Embed Size (px)
Citation preview
THE PRODUCTION THE PRODUCTION CONCEPTSCONCEPTS
JOIN KHALID AZIZJOIN KHALID AZIZECONOMICS OF ICMAP, ICAP, MA-ECONOMICS OF ICMAP, ICAP, MA-
ECONOMICS, B.COMECONOMICS, B.COM..FINANCIAL ACCOUNTING OF ICMAP FINANCIAL ACCOUNTING OF ICMAP
STAGE 1,3,4 ICAP MODULE B, B.COM, STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFABBA, MBA & PIPFA..
COST ACCOUNTING OF ICMAP STAGE COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA2,3 ICAP MODULE D, BBA, MBA & PIPFA..
CONTACTCONTACT::0322-33857520322-3385752R-1173,ALNOOR SOCIETY, BLOCK R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN19,F.B.AREA, KARACHI, PAKISTAN..
SCALES OF PRODUCTIONSCALES OF PRODUCTION
It is the upper limit to the size of Production.It is the upper limit to the size of Production.
The size of the Plant, number of Plants Installed and The size of the Plant, number of Plants Installed and the Technique of Production adopted by the Producer the Technique of Production adopted by the Producer fixes the Scale of Production.fixes the Scale of Production.
The Scale of Production are classified in followingsThe Scale of Production are classified in followings
1.1. Small Scale of ProductionSmall Scale of Production
2.2. Large Scale of ProductionLarge Scale of Production
3.3. Optimum Scale of Production Optimum Scale of Production
Internal EconomiesInternal Economies Technical EconomiesTechnical Economies Managerial EconomiesManagerial Economies Commercial EconomiesCommercial Economies Financial EconomiesFinancial Economies Risk-Bearing EconomiesRisk-Bearing Economies
External EconomiesExternal Economies Economies of InformationEconomies of Information Economies of ConcentrationEconomies of Concentration Economies of DisintegrationEconomies of Disintegration
ECONOMIES OF LARGE SCALE OF ECONOMIES OF LARGE SCALE OF PRODUCTIONPRODUCTION
LAWS OF RETURNSLAWS OF RETURNS The Law of Variable ProportionsThe Law of Variable Proportions
It refers to the behavior of output as the quantity of one input It refers to the behavior of output as the quantity of one input is increased while the other inputs are held constant. is increased while the other inputs are held constant.
It states that as successive units of a variable resource say It states that as successive units of a variable resource say labor are added to a fixed resource say land, so beyond some labor are added to a fixed resource say land, so beyond some point the extra or marginal product will decline.point the extra or marginal product will decline.
Till Marshall’s time this law was considered as the three Till Marshall’s time this law was considered as the three different laws i.e. Law of Diminishing Return, Law of different laws i.e. Law of Diminishing Return, Law of Increasing Return and Law of Constant Return. Increasing Return and Law of Constant Return.
But thereafter, these laws were considered as three different But thereafter, these laws were considered as three different stages of one law which is called as Law of Variable stages of one law which is called as Law of Variable Proportion.Proportion.
ASSUMPTIONS OF THE LAW OF ASSUMPTIONS OF THE LAW OF VARIABLE PROPORTIONVARIABLE PROPORTION
Short RunShort Run Constant TechnologyConstant Technology Homogeneous FactorsHomogeneous Factors
Basic Concepts of the LawBasic Concepts of the Law
Total Product (TP)Total Product (TP) Marginal Product (MP)Marginal Product (MP) Average Product (AP)Average Product (AP)
LAW OF VARIABLE PROPORTIONLAW OF VARIABLE PROPORTION
No. of WorkersNo. of WorkersTotal ProductTotal ProductMarginal Marginal ProductProduct
Average Average ProductProduct
0000----
11101010101010
222525151512.5012.50
33454520201515
44606015151515
55707010101414
6675755512.512.5
7775750010.7110.71
887070--558.758.75
Increasing Marginal Return
DiminishingMarginal Return
Negative Marginal Return
LAW OF VARIABLE PROPORTIONLAW OF VARIABLE PROPORTION
Stage1
0
No of WorkersMP
AP
TPStage2
Stage3
Output
Stage 1:Stage 1: Increasing Returns, TP increases at increasing rate, Increasing Returns, TP increases at increasing rate, MP increases at decreasing rate, decreases and is greater than AP, MP increases at decreasing rate, decreases and is greater than AP, AP goes to the maximum point.AP goes to the maximum point.
Stage 2:Stage 2: Diminishing Returns, TP increases at decreasing Diminishing Returns, TP increases at decreasing rate and reaches maximum point, MP goes on diminishing, rate and reaches maximum point, MP goes on diminishing, reaches to zero and is less than AP, AP starts decreasing.reaches to zero and is less than AP, AP starts decreasing.
Stage 3:Stage 3: Negative returns, TP starts decreasing, MP goes to Negative returns, TP starts decreasing, MP goes to negative and AP goes on decreasing but greater than MP.negative and AP goes on decreasing but greater than MP.
LAW OF VARIABLE PROPORTIONLAW OF VARIABLE PROPORTION
RETURNS TO SCALERETURNS TO SCALE
The laws of Returns to Scale study the behavior of The laws of Returns to Scale study the behavior of production when all the productive factors or inputs are production when all the productive factors or inputs are increased or decreased simultaneously in the same ratio.increased or decreased simultaneously in the same ratio.
We analyze here the effect of doubling, trebling and so We analyze here the effect of doubling, trebling and so on of all the inputs of productive resources on the on of all the inputs of productive resources on the output of the product.output of the product.
