1. CHAPTER 6 PB 102 - MICROECONOMIC

2. 1. WHAT IS PRODUCTION 2. PRODUCTION TERMINOLOGIES: FIRMS, INDUSTRIES AND TIME PERIOD 3. PRODUCTION CONCEPT Short Run Production: TP, AP, MP Law of Diminishing Marginal Returns Long Run Production: Law of Returns to Scale

3. WHAT IS PRODUCTION ? Transformation of input into output process fixed input Qtty of input not change according to output factors of prod goods/services/ finished product variable input Qtty of input change with output

4. FACTORS OF PRODUCTION LAND LABOUR Factory / place used to produce product No of workers employed to produce product CAPITAL ENTERPRENEUR Amount of The person who materials and give the idea to equipment used run the business in production / production

5. PRODUCTION TERMINOLOGIES FIRMS exist & make decisions in using factors of prod to produce output in order to maximize profit INDUSTRIES market to the production of an economic good or service within an economy TIME PERIOD - time frame Short run: time frame which at least ONE (1) input is fixed but other input is varied Long run: time frame which ALL inputs are variable

6. SHORT RUN PRODUCTION AT LEAST ONE (1) INPUTS IS FIXED BUT OTHER INPUTS ARE VARIABLE EQUATION Total Product (TP) Amount of output with a given input Average Product (AP) AP = TP / TL Marginal Product (MP) MP = change in TP change in TL

7. Capital (Fixed input) Labour (Variable input) Total Product (TP) 10 0 0 10 1 8 10 2 20 10 3 33 10 4 44 10 5 50 10 6 54 10 7 56 10 8 56 10 9 54 10 10 50 Marginal Product (MP) Average Product (AP) Stages of Product

8. continue Short Run Production TP/AP/MP STAGE 1 STAGE 2 STAGE 3 Remarks: TP AP MP Variable input (Labour)

9. continue Short Run Production LAW OF DIMINISHING MARGINAL RETURNS At a certain level of production, if the variable input increase with the same amount of fixed input, MP will decrease STAGE 1 STAGE 2 STAGE 3 Increasing Returns Diminishing Returns Negative Returns Starts from AP = MP until MP = 0 where TP is max. Starts from MP=0 and continues TP at diminishing rate AP & MP decrease but still +ve. TP decrease, MP become ve, AP continue decrease Starts from 0 until AP intersect with MP (AP = MP) where AP is max.

10. continue Short Run Production TP/AP/MP STAGE 1 STAGE 2 STAGE 3 Remarks: TP AP MP Variable input (Labour)

11. continue Short Run Production MOST EFFICIENT STAGE OF PRODUCTION STAGE 2 Diminishing Returns Fixed input & variable input are fully utilized Firm prefer to produce at this stage

12. TP/AP/MP STAGE 1 STAGE 2 STAGE 3 RELATIONSHIP TP MP & TP Variable input (Labour) TP/AP/MP STAGE 1 STAGE 2 STAGE 3 MP Variable input (Labour) Refer page 113

13. TP/AP/MP RELATIONSHIP STAGE 1 STAGE 2 STAGE 3 MP & AP AP Variable input (Labour) MP Refer page 113

14. LONG RUN PRODUCTION ALL INPUTS ARE VARIABLES LAW OF RETURNS TO SCALE The effect to change of output when all input change proportionately Increasing Returns to Scale Constant Returns to Scale Decreasing Returns to Scale Output increase > increase in input Output increase = increase in input Output increase < increase in input Input increase 50%, output increase 80% Input increase 50%, output increase 50% Input increase 50%, output increase 20%