Presentation ON Production Analysis

PRESENTATION
ON
PRODUCTION
ANALYSIS
By:- THE GO GETTERS
Ashutosh Srivastava 11 A
Ayushi 12 A
Bhoopendra Tiwari 13 A
Chandan Kumar 14 A
Debmalya Das 15 A
Deepika Mishra 16 A
Garima Manchanda 17 A
Gaurav Kr. Varshney 18 A
Gaurav Sarin 19 A
Gurdeep Singh 20 A
INTRODUCTION
q Every organization uses labor,capital and

land or raw materials for the purpose of
producing goods and services.
q Whole and sole aim is to maximize total
profit.
PRODUCTION AND
PRODUCTION FUNCTION
q PRODUCTION:- Refers to the transformation of
input resources into outputs of goods and services.
q Inputs are resources used in the production of
goods and services.
q Types of inputs: a) FIXED INPUT
b)VARIABLE
PRODUCTION FUNCTION
q Mathematical representation
of the relationship:
q Q = f (K, L, La)
q Output (Q) is dependent upon the amount of
capital (K), Land (L) and Labour (La) used
PRODUCTION FUNCTION
q States the relationship between inputs and outputs
q Inputs – the factors of production classified as:
q Land – all natural resources of the earth – not just ‘terra firma’!
q Price paid to acquire land = Rent
q Labour – all physical and mental human effort involved in
production
q Price paid to labour = Wages
q Capital – buildings, machinery and equipment
not used for its own sake but for the contribution
it makes to production
q Price paid for capital = Interest
TYPES OF PRODUCTION
FUNCTION
q SHORT RUN: time period during which at least
one input is fixed.
q LONG RUN:- time period during which all inputs
are variable.
Analysis of Production Function:
Short Run
q In the short run at least one factor fixed in supply but all other
factors capable of being changed
q Reflects ways in which firms respond to changes
in output (demand)
q Can increase or decrease output using more or less of some
factors but some likely to be easier
to change than others
q Increase in total capacity only possible
in the long run
ANALYSIS OF PRODUCTION
FUNCTION:SHORT RUN
In times of rising
sales (demand)
firms can
increase labour
and capital but
only up to a
certain level –
they will be
limited by the
amount of space.
In this example,
land is the fixed
factor which
cannot be
altered in the
short run.
ANALYSIS OF PRODUCTION
FUNCTION:SHORT RUN
If demand slows
down, the firm
can reduce its
variable factors
– in this example
it reduces its
labour and
capital but
again, land is
the factor which
stays fixed.
Analysing the Production
Function: Long Run
q The long run is defined as the period of time taken to
vary all factors of production
q By doing this, the firm is able to increase its total capacity –
not just short term capacity
q Associated with a change in the scale of production
q The period of time varies according to the firm
and the industry
q In electricity supply, the time taken to build new capacity
could be many years; for a market stall holder, the ‘long run’
could be as little as a few weeks or months!
Analysis of Production Function:
Long Run
In the long run, the firm can change all its factors of
production thus increasing its total capacity. In this example
it has doubled its capacity
Production Function
With Two Inputs
Q = f(L, K)
K Q
6 10 24 31 36 40 39
5 12 28 36 40 42 40
4 12 28 36 40 40 36
3 10 23 33 36 36 33
2 7 18 28 30 30 28
1 3 8 12 14 14 12
1 2 3 4 5 6 L
Production Function
With Two Inputs
Continuous Production Surface
TOTAL PRODUCT (TP)
It is derived by holding the quantity of one
input constant and changing the quantity of
the other input .
MARGINAL PRODUCT (MP)
It is the change in the total product or
extra output per unit change in an input
used.
For per unit change in labor it is

calculated as
MPL = ∆TP
∆L
AVERAGE PRODUCT (AP)
It is the ratio of total product and total unit of the
input which is changed to derive the total
product.
For per unit change in labor it is calculated as:

APL = TP
L
PRODUCTION OR OUTPUT
ELASTICITY (E)
It is the ratio of the percentage change in output
and the percentage change in the input which is
changed to derive the total product.
For per unit change in labor it is calculated as:
EL = ∆Q
∆L
LAW OF DIMINISHING
RETURN
As we go on using more more units of variable
input along with a given amount of fixed input
after a point we start getting diminishing returns
for the variable input. This is called the law of
diminishing return.
Production Function
With One Variable Input
Total Product TP = Q = f(L)
TP
Marginal Product MPL =
L
Average Product TP
APL =
L
Production or MPL
EL =
Output Elasticity APL
Production Function
Total, Marginal, and Average Product of Labor, and Output Elasticity
L Q MPL APL EL
0 0 - - -
1 3 3 3 1
2 8 5 4 1.25
3 12 4 4 1
4 14 2 3.5 0.57
5 14 0 2.8 0
6 12 -2 2 -1
Production Function
Production Function
The declining portion of the marginal product

curve reflects the law of diminishing return.
Optimal Use of the
Variable Input
Marginal Revenue
MRPL = (MPL)(MR)
Product of Labor
Marginal Resource TC
MRCL =
Cost of Labor L
Optimal Use of Labor MRPL = MRCL

Optimal Use of the
Variable Input
Use of Labor is Optimal When L = 3.50
L MPL MR = P MRPL MRCL

2.50 4 $10 $40 $20
3.00 3 10 30 20
3.50 2 10 20 20
4.00 1 10 10 20
4.50 0 10 0 20
Optimal Use of the
Variable Input
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.
Production With Two
Variable Inputs
Isoquants
Production With Two
Variable Inputs
Economic
Region of
Production
Production With Two
Variable Inputs
Marginal Rate of Technical Substitution
•It is the absolute value of the slope of isoquants.
•MRTS = -dK/dL
•We multiply dK/dL -1 in order to express the MRTS as a
positive number.
•The MRTS is the rate at which the firm would be willing
to give up capital in exchange for labor.
Production With Two
Variable Inputs
MRTS = -(-2.5/1) = 2.5
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 Rate of Labor ( L)
C w
K= − L r = Cost of Capital ( K )
r r
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
MRTS = w/r
Effect of a Change in Input Prices

EMPIRICAL PRODUCTION FUNCTION
•Cobb-Douglas Production function

Q = A KaLb
where, Q = quantities of output
K = capital
L = labor
A, a, b = parameters to be estimated empirically
Useful Properties of Cobb-Douglas
Production Function
•The marginal product of of capital & the
marginal product of labor depend on both the
quantity of capital & the quantity of labor used
in production.
•The exponents of K & L (that is a, b)
represent, respectively, the output elasticity of
labor & capital and the sum of the exponents
measures the returns to scale.
If a+b=1 then Constant Return of Scale
a+b>1 then Increasing Return of Scale
a+b<1 then decreasing Return of Scale
CONT…
• Cobb-Douglas Production Function can be estimated
by regression analysis by transforming it into
logQ = logA + alogK + blogL
Returns to Scale
Constant Increasing Decreasing

Returns to Returns to Returns to
Scale Scale Scale
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)

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PRESENTATION

q Every organization uses labor,capital and

For per unit change in labor it is

For per unit change in labor it is calculated as:

For per unit change in labor it is calculated as:

The declining portion of the marginal product

Optimal Use of Labor MRPL = MRCL

Use of Labor is Optimal When L = 3.50

L MPL MR = P MRPL MRCL

Effect of a Change in Input Prices

•Cobb-Douglas Production function

Constant Increasing Decreasing

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