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Production With

One Variable Input

What Is a Production Function?


A

production function describes the technical


relationship that transforms inputs (resources)
into outputs (commodities).

mathematician defines a function as a rule for


assigning to each value in one set of variables
(the domain of the function) a single value in
another set of variables (the range of the
function).

A general way of writing a production function is

= f(x)

where y is an output and x is an input. All values of x


greater than or equal to zero constitute the domain of this
function.

The range of the function consists of each output level (y)


that results from each level of input (x) being used.

Suppose the simple function

= 2x.

For each value of x, a unique and single value of y is


assigned. For example if x = 2, then y = 4; if x = 6 then y =
12 and so on.

The domain of the function is all possible values for x,


and the range is the set of y values corresponding to each
x.

In equation y=2x, each unit of input (x) produces 2 units


of output (y).

Fixed Versus Variable Inputs &


the Length of Run
y

= f(x)

where

y = an output

x = an input

= f(x1, / x2, x3, x4, x5, x6, x7).

Where x1 = fixed input, x2x7 = variable inputs

Note : Short Run & Long Run

Short Run vs. Long Run

The short run is defined as the


period of time when the plant
size is fixed.

The long run is defined as the


time period necessary to change
the plant size.

Plant size is
fixed, labor
is variable
Both Plant
size and labor
are variable

Duration of the long/short run


depends on the production
process
8

Plant size is
Short Run
fixed, labor
is variable
To increase
Short Run
production firms
increase Labor
but cant expand
their plant
Firms produce in the short run

Short Run vs. Long Run

Short Run vs. Long Run


Long Run
How can the
plant
size
be
Long
Run
variable?

Firms plan in the


long run

Plant size is
variable, labor is
variable
To increase
production firms
increase Labor
and
expand
their
Plant
size
is
plant.in the
variable
planning
stage

10

PRODUCTION IN THE SHORT


RUN
The

Short Run Is A Period Just Short Enough


That At Least One Resource (Input-industrial
Plant,machines) Cannot Be Changed -- Is Fixed
Or Inelastic.

Thus

In The Short Run Production Of A


Commodity Can Be Increased By Increasing The
Use Of Only Variable Inputs Like Labour And
Raw Materials.

LONG RUN
The

Long Run Is A Period Sufficiently Long


That All Factors Including Capital Can Be
Adjusted Or Are Variable.

This

Means That The Firm Can Choose Any


Combination On The Manufacturing.

01/04/2014

There are three important ways to


measure the productivity of input:

Product (TP)
Marginal Product (MP)
Average Product (AP)

13

Total

01/04/2014

Total Product Function (TP)


Represents

the relationship between the


number of workers (L) and the TOTAL
number of units of output produced (Q)
holding all other factors of production (the
plant size) constant.

14

For a coffee shop, output would be measured in number


of coffee cups a day
For a steel mill, output would be measured in tons of
steel produced a day

The Total Product Curve must show that:


1. With more workers more output can be
produced.
Total Product

Total Product

Total Product

INCREASING FUNCTION.

Labor

Labor

Labor

01/04/2014

Building a Total Product Graph

Number of units of
output produced

Constant Slope

25
20

5
5

15

Output increases
by the same
amount for each
worker hired

5
10
5
5
5
0

Number of Workers hired

Increasing Slope

75
25
50

ALL workers become


more productive as
increases
theyOutput
concentrate
on
increasing
doingbyonly
one task
amounts for each
worker hired

20
30
15
15
5

10
5

75
70
60

Decreasing Slope
5

10
15
ALL workers become
LESS productive as
the plant gets crowded
Output
increases
by
and
equipment
breaks
decreasing
amounts
down
often
for each worker hired

45
20
25
25

Positive Increasing and Positive Decreasing Slope

Increasing

125
120
110

Decreasing

5
10
15

95
20

75
25

50
20

30
15

15
5

10
5

10

Positive Increasing, Positive Decreasing and Negative


Slope
125
120
110

-5

5
10
15

95

-10
-15

20

75
25

50
20

30
15
5

15
10

5
2

10 11 12

ALL THREE FUNCTIONS ARE INCREASING.


