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THE Production Process and Cost

The document discusses production functions and factors of production. It defines a production function as relating the maximum output (Q) producible from given amounts of capital (K) and labor (L). It distinguishes between short-run and long-run production based on whether capital is fixed or variable. It also defines fixed factors as those that cannot be adjusted in the short-run, and variable factors as those that can be adjusted. Finally, it discusses measures of productivity including total product, average product, and marginal product and how they relate to phases of increasing, decreasing and negative marginal returns.

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Yssa Chavez
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157 views10 pages

THE Production Process and Cost

The document discusses production functions and factors of production. It defines a production function as relating the maximum output (Q) producible from given amounts of capital (K) and labor (L). It distinguishes between short-run and long-run production based on whether capital is fixed or variable. It also defines fixed factors as those that cannot be adjusted in the short-run, and variable factors as those that can be adjusted. Finally, it discusses measures of productivity including total product, average product, and marginal product and how they relate to phases of increasing, decreasing and negative marginal returns.

Uploaded by

Yssa Chavez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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THE

PRODUCTION
PROCESS AND
COST
THE PRODUCTION FUNCTION
A function that defines the maxi_x0002_mum amount of output that can
be produced with agiven set of inputs.

We will let K denote the quantity of capital, L the quantity of labor, and Q the level of output produced in the
production process.
Mathematically, the production function is denoted as:

Q = F(K, L)
that is, the maximum amount of output that can be produced with K units of capital
and L units of labor.
Short-Run versus Long-Run
Decisions
short run-is defined as the time frame in which there are fixed
factors of production.

The short-run production function is essentially only a function of


labor, since capital is fixed rather than variable.
If K* is the fixed level of capital, the short-run
produc_x0002_tion function may be written as:
Q= f(L)= F(K*, L)

long run- is defined as the horizon over which the manager can
adjust all factors of production.
FIXED AND VARIABLE FACTORS
OF PRODUCTION
Fixed Factors- are the inputs the manager cannot adjust in
the short run.

Variable Factors- are the inputs a manager can adjust to


alter production.
Measures of
Productivity
An important component of managerial decision making is
the determination of theproductivity of inputs used in the
production process.

The 3 most important measures of productivity:


⦁ total product
⦁ average product
⦁ marginal product.
1
Total Product (TP)
The maximum
level of output thatcan be produced
with a givenamount of inputs.
“Average Product
(AP)
A measure of the
output produced
per unit of input.
1
Marginal Product
(MP)
The change in total output attributable
to the last unit of an input.
Increasing, Decreasing, and Negative Marginal Returns
increasing marginal returns decreasing marginal returns
Range of input usage over which Range of input usage over which
marginal product increases. marginal product declines.
negative marginal returns
Range of input usage over which
marginal product is negative..

Principle:
Phases of Marginal Returns
As the usage of an input increases, marginal product initially
increases (increasing mar_x0002_ginal returns), then begins to
decline (decreasing marginal returns), and eventually becomes
negative (negative marginal returns).
2

Extra Resources
For Business Plans, Marketing Plans,
Project Proposals, Lessons, etc

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