View
107
Download
6
Category
Preview:
Citation preview
PRODUCTION ECONOMICS AND LABOR ECONOMICS
Group No: 02
PRODUCTION ECONOMICS
Production Economics• Production economics is the application of the principles of microeconomics in production.
• Production economics, thus provides a framework for decision making at the level of a firm for increasing efficiency and profits.
Agricultural Production Economics• Agricultural Production Economics is a sub-discipline within the broad subject of agricultural economics
• It may be defined as an applied field of science where in principles of economic choice are applied to the use of resources of land, labor, capital and management in the farming industry
Nature of Agricultural Production Economics• Agriculture is no more confined to production at the farm level.
• The storage, processing and distribution of agricultural products involve an array of agribusiness industries.
• Both microeconomics and macroeconomics have applications in agriculture.
• The production problems on individual farms are important.
• But agriculture is not independent of other sectors of the economy.
Production• The process through which some goods and services called inputs are transformed into other goods called products or output.
Relationships1. Input-Output Relationship2. Input-Input Relationship3. Output-Output Relationship
Input-Output Relationship (factor-product relationship )
• use to determine the amount of variable input, that will be used in combination with the fixed inputs
• Use to take decisions on, Ex: -How much fertilizer to apply per acre? -How much irrigation water to use?
-How many hens in a hen house of a given size?
Production Functions
• Letting q represent the output of a particular good during a period, K represent capital use, L represent labor input, and M represent raw materials, the following equation represents a production function.
),,( MLKfq
MARGINAL PHYSICAL PRODUCT AND AVERAGE PHYSICAL PRODUCT
ELASTICITY OF PRODUCTION
STAGE 1• MPP > APP• APP is increasing throughout stage I• Variable input is transformed into product,
increases until APP reached its maximum• Fixed inputs are under utilized• All inputs are not used• Out put is increasing in increasing rate
STAGE11• APP>MPP>0• MPP is decreasing• TPP at its maximum• Physical efficiency of variable input reaches a
peak• The efficiency of fixed input is greatest at the
end of stage II• Profit will be maximized
STAGE111• MPP is negative• TPP begins to decrease(excessive amounts
of variable input are combine with fixed input)• Efficiency of variable inputs are declining
PROFIT MAXIMIZATION
INPUT-INPUT RELATIONSHIP
• Relationships among one output and two or more variable inputs
• Substitution possibilities among inputs create what is called input-input relationship
• In here the basic problem is to finding the right combination of inputs
PRODUCTION FUNCTION• Shows the maximum amount of output (Q) that can be produced within a given time period with each combination of (L) and (K)
• This can be defined as follows:Q= f (L,K)
ISO QUANT• An isoquant is set of all possible bundles of productive inputs exactly sufficient to produce a given quantity of output
• Determine the optimum factor combination to produce certain units of a commodity at the least cost
ISO QUANT SCHEDULE
Combinations of Labor and
CapitalUnits of
Labor (L)Units of
Capital (K)Output of
Cloth (meters)
A 5 9 100
B 10 6 100
C 15 4 100
D 20 3 100
ISO QUANT CURVE
ISOQUANT MAP
• An isoquant map is a set of isoquants that shows the maximum attainable output from any given combination inputs.
PROPERTIES OF ISOQUANT CURVE• An isoquant curve slopes downward, or is negatively
sloped. • An isoquant curve is convex to its origin.• Isoquant curves cannot be tangent or intersect one
another.• Isoquant curves in the upper portions of the chart yield
higher outputs. • An isoquant curve should not touch the X or Y axis on the
graph• Isoquant curves do not have to be parallel to one another• Isoquant curves are oval shaped.
ISO COST LINE
ISOCOST CURVE• Shows various combinations of labor and capital that the
firm can buy for a given factor prices (budget line or budget constraint line )
• C= wL + rK• Where ;
w= wage rate r=rental rate (price of the capital) C=cost
LEAST COST FACTOR COMBINATION (OPTIMAL COMBINATION OF INPUTS)
• The firm can achieve maximum profits by choosing that combination of factors which will cost it the least
• The least cost factor combination can be determined by imposing the isoquant map on iso -cost line
MARGINAL RATE OF TECHNICAL SUBSTITUTION
Essential condition is that the slope of the iso cost line must equal the slope of the isoquant
PRODUCTION EXPANSION PATH
Joins the tangency points of isoquant curves and isocost lines. =
RETURNS TO SCALE• Returns to scale describes what happens to total output
as all of the inputs are changed by the same proportion
OUTPUT-OUTPUT RELATIONSHIP• OUTPUT-OUTPUT RELATIONSHIP
• What combination of products (Y1,Y2) should be produced from a given bundle of fixed and variable inputs
PRODUCTION POSSIBILITY FRONTIER
• A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed
LAW OF INCREASING OPPORTUNITY COST
OPPORTUNITY COST AND THE PPF
• Reallocating scarce resources from one product to another involves an opportunity cost
• If the law of diminishing returns holds true then the opportunity cost of expanding output of X measured in terms of lost units of Y is increasing.
• the law of diminishing returns occurs because not all factor inputs are equally suited to producing items
• The maximum revenue combination of output on a production possibility curve can be determined using,
ΔY2 = PY1ΔY1 PY2
MRT=slope of production slope of isorevenue possibility curve line
MARGINAL RATE OF TRANSPORTATION
• The slope of the production–possibility frontier (PPF) at any given point is called the marginal rate of transformation (MRT).
• The slope defines the rate at which production of one good can be redirected (by reallocation of productive resources) into production of the other.
• It is also called the (marginal) "opportunity cost" of a commodity, that is, it is the opportunity cost of X in terms of Y at the margin.
• Thus, MRT increases in absolute size as one moves from the top left of the PPF to the bottom right of the PPF.[8]
LABOR ECONOMICS
LABOR ECONOMICS• Labor economics studies how labor markets work
• Labour Economics can be defined as a study of the organization, institutions and behavior of the labour market in an industries or industrial economy
LABOR DEMAND• The relation between the price of labor and how many
workers firms are willing to hire is summarized by the downward-sloping labor demand curve
SHIFT IN LABOR DEMAND
LABOR SUPPLY
SHIFTS IN MARKET LABOR SUPPLY CURVE
LABOR SUPPLY TO INDIVIDUAL FIRMS
LABOR MARKET EQUILIBRIUM
EQUILIBRIUM IN A COMPETITIVE LABOR MARKET
MARGINAL REVENUE PRODUCTION
MPR is the additional revenue that results from the use of an additional unit of labor
MRP = TR L
MARGINAL FACTOR COST (MFC) • MFC is the additional cost associated with the use of an additional unit of labor
MFC = TC L
Slope of MRP curve
• MRP = MR x MP• MR is constant if the output market is perfectly
competitive and decreasing if the output market is imperfectly competitive.
Marginal factor cost
Short-run labor demand in a perfectly competitive labor market
Theory of Labour supply
• Households are suppliers of labour• Workers maximize their utility• Worker’s utility is determined by the choice between income
and leisure
(Y)
W=wage rate b= benefit from leisure time (as a good)
Recommended