Q
Same size steps
Larger steps
Constant Slope
Increasing Slope

L
As L increases, Q increase by the
same amount
Q

As L increases, Q increase by
increasing amounts
Smaller steps

Decreasing Slope
As L increases, Q increase by
decreasing amounts
L

01/04/2014

Marginal Product (MP)


The additional output that can be
produced by adding one more worker
while holding plant size constant.
MP = Q/
L
of

the

Total

Product
22

Is the slope
Function

MP: Slope of the Production Function


Q (units
produced)

MP = 30 Slope = 30/1 = 30
TP(Q)

160 units

30 units Rise Q
130 units

Run L

The 10th
worker adds
30 units to
production

10

L (Workers hired)

MP: Slope of the Production


Function
Slope = 30/3 = 10
Q

MP = 10
TP

160 units

30

Each one of these


three workers
adds 10 units to
production

Rise

130 units

Run

3
9

12

MP INCREASES AND DECREASES WHILE TOTAL


PRODUCT STILL RISING
If more workers are added, MP turns NEGATIVE

MP
25

27

23

MP = 12

-4

20

MP = 8

MP = 5

12
8

MP = 2

1
1st

2
2nd

3
3rd

4th

5
5th

MP = -4

Total Product vs. Marginal Product


TP rises up to
4th worker

TP falls after 4th


worker

27
25
23

MP rises up
to 2nd
worker
MP

MP falls
after to
2nd
worker

MP = 12

20

MP becomes
negative after
4th worker

MP = 8
MP = 5

MP = 2
1

5
2

MP = -4

Represents the amount of output


produced by each worker on
average.

Or
Output per worker.

27

01/04/2014

Average Product (AP)

Output per worker


Slope of that
ray= Q/L = AP
Q

When 10 workers
produce 150 units,

Output per
worker = 15
units
TP

150 units
If we draw a
line (a ray)
from the
origin to a
point on the
production
function

AP = Q/L
AP = 150/10 = 15

Q
Rise

Run
L

10

OUTPUT PER WORKER: AVERAGE PRODUCT (AP)

AP = Q/L What happens to


as L from origin
AP = Slope the
ofAPray
What happens to
increases?

the slope as L
increases?

Q L AP
5 5 1.00

82
80
70

TP

20 10 2.00
30 12 2.50
70 16 4.38

30

80 20 4.00

20

82 23 3.57
L

10 12 16 20 23
29

AP AP Increases up
to 16 workers

AP Decreases
after L=16

Q L AP
5 5 1.00
20 10 2.00

70/16
=4.38

30 12 2.50
70 16 4.38
80 20 4.00

16

82 23 3.57
L
L

30

AP: Increases, reaches a


maximum and decreases.

IfIfthe
your
MPnext
of the
grade
nextisworker
say 70is> say
your70
test
>
If MP (70) > AP (60), then the Average
per
average
worker
so
average
far
say
so
60,
far
then
say
your
60,
test
then
Product increases.
the
per worker
average (AP) increases.
Average
increases.
If MP (50) < AP (60), then the AP will
Ifdecrease.
MP
of the
next
say 50
<
Ifthe
your
next
grade
is worker
say 50 is
< your
test
worker
so far
say
60,test
then
per
If
MP
= AP,
then
AP
isyour
not
average
soaverage
far
saythe
60,
then
the
per worker
average (AP)itdecreases.
increasing
or decreasing:
is at the
Average
decreases.
maximum
point.
If
your
next
grade
60 = your
test60 = per
If the MP of the
nextisworker
is say
average
so far 60,
then
worker
average
so far
sayyour
60, test
thenAverage
the per
stays the
same(AP)
.
stays the same.
worker
average

31

The Relationship between


AP and MP

32

THE AP AND MP
TP

Slope of ray is max

Changes concavity

MP,AP

MP is max
AP is max

MP

AP
L

33

MP and AP
Suppose that 8 workers produce a total of 35 units
9 workers produce a total of 45 units
MP AP
10 Marginal product of 9th worker = 10

5 AP of 9 workers = 45/9=5
4.4

AP of 8 workers = 35/8 = 4.4


MP

9
8

AP

Suppose that 12 workers produce a total of 71 units


13 workers produce a total of 76.9 units

MP = 5.9

MP AP

5.9

AP = MP=5.9
5. 5.9
9
AP remains
same
AP
MP

AP of 13 workers = 76.9/13 = 5.9 1213


AP of 12 workers = 71/12 = 5.9

01/04/2014
34

MP and AP

MP AP

70

01/04/2014
35

Relationship between MP
and AP
MP = AP, AP doesnt
change and
AP is max

MP above AP

60
MP below AP
MP

AP

The Law of Diminishing Returns

constant

increasing

decreasing

Marginal and Average Physical


Product

= f(x),

dy/dx

= fN(x) = f1 = dTPP/dx = MPP.

MPP and APP for the


Neoclassical Function

The MPP function changes as the use of input x1 increases. At first,


as the productivity of input x1 increases, so does its marginal
product, and the corresponding MPP function must be increasing
(Figure 2.3). The inflection point marks the maximum
marginal product.

