
Incremental (Marginal) Profit = Additional (Marginal) Revenue - Additional (Marginal) Cost

6. 4.2 Production Decision Marginal Profit = MR - MC
Maximum Profit if Marginal Profit = 0
hence MR = MC
Business Rule
Consider the level of output when
MR = MC
If also
Average Revenue > or = Average Cost
this is the optimal output level to produce

7. 4.3 Production Process
The process of production is normally described as a transformation of inputs into outputs
A production function is a table, graph or mathematical formula showing the maximum output that can be produced from a given level of inputs
A simple input-output relationship of one output and two inputs (capital-machines and labour-operatives) is considered first (re: next two slides)
Every combination of inputs is called a technique of production
All these techniques comprise the technology of production
The supplier’s production capacity is determined by the maximum output that could be produced using different techniques, given the production technology

8. 4.3 Production Process Machines (Capital) Output (X)
Input-Output Relationship
(one output, two inputs)
Machines (Capital) Output (X)
_________________________________________
Operatives (Labour)

9. Figure 4.3.1 - Input-Output Relationship
4.3 Production Process
Figure Input-Output Relationship
Output (one output, two inputs) 85
Total Product 50
5 Marginal Product
Operatives (Variable)/ Machines (Fixed)

10. 4.3 Production Process K - capital L - labour
Generalise this into a two-input-one-output production function: Q = f (L,K), where
K - capital
L - labour
Q = f (kL,kK) = kn f(L,K)
k - constant (scale factor)
n - degree of homogeneity, i.e., change in output Q in response to a k per cent change in both inputs
n = 0 homogenous of degree 0 (if all inputs change by k, there is no change in output)
n = 1 constant returns to scale
n > 1 increasing returns to scale (scale economies)
n < 1 decreasing returns to scale (scale diseconomies)

11. 4.4 Short and Long Runs
Long run - the period of time in which all and any inputs can be varied (e.g., when a new firm is planned)
Short run - the period of time in which only some inputs can be varied (variable inputs) and at least one input is fixed (fixed input)
Short and long runs are about degrees of freedom in making decisions about inputs. Not to be confused with the time passing

12. 4.5 Production Decision in the Short Run
Total product shows how levels of output depend on the level of a variable input, all other inputs being fixed or held constant
Average product is the amount of output per unit of variable input
Marginal product is the extra output produced when one more unit of variable input is employed

13. 4.5 Production Decision in the Short Run
The law of diminishing marginal returns states that if increasing amounts of variable input (say, labour) are applied to a constant level of a fixed input (say, capital), eventually output will only increase by a diminishing amount
In the short run, the challenge is to make the best use of the variable input by maximising its productivity given the fixed amount of the other input
That means producing in the range where the Marginal Product of the variable input declines but remains positive (above the horizontal axis)

14. 4.5 Production Decision in the Short Run
Total, Average and Marginal Products
in the Short Run
Output/Product
efficient production
Total Product
Average Product
Marginal Product
Labour (variable)
Capital (fixed)

15. 4.6 Production Decision in the Long Run
Long Run Input-Output Relationship
Isoquants
Machines (Capital) Output (X)
_________________________________________
Operatives (Labour)

16. 4.6 Production Decision in the Long Run
In the long run all inputs are free to vary Q = Q(K,L)
Substitute and complementary inputs
K K
K/L
Q Q
L L

17. 4.7 Scale and Scope
Most production processes produce many outputs using many inputs
(Qa, Qb, Qc) = (K, L, T)
where Qa, Qb, Qc are different product lines
Size - measured with reference to an input at full capacity
Scale - measured with reference to an output at full capacity
Scope - measured with reference to a range of products that could be produced

18. 4.8 Linking Prices to Production
Combine input prices and quantities to produce costs
K Pk + L PL = Cost of Q
Short run and long run costs
Explicit and implicit costs
Opportunity cost
Sunk cost

19. 4.9 Short Run Costs Short-run Costs Costs($) Total Cost Marginal Cost
Marginal Revenue = AR
Average Total Cost (SRAC)
Q* Quantity

20. 4.10 Long Run Costs Long-run Costs Costs ($) SAC1 SAC3 SAC2 LRAC MR=AR
Q* Q Output

21. 4.11 Returns to Scale and Scope
Average Cost ($)
minimum efficient scale
Quantity
Economies Constant Returns Diseconomies

22. 4.11 Returns to Scale and Scope
Returns to Scope (Decreasing)
Total Cost ($)
Product A
Product B

23. 4.12 Further reading
Baye (2010): ch. 5