MBA108
Presented by:
Nesyra Angela M. Venesa
Production
Inputs Function Output
• Capital (K) –
services the relationship between the
provided by quantities of inputs used and
long- lived inputs maximum quantity of output
• Labor (L) – that can be produced, given The output can be
human services current knowledge about a service or
• Materials (M) – technology and organization physical product
natural resources
and raw goods
and processed q = ƒ (L, K)
products
The short run is a period in which at least one input is fixed.
q = ƒ (L, K)
FIXED INPUT – a factor that cannot be varied practically in the short run
VARIABLE INPUT – a factor of production whose quantity can be changed readily by the firm
during the relevant period
TOTAL PRODUCT, MARGINAL PRODUCT, AND
AVERAGE PRODUCT OF LABOR WITH FIXED CAPITAL MARGINAL PRODUCT OF LABOR
- the change in total output resulting from
using an extra unit of labor, holding other
factors (capital) constant.
13
= = 13
1
AVERAGE PRODUCT OF LABOR
- The ratio of output to the amount of labor
used to produce that output.
108
= = 12
9
GRAPHING THE PRODUCT
The Effect of Extra Labor
CURVES Output may initially rise more than in
proportion to labor because of greater
specialization of activities. With greater
specialization, workers are assigned to tasks
at which they are particularly adept, and time
is saved by not having workers move from
task to task.
Relationship Among Product Curves
The average product rises with extra labor
if the marginal product is above the average
product curve, and the average product falls
if the marginal product curve is below the
average product curve.
PRODUCTION RELATIONSHIPS WITH VARIABLE LABOR
If a firm keeps increasing an input, holding all other inputs and
technology constant, the corresponding increases in output will
eventually become smaller (diminish).
COMMON CONFUSION
An input’s marginal product must eventually fall as a firm uses more of the input.
This claim is true only if as we add more of an input, we hold
technology and other inputs constant. If we increase labor while
simultaneously increasing other factors or adopting superior
technologies, the marginal product of labor may increase indefinitely.
The long run is a lengthy enough period that all relevant inputs can be varied.
NO INPUT ARE FIXED.
ISOQUANTS – a curve that shows the efficient combinations of labor and capital
that can produce same (iso) level of output (quantity). The isoquant shows the
smallest amounts of inputs that will produce a given amount of output.
q = ƒ (L, K)
PROPERTIES OF ISOQUANTS
1. The farther an isoquant is from the
origin, the greater is the level of
output.
2. Isoquants do not cross.
3. Isoquants slope downward.
Marginal Rate of technical
substitution (MRTS)
- slope of an isoquant
- tells how many units of capital the
firm can replace with an extra unit of
labor while holding output constant.
−6
𝑀𝑅𝑇𝑆 = = −6
1
• Substitutability of Inputs and
Marginal Products
• Cobb-Douglas Production Functions
❖ Charles W. Cobb
❖ Paul H. Douglas
The marginal rate of technical substitution
• Substitutability of Inputs Varies Along along an isoquant that holds output fixed at q is:
an Isoquant
How much output changes if a firm increases all its inputs proportionately?
CONSTANT RETURNS TO SCALE (CRS)
When all input are increased by a certain proportion, output increases by that same proportion.
q = ƒ (L, K)
𝑥1 pounds of Idaho potatoes 𝑥2 = 2𝑥1
𝑦1 pounds of Maine potatoes 𝑦2 = 2𝑦1
𝑞1=𝑥1+𝑦1
INCREASING RETURNS TO SCALE (IRS)
If output rises more than in proportion to an equal proportional increase in all inputs.
Although it could build a copy of its original small factory and double its output, the
firm might be able to more than double its output by building a single large plant,
thereby allowing for greater specialization of labor or capital.
DECREASING RETURNS TO SCALE (DRS)
If output rises less than in proportion to an equal proportional increase in all inputs.
The difficulty of organizing, coordinating, and integrating activities increases with firm
size.
A new idea, device or method – affects markets
in many ways.
Disruptive innovation – innovations that have
dramatic effects on the products we consume or on
the nature of production.
1. PROCESS INNOVATION
- improve the method of production for existing products to increase
output, occur much more frequently than new product innovation
2. ORGANIZATIONAL INNOVATION
- new ways of organizing firms, also increase output
TECHNICAL PROGRESS
- a successful process innovation or organizational
innovation is an advance in knowledge that allows more
input to be produced with the same level of inputs.
