MANAGERIAL ECONOMICS
Organization of Production and
Production Function
Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS
Organization of Production and
Production Function
Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS
Important Set of Decisions
First, the firm must choose its production process, selecting
how much labour and capital to use.
Second, if a firm wants to expand its output, it must decide
how to do that in both the short run and the long run.
Third, given its ability to change its output level, a firm must
determine how large to grow based on its expectations about
future demand and costs.
MANAGERIAL ECONOMICS
Input and Outputs
The main lesson of this UNIT is that firms are no black boxes
that mysteriously transform inputs into outputs.
Economic theory explains how firms make decisions about
production processes, the types of inputs to use, and volume
of output to produce.
MANAGERIAL ECONOMICS
Concept of Production
Inputs
(factors of production) Outputs
Raw Goods
Natural Transformation
resources materials
Process
Human Capital Services
resources
MANAGERIAL ECONOMICS
Concept of Production Function
A production function refers to the functional relationship,
under the given technology, between physical rates of input
and output of a firm at a given time period.
MANAGERIAL ECONOMICS
Simple Production Function
A simple production function, assuming a two-factor model:
Ox = f (L,K)
Ox = Quantity of commodity X per unit of time
L = Units of labour services
K = Units of capital
MANAGERIAL ECONOMICS
Fixed Inputs and Variable Inputs
Fixed inputs are those that cannot be readily changed during
the time period under consideration, excepts perhaps at very
great expense. Example.
Variable inputs are those that can be varied on short notice.
Example.
MANAGERIAL ECONOMICS
Time Element and Production Function
Short-run: The term “short run” is defined as a period of time
over which the inputs of some factors of production cannot
be varied. Factors which cannot be altered in the short run
are called fixed factors.
Long-run: The term “long run” is defined as a period of time
long enough to permit variations in the inputs of all factors of
production employed by a firm. In other words, the long run
is such a time period over which all factors become variable.
MANAGERIAL ECONOMICS
Simple Production Function
In the short run, the firm’s production function becomes:
ഥ
Ox = f (L,𝐾)
Ox = Quantity of commodity X per unit of time
L = Amount of labour
ഥ = Fixed amount of capital
𝐾
MANAGERIAL ECONOMICS
Total Product, Average Product, and Marginal Product
• Total Product (TP): It refers to the total amount of final
output produced by a firm given inputs in a given period of
time.
• Average Product (AP): It refers to the output produced
using per unit of factors of production.
• Marginal Product (MP): It refers to the additional output
produced as a result of employing an additional unit of the
variable factor input, all other factors being held constant,
is known as marginal product (MP).
MANAGERIAL ECONOMICS
Total Product, Average Product, and Marginal Product
Total Marginal Product Average Product
Capital Labour Product (TP) of Labour of Labour
8 0 0
8 1 5 5 5
8 2 18 13 9
8 3 36 18 12
8 4 56 20 14
8 5 75 19 15
8 6 90 15 15
8 7 98 8 14
8 8 104 6 13
8 9 108 4 12
8 10 110 2 11
8 11 110 0 10
8 12 108 -2 9
8 13 104 -4 8
MANAGERIAL ECONOMICS
Using Calculus: Calculating the Marginal Product of Labour
For a linear production function q = f(L,K) = 2L+K and a
multiplicative production function q = LK, what are the short-
run production functions given that capital is fixed at 𝐾 ഥ=
100? What are the marginal products of labour for these
short-run production functions?
THANK YOU
Biplab Sarkar
Department of Management Studies
[email protected]
+91 80 6666 3333 Extn 337
