1. SHORT-RUN THEORY OF PRODUCTION
Profits and the aims of the firm
Long-run and short-run production:
fixed and variable factors
The law of diminishing returns
The short-run production function:
total physical product (TPP)
average physical product (APP)
marginal physical product (MPP)
the graphical relationship between TPP, APP and MPP 2

2. Wheat production per year from a particular farm (tonnes)

3. Wheat production per year from a particular farm
Number of
workers 1 2 3 4 5 6 7 8
TPP 3 10 24 36 40 42
Tonnes of wheat produced per year
Number of farm workers

4. Wheat production per year from a particular farm
TPP
Tonnes of wheat produced per year
Number of farm workers

5. Wheat production per year from a particular farm
TPP
Diminishing returns
set in here
Tonnes of wheat produced per year b a
Number of farm workers

6. Wheat production per year from a particular farm
TPP
Maximum output
Tonnes of wheat produced per year b a
Number of farm workers

7. Wheat production per year from a particular farm
TPP
Tonnes of wheat per year
DTPP = 7
Number of
farm workers (L)
DL = 1
MPP = DTPP / DL = 7
Tonnes of wheat per year
Number of
farm workers (L)

8. Wheat production per year from a particular farm
TPP
Tonnes of wheat per year
Number of
farm workers (L)
Tonnes of wheat per year
Number of
farm workers (L)
MPP

9. Wheat production per year from a particular farm
TPP
Tonnes of wheat per year
Number of
farm workers (L)
APP = TPP / L
Tonnes of wheat per year
APP
Number of
farm workers (L)
MPP

10. Wheat production per year from a particular farm
TPP
Tonnes of wheat per year b
Diminishing returns
set in here
Number of
farm workers (L) b
Tonnes of wheat per year
APP
Number of
farm workers (L)
MPP

11. Wheat production per year from a particular farm
TPP
Maximum
output
Tonnes of wheat per year b
Number of
farm workers (L) b
Tonnes of wheat per year
APP d
Number of
farm workers (L)
MPP

12. Wheat production per year from a particular farm
Slope = TPP / L
= APP
TPP
Tonnes of wheat per year b
Number of
farm workers (L) b c
Tonnes of wheat per year
APP d
Number of
farm workers (L)
MPP

13. LONG-RUN THEORY OF PRODUCTION
All factors variable in long run
The scale of production:
constant returns to scale
increasing returns to scale
decreasing returns to scale 4

14. LONG-RUN THEORY OF PRODUCTION
Economies of scale
specialisation & division of labour
indivisibilities
container principle
greater efficiency of large machines
by-products
multi-stage production
organisational & administrative economies
financial economies
economies of scope 5

15. LONG-RUN THEORY OF PRODUCTION
Diseconomies of scale
External economies and diseconomies of scale
Optimum combination of factors MPPa/Pa = MPPb/Pb ... = MPPn/Pn 6

16. ISOQUANT- ISOCOST ANALYSIS
Isoquants
their shape
diminishing marginal rate of substitution
isoquants and returns to scale
isoquants and marginal returns
Isocosts
slope and position of the isocost
shifts in the isocost 7

17. An isoquant a Units of K 40 20 10 6 4 Units of L 5 12 20 30 50
Point on
diagram a b c d e
Units of capital (K)
Units of labour (L)

18. An isoquant a Units of K 40 20 10 6 4 Units of L 5 12 20 30 50
Point on
diagram a b c d e
Units of capital (K) b
Units of labour (L)

19. An isoquant a Units of K 40 20 10 6 4 Units of L 5 12 20 30 50
Point on
diagram a b c d e
Units of capital (K) b c d e
Units of labour (L)

20. Diminishing marginal rate of factor substitution
MRS = 2
MRS = DK / DL
DK = 2 h
DL = 1
Units of capital (K)
isoquant
Units of labour (L)

21. Diminishing marginal rate of factor substitution
MRS = 2
MRS = DK / DL
DK = 2 h
DL = 1
Units of capital (K) j
MRS = 1
DK = 1 k
DL = 1
isoquant
Units of labour (L)

22. An isoquant map
Units of capital (K) I1
Units of labour (L)

23. An isoquant map
Units of capital (K) I2 I1
Units of labour (L)

24. An isoquant map
Units of capital (K) I3 I2 I1
Units of labour (L)

25. An isoquant map
Units of capital (K) I4 I3 I2 I1
Units of labour (L)

26. An isoquant map Units of capital (K) I5 I4 I3 I2 I1
Units of labour (L)

27. An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000
Units of capital (K)
TC = £
Units of labour (L)

28. An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000
Units of capital (K) b
TC = £
Units of labour (L)

29. An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000
Units of capital (K) b c
TC = £
Units of labour (L)

30. An isocost Assumptions PK = £20 000 W = £10 000 TC = £300 000
Units of capital (K) b c
TC = £ d
Units of labour (L)

31. ISOQUANT- ISOCOST ANALYSIS
Least-cost combination of factors for a given output
point of tangency
comparison with marginal productivity approach
Highest output for a given cost of production 8

32. Finding the least-cost method of production
Assumptions
PK = £20 000
W = £10 000
TC = £
Units of capital (K)
TC = £
TC = £
TC = £
Units of labour (L)

33. Finding the least-cost method of production
Units of capital (K)
TPP1
Units of labour (L)

34. Finding the least-cost method of production
Units of capital (K)
TC = £ r
TPP1
Units of labour (L)

35. Finding the least-cost method of production
Units of capital (K)
TC = £ r t
TPP1
Units of labour (L)

36. Finding the maximum output for a given total cost
Units of capital (K)
TPP5
TPP4
TPP3
TPP2
TPP1 O
Units of labour (L)

37. Finding the maximum output for a given total cost
Units of capital (K)
Isocost
TPP5
TPP4
TPP3
TPP2
TPP1 O
Units of labour (L)

38. Finding the maximum output for a given total cost
Units of capital (K)
TPP5
TPP4 v
TPP3
TPP2
TPP1 O
Units of labour (L)

39. Finding the maximum output for a given total cost
Units of capital (K) u
TPP5
TPP4 v
TPP3
TPP2
TPP1 O
Units of labour (L)

40. Finding the maximum output for a given total cost
Units of capital (K) t u
TPP5
TPP4 v
TPP3
TPP2
TPP1 O
Units of labour (L)

41. Finding the maximum output for a given total cost
Units of capital (K) t K1 u
TPP5
TPP4 v
TPP3
TPP2
TPP1 O L1
Units of labour (L)