We have noted earlier that the production func­tion shows the maximum amount of output that can be produced from specified levels of input usage. From the total product curve we derive the average phys­ical product or average product (AP) curve and the marginal physical product or marginal product (MP) curve. The exact amount of labour that should be used so as to maximize profits can be determined only after knowing the prices of inputs and outputs. Suppose that we start with the following production function: Furthermore, suppose that we multiply each in­put by a constant a. This product line extension strategy was effective because it capitalized on the product development capabili­ties, distribution network, and marketing skills de­veloped by the firm in its soft drink business. Whenever marginal product is less than av­erage product, average product will diminish. Output, first increases at an increasing rate. Raw material, labour, power, transportation etc., are examples of variable inputs, whose quantity can often be increased are decreased on short notice. In like manner, increasing returns in panel (a) results in total costs in panel (a’) growing at a decreasing rate, that is, continuously declining cost per unit. The essence of the Law of Variable Proportions may be stated thus: If all the inputs can­not be varied proportionately in the short run, output will follow the Law of Non-proportional Returns. It is also important to note that combinations other than those on a given isoquant can be used to produce the given level of output; but such com­binations would not reflect the “maximum-amount- of-output” and thus show economic efficiency of the production process. 13.9 are called isocost lines be­cause they show the various combinations of in­puts that may be purchased with a fixed amount of money. But it is a curve having a special feature: It is the locus along which output will expand when fac­tor prices are constant. 13.2 show that at the early stage of the production pro­cess output increases at an increasing rate as the first few units of labour are added; at the second stage it continues to increase but at a decreasing rate as more and more workers are employed. In this case the distance along the ray between any two successive isoquants remains unchanged, suggesting a proportionate increase in both inputs and output. Since the marginal product of capital is 3, two units of capital must be released. 3. The firm seeks either to minimize the cost of pro­ducing a given level of output or to maximize the output attainable with a given level of cost. It is an easy way to define a project that may seem complex and is not well scoped. Here, Fig. Table 13.2 furnishes details of the results of sub­stituting values for the variable input, labour, into Equation (11). This in our example occurs when 3.75 units of labour are used in the production pro­cess. This is because the fixed factors of production cannot be utilized ef­ficiently without sufficient use of the labour input. A firm reaches equilib­rium and thus minimizes cost when the lowest pos­sible isocost line (whose slope is the factor-price ra­tio) is tangent to the isoquant (whose slope is MRTS). In our example, the production decision maker should in­crease the use of labour up to at least 3.75 units. So the production process has to be organized in the most efficient manner. Thus he has to make either of two input choice decisions: 1. The elasticity of production has greater practi­cal implications for production managers who are being asked to raise and lower output on a periodic basis. The number at the intersec­tion of a row and column shows the output for that level of capital and labour input. 13.7(c), it- is clear that 100 units of output could be produced using more than 10 units of capital and more than 75 units of labour. 13.15. Thus, constant returns in panel (b) leads to linear total cost curve in panel (b’) – constant cost per unit. 100) and labour receives a wage of Rs. We shall do some comparative statics exer­cises, i.e., we shall consider the effect of an increase in all inputs on total output and consider the effect of changes in factor prices on factor proportion or relative input usage. If not, why not? This implies that a 1% increase in the ratio of the price of labour to the price of cap­ital causes a 1% increase in the capital-labour ratio. The distance be­tween successive isoquants gets larger and larger for proportionate increases in inputs. In fact, the former is derived from the latter. The principles developed in this section will continue to apply. Let us suppose that we have collected necessary information on the relationship between the number of radios produced per month and the labour (L) utilized on a monthly basis as noted in Table 13.1. Thus the isocost line for C = Rs. So the total cost equation is C = rK + wL where all the terms have their usual meaning. Here we concerned with production in the narrow sense of physical trans­formation, with particular reference to economic problems connected with production in the factory. It has five components in its own right. The isocost line KL shows all possible combinations of the two inputs that can be purchased with a fixed amount of money and a fixed set of factor prices. With a given state of technology, the attainable level of output depends largely, but not entirely, upon the quantities of the various inputs employed in the pro­duction process. The output, products and byproducts, result from the type of processes used to change the system inputs. It is, in reality, a state­ment concerning the physical relationship between different amounts of a variable input and the result­ing output. Key process input or output variable (KPIV) refers to various factors that can cause an impact during a process or journey. This does not necessarily mean that the second unit of labour is more efficient than the first unit. Clearly, atthe given level of cost, output level Q3 is unattain­able. 13.9. Increasing returns to scale if n > 1, in which case αn > α (output goes up proportionately more than the increase in input usage). These new isocost lines are shown as ZF, Z’F’ and Z” F”. All inputs used in production are broadly classified into four categories – land, labour capital and entrepreneurship. BUSINESS PROCESS: A business process is a sequence of steps performed for a given purpose. The total product curve reflects the following assumptions: 1. This is known as the least cost combination (i.e., most efficient) of inputs. On the basis of such classification of inputs, economists draw a distinction between the short run and the long-run. So as a general rule, we can define maximum output, Q to be a function of the level of usage of the various inputs, X, that is, But in our discussions we shall focus on the simpler case of one output produced using either one input (labour) or two inputs (capital and labour). 13.7(c). Ans. Factors of production are inputs Inputs: Land, Labour, Capital and Entrepreneurship Capital includes, money, technology, building and machines and technical know how. If w falls relative to r, the isocost line becomes flatter. FALSE. The implication is that the aver­age efficiency of the variable factor is increasing. Recall that MRTS shows the rate at which the producer can substitute between the inputs in production. Thus, as the purchase of labour is increased, the purchase of capital has to fall if total cost remains fixed. Look at the three optimum points, A, B, and C. Since at each of these: (2) The MRTS is equal to the factor-price ratio, it follows that the marginal rates of technical substitution are equal at A, B, and C. Therefore, the expansion path, OS, is a locus of points along which the MRTS is constant and equal to the factor price ratio. We see that isoquants for perfect complements are Z-shaped. It forms the foundation for the theory of supply, which, is one of the basic concepts in the deter­mination of prices. The sum of the quantities of each input used, times the respective input price, gives the minimum cost of producing every level of output. Functions - The specific functions of managerial economists are given below- It shows output expansion effect which is similar to income effect (studied in the theory of consumer demand). 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