production iso-quant

7/30/2019 Production ISO-Quant

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Production

(ISO Quant)


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Production Function

A production function is the functionalrelationship between inputs and output

Maximum output. That can be

obtained for a given combination ofinputs.

It expresses the technologicalrelationship between inputs and outputof a product

Q = f (L, K)


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Economic Efficiency vs

Technical Efficiency

A firm is Technically efficient when

it obtains maximum level of outputfrom given inputs. A producer

cannot reduce one input and at the

same time maintain the output atsame level .


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A firm is economically efficient

when it produces a given amount

of output at the lowest possible

costs for a combination of inputsprovided that prices of inputs are

given/ constant. How to produce

a given amount of output atlowest cost.


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Short Run & Long Run

All inputs can be divided in to

Fixed inputs Plant, Buildings,Equipment.

Variable Inputs Amount can bechanged during the short run.

Short Run is defined to be that periodwhen some of the firms inputs arefixed.


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Long Run is that period over

which all the firms inputs

are variable and the firm hasthe flexibility to adjust or

change its environment.


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Production Function

Short Run PF Long Run PF

Returns to a factor Returns to Scale

One variable factor All factors variable

Short run analysis Long run analysis

Law of variable Law of returns toProportions Scale


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Stage of Production

Stage I MP>O, AP rising thus

MP>AP

Stage II MP>O, AP falling. MPO)

Stage III MP


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Question : Why a profit maximizingproducer would produce in stage II and

not in stage I or III. Explain.

Causes of the operation ofLaw of variable proportion

Indivisibility of factors (a criticalminimum factor to be employed, fuller

use of fixed factor) Division of labour or specialization

Imperfect substitution Leads to

diminishing returns.


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Significance of law of

variable proportion

Firm to use its resources rationally

(Capacity Building)/ Capacity

Planning Firm to understand the trade off

between marginal benefit and

costs


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Law of returns to a factor &

returns to scale

Law of returns to a factor is a short

run phenomenon, whereas the law

of returns to scale operation in thelong run.

Returns to scale refers to the

change in output as all factors

change in the same proportion.


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I. Q = f (l, k)

II. Q1 = f (al, ak)

Stages of Returns toScaleI. Increasing Returns to Scale

II. Constant Returns to Scale

III. Diminishing Returns to Scale


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Theory of Production : IS

Quant Curve Approach

ISO = Equal

Quant = Quantity of ProductAn ISO-Quant curve approach is a

curve which represents different

combinations of two factorswhich field same level of output.


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Other Names of ISO-

Quant

Equal product curve

Product Indifference

curve

Constant Product curve


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Assumption of the concept

of ISO-Quants

There are only two factors of

production

There exists substitutability of the

factor i.e K (Capital) and Labour

Technique of production isconstant

Factors can be substituted


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Returns to scale & ISO-

Quant Approach ConstantReturns to Scale

Doubling the input doubles theoutput

Input and output are increasing

proportionately


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Diminishing Returns to

Scale

Change in factor inputsresults in to proportionately

smaller changes in outputs.


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Increasing Returns

to Scale

Doubling of Resources

more than doubles the

level of output.

f


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Factors of production can be divided in

to smaller units.

An ISO Quant Map is a set or family of

ISO- Quants.

The concept of ISO-Quant is based on

Marginal rate of technical substitution

(MRTS)

MRTS = Rate at which one input can be

substituted for another input without

changing the level of output.

MRTS = K

L


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To be in equilibrium the entrepreneurequates the MRTS or the ratio of

Marginal Physical product of twofactors with the Price Ratio of the twofactors.

Expansion Path

An expansion path is the line whichreflect best input combinations, least

cost method of producing differentlevels of output assuming that inputprices are constant.


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Optimum Combination of

InputsMRTS = PL

PK

orMarginal productivity of Labour = PL

Marginal productivity of K PK

orMP of Labour = MP of K

Price of Labour Price of K


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ISO- Cost Line

It is a locus of all combinations oftwo inputs which the producer

can buy using his fixed outlay at

fixed input price.

Other Names:

Factor Price Line Outlay line

Firms Budget Control Line


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Producer Equilibrium

MRTS = PL

LK PK

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