1. 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

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

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

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

5. Production Function Labor Output (TPL) MPL APL 1 2000 ? 2 3000 3 35001
2000 ? 2
3000 3
3500 4
3800 5
3900

6. 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

7. Production Function Labor Output (TPL) MPL APL 1 2000 2 3000 1000 15001
2000 2
3000
1000
1500 3
3500
500
1167 4
3800
300
950 5
3900
100
780

8. Production Function

9. 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

10. 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.

11. 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)

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

13. 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

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

15. Technological Change
Product Innovation
Process Innovation

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

17. Networks Effect Adoption Externality Tippy network markets
Role of history

18. Networks Effect positive network externalities
demand-side economies of scale