It is here that the productivity of the incremental unit of the input x1


is at its greatest. After the inflection point, the marginal product of
x1 declines and the MPP function must also be decreasing.

The marginal product of x1 is zero at the point of output


maximization, and negative at higher levels. Therefore, the MPP
function is zero at the point of output maximization, and negative
thereafter.

Average physical product (APP) also changes as the use of x1


increases, although APP is never negative. As indicated earlier, APP
is the ratio of output to input, in this case y/x1 or TPP/x1. Since this
is the case, APP for a selected point on the production function can
be illustrated by drawing a line (ray) out of the origin of the graph to
the selected point.

The slope of this line is y/x1 and corresponds to the values of y and x1
for the production function.

If the point selected on the function is for some value for x1 called
x1*, then the APP at x1* is y/x1*.

APP reaches a maximum at a point after the inflection point but


before the point in which output is maximized. Figure 2.3 illustrates
several lines drawn out of the origin. The line with the greatest slope
is tangent to the production function at that point.

Therefore it also represents the slope of the production function at


that point. The slope of each line drawn from the origin to a point on
the production function represents the APP for the function at that
point, but only one line is tangent to and thus also represents the
slope of the production function at that point. It is here where
marginal product must equal average product, APP must equal MPP,
and y/x = dy/dx.

Figure 2.3 also illustrates the relationships that exist between the
APP and the MPP function for the neoclassical production function.

The MPP function first increases as the use of the input is increased,
until the inflection point of the underlying production function is
reached (point A). Here the MPP function reaches its maximum.
After this point, MPP declines, reaches zero when output is
maximum (point C), and then turns negative.

The APP function increases past the inflection point of the


underlying production function until it reaches the MPP function
(point B). After point B, APP declines, but never becomes negative.

Stage I: APP
increasing, MPP>APP,
TPP increasing

Stage II: APP


decreasing,MPP<APP,
TPP increasing

Stage III: TPP


decreasing, MPP<0

farm management chapter


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Figure.
Graphical illustration of a production function

48

Stage

I:

APP increasing, MPP>APP,


TPP increasing

Stage

II: APP decreasing, MPP<APP,


TPP increasing

Stage

III: TPP decreasing, MPP<0

farm management chapter


7

Stages of Production

49

BEHAVIOUR OF TPP, MPP & APP DURING THE


THREE STAGES OF PRODUCTION
TOTAL PHYSICAL
PRODUCT
STAGE I
INCREASES AT AN
INCREASING RATE
STAGE II
INCREASES AT A
DIMINISHING RATE
TILL IT REACHES
MAXIMUM
STAGE III
STARTS DECLINING

MARGINAL PHYSICAL
PRODUCT

AVERAGE
PHYSICAL
PRODUCT

INCREASES, REACHES ITS


INCREASES &
MAXIMUM & THEN DECLINES TILL REACHES ITS
MAXIMUM
MR = AP
IS DIMINISHING AND BECOMES
EQUAL TO ZERO

STARTS
DIMINISHING

BECOMES NEGATIVE

CONTINUES TO
DECLINE

A Single-Input Production
Elasticity

The elasticity of production is one way of measuring how


responsive the production function is to changes in the use of
the input.

A large elasticity (for example, an elasticity of production


greater than 1) implies that the output responds strongly to
increases in the use of the input.

An elasticity of production of between zero and 1 suggests that


output will increase as a result of the use of x, but the smaller
the elasticity, the less the response in terms of increased
output.

A negative elasticity of production implies that as the level of


input use increases, output will actually decline, not increase.

1. The elasticity of production is greater than 1 until the point is


reached where MPP = APP (point A).

2. The elasticity of production is greatest when the ratio of MPP


to APP is greatest. For the neoclassical production function, this
normally occurs when MPP reaches its maximum at the
inflection point of the production function (point B).

3. The elasticity of production is less than 1 beyond the point


where MPP = APP (point A).

4. The elasticity of production is zero when MPP is zero. Note


that APP must always be positive (point C).

5. The elasticity of production is negative when MPP is negative


and, of course, output is declining (beyond point C). If the
production function is decreasing, MPP and the elasticity of
production are negative. Again, APP must always be positive.

6. A unique characteristic of the neoclassical production function


is that as the level of input use is increased, the relationship
between MPP and APP is continually changing, and therefore the
ratio of MPP to APP must also vary. Since Ep = MPP/APP, the
elasticity of production too must vary continually as the use of
the input increases. This is a characteristic of the neoclassical
production function, which in general is not true for some other
production functions.

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