It has also three distinct stagesIt has also three distinct stages Increasing Returns to ScaleIncreasing Returns to Scale Constant Returns to ScaleConstant Returns to Scale Diminishing Returns to ScaleDiminishing Returns to Scale
RETURNS TO SCALERETURNS TO SCALE
S. S.
No.No.Scale of ProductionScale of ProductionTotal Total
ReturReturnsns
Marginal Marginal ReturnsReturns
111 Worker+3 Acres 1 Worker+3 Acres of landof land
2222
222 workers+6 Acres 2 workers+6 Acres of landof land
5533
333 +9 3 +9 9944
444 +124 +12141455
555 +155 +15191955
666 +186 +18242455
777 +217 +21282844
888 +248 +24313133
999 +279 +27333322
Increasing Returns
Constant Returns
DiminishingReturns
RETURNS TO SCALERETURNS TO SCALE
321 4 5 6 7 8 9 10
1
5
4
0
2
3
MP
Scale
Stage1
Stage2
Stage3
ISOQUANTS OR EQUAL PRODUCT ISOQUANTS OR EQUAL PRODUCT CURVES CURVES
It means equal quantity produced. It shows various It means equal quantity produced. It shows various combinations of two inputs say Labor and Capital combinations of two inputs say Labor and Capital giving the same level of output.giving the same level of output.
CombinatioCombinationsns
Factor XFactor XFactor YFactor YTotal Total OutputOutput
DMRTS xyDMRTS xy
AA111212100 units100 units
BB2288100 units100 units4:14:1
CC3355100 units100 units3:13:1
DD4433100 units100 units2:12:1
EE5522100 units100 units1:11:1
PROPERTIES OF ISO-PRODUCT CURVESPROPERTIES OF ISO-PRODUCT CURVES
Slopes Downward from left to rightSlopes Downward from left to right
The higher Isoquant show higher outputThe higher Isoquant show higher output
Non-intersectingNon-intersecting
Convex to the origin because of the Marginal Rate of Convex to the origin because of the Marginal Rate of Technical Substitution Technical Substitution
MRTSxy =MRTSxy = Change in XChange in X = = MPxMPxChange in YChange in Y MPyMPy
They are also called as Outlay Lines, Price Lines or They are also called as Outlay Lines, Price Lines or Factor Cost Lines.Factor Cost Lines.
Each Iso-cost shows different combinations of two Each Iso-cost shows different combinations of two inputs that a firm can buy for a given sum of money at inputs that a firm can buy for a given sum of money at the given prices. the given prices.
ISOCOST CURVESISOCOST CURVES
Suppose a firm has Rs.400 to spend on the combination of two Suppose a firm has Rs.400 to spend on the combination of two factors for producing a level of output. So it will have the factors for producing a level of output. So it will have the following Isocost curve. following Isocost curve.
2
4
6
8
10
01 2 3 4 5
Factor YRs.40 per unit
Factor XRs.80 per unit
A
B
C
D
E
F
ISOCOST CURVESISOCOST CURVES
PRODUCER’S EQUILIBRIUMPRODUCER’S EQUILIBRIUM
It is achieved when the Producer produce goods at It is achieved when the Producer produce goods at lowest possible rates.lowest possible rates.
The Least Cost Factors Combination method is used to The Least Cost Factors Combination method is used to determine the Producer’s Equilibrium.determine the Producer’s Equilibrium.
The Least Cost Factors Combination refers to the The Least Cost Factors Combination refers to the combination of factors with which a firm can produce a combination of factors with which a firm can produce a specific quantity of output at the lowest possible cost.specific quantity of output at the lowest possible cost.
We take the Isoproduct curve and Isocost Line to We take the Isoproduct curve and Isocost Line to determine the producer’s equilibrium under Least Cost determine the producer’s equilibrium under Least Cost Factors Combination method.Factors Combination method.
Assumptions for the Producer’s EquilibriumAssumptions for the Producer’s Equilibrium
Two factors say X and Y are involvedTwo factors say X and Y are involved Homogeneous units of both FactorsHomogeneous units of both Factors Prices of Factors are given and ConstantPrices of Factors are given and Constant Total Outlay is givenTotal Outlay is given
Producer’s Equilibrium ConditionsProducer’s Equilibrium Conditions
The Isoquant curve must be Convex to the OriginThe Isoquant curve must be Convex to the Origin The Slope of the Isoquant Curve must be equal to the slope of The Slope of the Isoquant Curve must be equal to the slope of
Isocost Line.Isocost Line.MRTSxy MRTSxy Y Y == PxPx
XX PyPy
PRODUCER’S EQUILIBRIUMPRODUCER’S EQUILIBRIUM
PRODUCER’S EQUILIBRIUMPRODUCER’S EQUILIBRIUM
2
4
6
8
10
01 2 3 4 5
FactorY
Factor X
A
B
C
D
E
F
IPiii
IPii
IPi
Producer’ EquilibriumPoint
JOIN KHALID AZIZJOIN KHALID AZIZECONOMICS OF ICMAP, ICAP, MA-ECONOMICS OF ICMAP, ICAP, MA-
ECONOMICS, B.COMECONOMICS, B.COM..FINANCIAL ACCOUNTING OF ICMAP FINANCIAL ACCOUNTING OF ICMAP
STAGE 1,3,4 ICAP MODULE B, B.COM, STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFABBA, MBA & PIPFA..
COST ACCOUNTING OF ICMAP STAGE COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA2,3 ICAP MODULE D, BBA, MBA & PIPFA..
CONTACTCONTACT::0322-33857520322-3385752R-1173,ALNOOR SOCIETY, BLOCK R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN19,F.B.AREA, KARACHI, PAKISTAN..
