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(ISO
Quant)
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Production Function
A production function is the functional
relationship between inputs and output
Maximum output. That can be obtained
for a given combination of inputs.
It
expresses
the
technological
relationship between inputs and output
of a product
Q = f (L, K)
Economic Efficiency vs
Technical Efficiency
A firm is Technically efficient
when it obtains maximum
level of output from given
inputs. A producer cannot
reduce one input and at the
same
time
maintain
the
output at same level .
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A
firm
is
economically
efficient when it produces a
given amount of output at
the lowest possible costs for
a
combination
of
inputs
provided that prices of inputs
are given/ constant. How to
produce a given amount of
output at lowest cost.
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Plant,
Buildings,
Equipment.
Variable Inputs Amount can be changed
during the short run.
Short Run is defined to be that period
when some of the firms inputs are fixed.
Production Function
Short Run PF Long Run PF
Returns to a factor Returns to Scale
One variable factor
Law of returns to
Scale
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Stage of Production
Stage I MP>O, AP rising thus
MP>AP
Stage II MP>O, AP falling. MP<AP
falling
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of
factors
(a
critical
minimum factor to be employed, fuller
use of fixed factor)
Division of labour or specialization
Imperfect
substitution
Leads
to
diminishing returns.
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Significance of law of
variable proportion
Firm
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short
run
phenomenon,
whereas the law of returns to
scale operation in the long run.
Returns to scale refers to the
change in output as all factors
change in the same proportion.
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I. Q = f (l, k)
II. Q1 = f (al, ak)
Stages of Returns to
Scale
I. Increasing Returns to Scale
II. Constant Returns to Scale
III. Diminishing Returns to
Scale
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Theory of Production : IS
Quant Curve Approach
ISO = Equal
Quant = Quantity of Product
An ISO-Quant curve approach
is a curve which represents
different combinations of two
factors which field same level
of output.
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curve
Constant Product
curve
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Assumption of the
concept of ISO-Quants
production
There exists substitutability of
the factor i.e K (Capital) and
Labour
Technique of production is
constant
Factors can be substituted
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increasing proportionately
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Diminishing Returns
to Scale
Change in factor inputs
results
in
to
proportionately smaller
changes in outputs.
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Increasing Returns
to Scale
Doubling of Resources
more than doubles
the level of output.
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to smaller units.
An ISO Quant Map is a set or family of
ISO- Quants.
The concept of ISO-Quant is based on
Marginal rate of technical substitution
(MRTS)
MRTS = Rate at which one input can be
substituted for another input without
changing the level of output.
MRTS = K
L
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Optimum Combination
MRTS
=
PL
of
Inputs
PK
or
Marginal productivity of Labour = PL
Marginal productivity of K
PK
or
MP of Labour= MP of K
Price of Labour
Price of K
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Producer Equilibrium
MRTS = PL
PK
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