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Producer and Optimal Production Choice

The document discusses production from the perspective of a producer. It defines production as the process by which inputs are combined and transformed into outputs. A firm's goal is to maximize profits by choosing an optimal combination of inputs to either minimize costs for a given output or maximize output for a given cost. The document also defines key production concepts like the production function, short run vs long run, variable vs fixed inputs, and measures of output including total product, average product, and marginal product.

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Sangram sahoo
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537 views20 pages

Producer and Optimal Production Choice

The document discusses production from the perspective of a producer. It defines production as the process by which inputs are combined and transformed into outputs. A firm's goal is to maximize profits by choosing an optimal combination of inputs to either minimize costs for a given output or maximize output for a given cost. The document also defines key production concepts like the production function, short run vs long run, variable vs fixed inputs, and measures of output including total product, average product, and marginal product.

Uploaded by

Sangram sahoo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Producer and Optimal

Production Choice
Dr Bibhunandini Das
The producer and the production
process
• Business firms demand factors of production in input
markets and supply goods and services in output market

• Purchase inputs to produce and sell outputs


The producer and the production
process
• The behaviour of profit maximising firms should include
• Optimal combination of factors, to minimise its cost for a given
output

• To maximise its output for a given cost


The producer and the production
process
• Central to our discussion- production

• The process by which inputs are combined, transformed


and turned into outputs
The producer and the production
process
• Irrespective of size and internal organisation firms take
inputs and transform them into things

• Example- Carpenter combines labour, raw material like


wood, capital to prepare wooden objects and structures
What is a firm?

• An organisation that comes into being when a person or


a group of people decides to produce a good or service
to meet a perceived demand
Production is not limited to firms….

• Production and productive activity are not confined to


private business firms

• Both households and government engage in


transforming factors of production into useful things
Production function

• Production function- the relationship between inputs and


outputs of a firm

• An expression of the technological relation between


physical inputs and output of a good
Production function

• Symbolically
• Ox = f (i1, i2, i3……in)
• Ox is the output of commodity X
• f is the functional relationship
• i1, i2, i3……in are input needed for Ox
Production function
• Specifies either the maximum output that can be
produced with the given inputs/ the minimum quantity
of inputs needed to produce a given level of output

• Establishes a relation between inputs and output which


is technical in nature
Production function

• Always defined with respect to a given technology. If


there is an improvement in the technique of production-
increased output can be obtained with the same physical
inputs
Short run and Long run

• Short run- a period in which output can be changed by


changing only variable factors

• Fixed inputs like plant, machinery, building can not be


changed

• Production can be raised only by increasing variable


factor
Short run and Long run

• Long run refers to a period in which output can be


changed by changing all factors of production

• Firms can change its factory size, switch to new


techniques of production, purchase new machinery etc.
Variable factors and fixed factors

• Variable factors refer to those factors which can be


changed in the short run

• Vary directly with the level of output

• Example- raw material, casual labour, power, fuel etc.


Variable factors and fixed factors

• Fixed factors refer to those factors, which cannot be


changed in the short run

• The quantity of fixed factors remain same in the short


period irrespective of level output
Concepts of Product/Output

• Output refers to the volume of goods produced by a firm


or an industry during a specified period of time
• Total product
• Marginal Product
• Average Product
Total Product

• Total quantity of goods produced by a firm during a


given period of time with given number of inputs

• Example- 10 labourers produce 60 kgs of rice

• Total product is 60 kgs


Total Product

• In the short run a firm can expand TP by increasing only


the variable factors

• Total product/Total physical product/Total output


Average Product

• Refers to output per unit of variable input

• It is obtained by dividing TP by units of variable factor

𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
• AP=
𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑓𝑎𝑐𝑡𝑜𝑟

• TP in terms of AP will be = AP× Units of variable factor


Marginal Product
• Addition to total product, when one more unit of variable
factor is employed

• 𝑀𝑃𝑛 = 𝑇𝑃𝑛 − 𝑇𝑃𝑛−1

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡


• MP =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑙𝑒 𝑓𝑎𝑐𝑡𝑜𝑟

• TP is summation of MP

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