22-03-2014, 10:42 AM
LONG RUN PRODUCTION FUNCTION
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PRODUCTION FUNCTION
The tool of analysis used to explain the input-output relationship
Describes the technological relationship between inputs and outputs in physical terms
It tells that the production of a commodity depends on specific inputs
It represents quantitative relationship between inputs and output
It represents the technology of a firm, of an industry, or of the economy as a whole
Production Function
Mathematical representation
of the relationship:
Q = f (K, L, La)
Output (Q) is dependent upon the amount of capital (K), Land (L) and Labour (La) used
What is long run production function ?
Long run refers to that time in the future when all inputs are variable inputs.
In the long run both capital and labour are included
Output can be varied by changing the levels of both L & K and the long run production function is expressed as:
Returns to Scale
When all inputs are changed in the same proportion (or scale of production is changed),the total product may respond in three possible ways:
Increasing returns to scale
Constant returns to scale, and
Diminishing returns to scale
Production Isoquants/ isoquant curve/iso-product curve
In the long run, all inputs are variable & isoquants are used to study production decisions
An isoquant or iso-product curve is a curve showing all possible input combinations capable of producing a given level of output
Isoquants are downward sloping; if greater amounts of labor are used, less capital is required to produce a given output