Idea Transcript
Managerial Economics in a Global Economy, 5th Edition by Dominick Salvatore Chapter 6 Production Theory and Estimation
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 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 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 2
Production Function With Two Inputs Q = f(L, K) K 6 5 4 3 2 1
Q 10 12 12 10 7 3 1
24 28 28 23 18 8 2
31 36 36 33 28 12 3
36 40 40 36 30 14 4
40 42 40 36 30 14 5
39 40 36 33 28 12 6 L
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3
Production Function With Two Inputs Discrete Production Surface
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 4
Production Function With Two Inputs Continuous Production Surface
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 5
Production Function With One Variable Input Total Product
TP = Q = f(L) TP L
Marginal Product
MPL =
Average Product
TP APL = L MPL EL = AP L
Production or Output Elasticity
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 6
Production Function With One Variable Input Total, Marginal, and Average Product of Labor, and Output Elasticity
L 0 1 2 3 4 5 6
Q 0 3 8 12 14 14 12
MPL 3 5 4 2 0 -2
APL 3 4 4 3.5 2.8 2
EL 1 1.25 1 0.57 0 -1
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 7
Production Function With One Variable Input
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 8
Production Function With One Variable Input
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 9
Optimal Use of the Variable Input Marginal Revenue Product of Labor Marginal Resource Cost of Labor
MRPL = (MPL)(MR) MRCL =
TC L
Optimal Use of Labor MRPL = MRCL Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 10
Optimal Use of the Variable Input Use of Labor is Optimal When L = 3.50 L 2.50 3.00 3.50 4.00 4.50
MPL 4 3 2 1 0
MR = P $10 10 10 10 10
MRPL $40 30 20 10 0
MRCL $20 20 20 20 20
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 11
Optimal Use of the Variable Input
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 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. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 13
Production With Two Variable Inputs Isoquants
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 14
Production With Two Variable Inputs Economic Region of Production
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 15
Production With Two Variable Inputs Marginal Rate of Technical Substitution
MRTS = - K/ L = MPL/MPK
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 16
Production With Two Variable Inputs MRTS = -(-2.5/1) = 2.5
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 17
Production With Two Variable Inputs Perfect Substitutes
Perfect Complements
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 18
Optimal Combination of Inputs Isocost lines represent all combinations of two inputs that a firm can purchase with the same total cost. C
wL rK
C Total Cost w Wage Rateof Labor (L)
K
C r
w L r
r Cost of Capital (K )
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 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
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 20
Optimal Combination of Inputs MRTS = w/r
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 21
Optimal Combination of Inputs Effect of a Change in Input Prices
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 22
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.
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 23
Returns to Scale Constant Returns to Scale
Increasing Returns to Scale
Decreasing Returns to Scale
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 24
Empirical Production Functions Cobb-Douglas Production Function Q = AKaLb Estimated using Natural Logarithms ln Q = ln A + a ln K + b ln L
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 25
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)
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 26