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PRODUCTION FUNCTION LONG RUN AND SHORT RUN

PRODUCTION FUNCTION LONG RUN AND SHORT RUN. UNIT 3. Production. An entrepreneur must put together resources -- land, labour, capital -- and produce a product people will be willing and able to purchase. PRODUCTION FUNCTION.

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PRODUCTION FUNCTION LONG RUN AND SHORT RUN

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  1. PRODUCTION FUNCTION LONG RUN AND SHORT RUN UNIT 3 MG52 Eng.economics and financial accounting- CAPE

  2. Production • An entrepreneur must put together resources -- land, labour, capital -- and produce a product people will be willing and able to purchase MG52 Eng.economics and financial accounting- CAPE

  3. PRODUCTION FUNCTION • THE RELATIONSHIP BETWEEN THE AMOUNT OF INPUT REQUIRED AND THE AMOUNT OF OUTPUT THAT CAN BE OBTAINED IS CALLED THE PRODUCTION FUNCTION MG52 Eng.economics and financial accounting- CAPE

  4. What can you say about Marginal Product ? • As the quantity of a variable input (labour, in the example) increases while all other inputs are fixed, output rises. Initially, output will rise more and more rapidly, but eventually it will slow down and perhaps even decline. • This is called the LAW OF DIMINISHING MARGINAL RETURNS MG52 Eng.economics and financial accounting- CAPE

  5. ALTERNATIVE QUANTITIES OF OUTPUT THAT CAN BE PRODUCED BY DIFFERENT COMBINATIONS OF RESOURCES MG52 Eng.economics and financial accounting- CAPE

  6. PRODUCTION IN THE SHORT RUN • THE SHORT RUN IS A PERIOD JUST SHORT ENOUGH THAT AT LEAST ONE RESOURCE (INPUT-INDUSTRIAL PLANT,MACHINES) CANNOT BE CHANGED -- IS FIXED OR INELASTIC.THUS IN THE SHORT RUN PROUDCTION OF A COMMODITY CAN BE INCREASED BY INCREASING THE USE OF ONLY VARIABLE INPUTS LIKE LABOUR AND RAW MATERIALS. MG52 Eng.economics and financial accounting- CAPE

  7. Quantities of Output that Can Be Produced When One Resource is Fixed MG52 Eng.economics and financial accounting- CAPE

  8. LONG RUN • THE LONG RUN IS A PERIOD SUFFIECIENTLY LONG THAT ALL FACTORS INCLUDING CAPITAL CAN BE ADJUSTED OR ARE VARIABLE. • THIS MEANS THAT THE FIRM CAN CHOOSE ANY COMBINATION ON THE MANUFACTURING TABLE -- NOT JUST THOSE ALONG COLUMN LABELLED “10” MG52 Eng.economics and financial accounting- CAPE

  9. The Long Run or Planning Period: As we double both resources, what happens to output? MG52 Eng.economics and financial accounting- CAPE

  10. The Long Run or Planning Period: As we double both resources, what happens to output? MG52 Eng.economics and financial accounting- CAPE

  11. THREE STAGES OF PRODUCTION

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