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The Organization of Production

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Presentation on theme: "The Organization of Production"— Presentation transcript:

1 The Organization of Production
Inputs Labor, Capital, Land Fixed Inputs Variable Inputs Short Run At least one input is fixed Long Run All inputs are variable PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

2 Production Function With Two Inputs
Q = f(L, K) PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

3 Production Function With Two Inputs
Discrete Production Surface PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

4 Production Function With Two Inputs
Continuous Production Surface PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

5 Production Function With One Variable Input
Total Product TP = Q = f(L) MPL = TP L Marginal Product APL = TP L Average Product EL = MPL APL Production or Output Elasticity PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

6 Production Function With One Variable Input
Total, Marginal, and Average Product of Labor, and Output Elasticity PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

7 Production Function With One Variable Input
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

8 Production Function With One Variable Input
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

9 Optimal Use of the Variable Input
Marginal Revenue Product of Labor MRPL = (MPL)(MR) Marginal Resource Cost of Labor TC L MRCL = Optimal Use of Labor MRPL = MRCL PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

10 Optimal Use of the Variable Input
Use of Labor is Optimal When L = 3.50 PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

11 Optimal Use of the Variable Input
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

12 Production With Two Variable Inputs
Isoquants show combinations of two inputs that can produce the same level of output. Firms will only use combinations of two inputs that are in the economic region of production, which is defined by the portion of each isoquant that is negatively sloped. PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

13 Production With Two Variable Inputs
Isoquants PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

14 Production With Two Variable Inputs
Economic Region of Production PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

15 Production With Two Variable Inputs
Marginal Rate of Technical Substitution MRTS = -K/L = MPL/MPK PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

16 Production With Two Variable Inputs
MRTS = -(-2.5/1) = 2.5 PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

17 Production With Two Variable Inputs
Perfect Substitutes Perfect Complements PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

18 Optimal Combination of Inputs
Isocost lines represent all combinations of two inputs that a firm can purchase with the same total cost. PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

19 Optimal Combination of Inputs
Isocost Lines AB C = $100, w = r = $10 A’B’ C = $140, w = r = $10 A’’B’’ C = $80, w = r = $10 AB* C = $100, w = $5, r = $10 PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

20 Optimal Combination of Inputs
MRTS = w/r PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

21 Optimal Combination of Inputs
Effect of a Change in Input Prices PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

22 Production Function Q = f(L, K)
Returns to Scale Production Function Q = f(L, K) Q = f(hL, hK) If  = h, then f has constant returns to scale. If  > h, then f has increasing returns to scale. If  < h, the f has decreasing returns to scale. PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

23 Returns to Scale Constant Returns to Scale Increasing Returns to Scale
Decreasing Returns to Scale PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

24 Innovations and Global Competitiveness
Product Innovation Process Innovation Product Cycle Model Just-In-Time Production System Competitive Benchmarking Computer-Aided Design (CAD) Computer-Aided Manufacturing (CAM) PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.


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