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Physical Production Relationships (Chapter 2) : Principles of Agricultural and Resource Economics AE - 201

Physical production relationships describe how inputs combine to produce outputs. A production function shows the maximum output possible from different amounts of variable and fixed inputs given current technology. It can be written as Y=f(X1, X2, X3...Xn) where Y is output and the X's represent inputs. The slope of a production function shows how output changes with changes in a variable input, holding other inputs fixed. Examples are given of linear production functions in the form of Y=a+bX, where a is the vertical intercept and b is the slope. A production schedule is a table summarizing different input-output combinations.

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420 views17 pages

Physical Production Relationships (Chapter 2) : Principles of Agricultural and Resource Economics AE - 201

Physical production relationships describe how inputs combine to produce outputs. A production function shows the maximum output possible from different amounts of variable and fixed inputs given current technology. It can be written as Y=f(X1, X2, X3...Xn) where Y is output and the X's represent inputs. The slope of a production function shows how output changes with changes in a variable input, holding other inputs fixed. Examples are given of linear production functions in the form of Y=a+bX, where a is the vertical intercept and b is the slope. A production schedule is a table summarizing different input-output combinations.

Uploaded by

Ibtisam Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Physical Production Relationships

(Chapter 2)

Principles of Agricultural and Resource Economics


AE - 201

Mr. Qasir Abbas


Institute of Agricultural and Resource Economics
University of Agriculture, Faisalabad
Introduction
Input
Output
Combination of goods and services
Factors of production

How much to produce?


What to produce?
How to produce?
When to produce?
Introduction Contd..
Purpose is to provide you with the best understanding

Physical production process

Relationship between physical production and


resultant output

It is not a mathematical or economic situation solving


Theory of Firm

Decision for inputs


Combination of goods and services
Decided by manager and firm behave accordingly

Its also called theory of firm

Purpose is to maximize the profit

Revenue-cost = Profit
How to combine factors of production?

Combination of goods and services

Examples of input factors

Wheat = fertilizer+water+seed+labor+machinery+land
Notations
X and Y

X = input factors

Y = Output/production

Y = X1 + X2 + X3Xn
Factors of Production (Types)
Fixed factors of production

Variable factors of production

Immediate short-run

Intermediate short-run or short-run

Long-run factors of production


Production Function

The technical relationship between input and output


indicating the maximum amount of output that can be
produced using alternative amounts of variable inputs in
combination with one or more fixed inputs under a given
state of technology.
Production Function Contd.

Relationship describing the way inputs and outputs are


physically correlated
Amount of output depends on the amount of input added
Production function can be described in several ways

Mathematical form/relationship

Y = f(X1,X2,X3Xn)
Production Function Contd.
f means result from

OR

is a function of

Y = f(X1,X2,X3Xn)
Production Function Contd.
Y = f (X1 l X2,X3,Xn)

Variable and fixed factors of production distinguishing

X1 = variable
Slope and Relationship
Linear relationship

Slope ( of straight line is the ratio of the vertical change


to the horizontal change between any two points)

Slope = vertical change__


horizontal change

Cetirus paribus
Equation of a Relationship
Vertical Intercept ( of a line is the point where the line
meets the vertical axis)

y = a+ bx

y = dependent variable
a = vertical intercept
b = slope of line
x = independent variable
Example

Income Consumption Point

0 50 A

100 100 B

200 150 C

300 200 D

400 250 E
Example Contd..
Income Saving Point

20 0 A

50 20 B

100 50 C

150 100 D

200 150 E
Production Function Examples
Y = 20 + bX

Y = 20 + 0.4 X

Y = 20 + 0.4 (0) = 20

Y = 20 + 0.4 (30) = 32
Production Schedule
Amount of X Amount of Y (Wheat Point
(fertilizer used) Yield)

0 20 A

10 24 B

20 28 C

30 32 D

40 36 E

Production schedule is a tabular summary of the input-output


relationship.

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