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THEORY OF PRODUCTION

THEORY OF PRODUCTION. Introduction. How can production be optimized or cost optimized? How does output respond to change in quantity of inputs? How does technology matter in reducing the cost of production? How can the least cost combination of input be achieved?

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THEORY OF PRODUCTION

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  1. THEORY OF PRODUCTION

  2. Introduction • How can production be optimized or cost optimized? • How does output respond to change in quantity of inputs? • How does technology matter in reducing the cost of production? • How can the least cost combination of input be achieved? • Given the technology, what happens to the rate of return when more plants are added to the firm?

  3. Some Basic Concepts • ‘Production’ means a process by which resources are transformed into a different and more useful commodity or service. • Input is anything which a firm buy for use in its production & output is goods that come out of production.

  4. Fixed Input is one whose supply is inelastic for short-run. • Variable Input is one whose supply in the short-run is elastic. • Short-run & Long- run are the period involve in the production process.

  5. Production Function • It state the technological relationship between input and output in the form of an equation, a table or a graph. • Q = ƒ (LB, L, K, M, T, t) LB: Land and Building, L: Labour, K: Capital, M: Raw Materials, T: Technology, t: Time

  6. Production function with two variables Q = ƒ (L, K)

  7. Coal Mining Production Function Qc = ƒ (K, L) Qc: The quantity of coal produce per unit time K : Capital L: Labour

  8. Short-run Production function Q = ƒ ( , L) Where K: Constant Q = bL Where b= gives constant return to labour

  9. Long-run production function Q = ƒ (K, L) Q = A Where A, a & b are parameters

  10. Short-run Law of Production

  11. Total, Average & Marginal Product TPL Total output (Tonnes) Labour

  12. Marginal and Average Product APL MPL Labour

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