The theory of producer behavior production (KINH tế VI mô SLIDE)

Microeconomics Chapter Theories of Producer Behavior - Production Topics to be Discussed  The Technology of Production  Production with One Variable Input (Labor)  Isoquants  Production with Two Variable Inputs  Returns to Scale 2011, FTU Kieu Minh Introduction  Production decisions of a firm are similar to consumer decisions  Can also be broken down into three steps 2011, FTU Kieu Minh Production Decisions of a Firm Production Technology  Describe how inputs can be transformed into outputs  Inputs: land, labor, capital & raw materials  Outputs: cars, desks, books, etc  Firms can produce different amounts of outputs using different combinations of inputs 2011, FTU Kieu Minh Production Decisions of a Firm Cost Constraints  Firms must consider prices of labor, capital and other inputs  Firms want to minimize total production costs partly determined by input prices 2011, FTU Kieu Minh Production Decisions of a Firm Input Choices  Given input prices and production technology, the firm must choose how much of each input to use in producing output  Given prices of different inputs, the firm may choose different combinations of inputs to minimize costs  If labor is cheap, may choose to produce with more labor and less capital 2011, FTU Kieu Minh Production Decisions of a Firm  If a firm is a cost minimize, we can also study  How total costs of production varies with output  How does the firm choose the quantity to maximize its profits 2011, FTU Kieu Minh The Technology of Production  We can represent the firm’s production technology in form of a production function  Production Function:  Indicates the highest output (q) that a firm can produce for every specified combination of inputs  Shows what is technically feasible when the firm operates efficiently  For simplicity, we will consider only labor (L) and capital (K) 2011, FTU Kieu Minh The Technology of Production  The production function for two inputs: q = F(K,L)  Output (q) is a function of capital (K) and Labor (L)  The production function is true for a given technology  If technology increases, more output can be produced for a given level of inputs 2011, FTU Kieu Minh The Technology of Production  Short Run versus Long Run  It takes time for a firm to adjust production from one set of inputs to another  Firms must consider not only what inputs can be varied but over what period of time that can occur  We must distinguish between long run and short run 2011, FTU Kieu Minh 10 Isoquant Describing the Production of Wheat Point A is more capital-intensive, and B is more labor-intensive Capital 120 100 90 80 A B  K  - 10  L  260 Output = 13,800 bushels per year 40 250 2011, FTU Kieu Minh 500 760 1000 Labor 50 A Production Function for Wheat  Increase L to 760 and decrease K to 90 the MRTS =0.04 < MRTS  -  K L   (10 / 260 )  04 When wage is equal to cost of running a machine, more capital should be used Unless labor is much less expensive than capital, production should be capital intensive 2011, FTU Kieu Minh 51 Returns to Scale  In addition to discussing the tradeoff between inputs to keep production the same  How does a firm decide, in the long run, the best way to increase output  Can change the scale of production by increasing all inputs in proportion  If double inputs, output will most likely increase but by how much? 2011, FTU Kieu Minh 52 Returns to Scale  Rate at which output increases as inputs are increased proportionately  Increasing returns to scale  Constant returns to scale  Decreasing returns to scale 2011, FTU Kieu Minh 53 Returns to Scale  Increasing returns to scale: output more than doubles when all inputs are doubled  Larger output associated with lower cost (cars)  One firm is more efficient than many (utilities)  The isoquants get closer together 2011, FTU Kieu Minh 54 Increasing Returns to Scale Capital (machine hours) A The isoquants move closer together 30 20 10 2011, FTU Kieu Minh 10 Labor (hours) 55 Returns to Scale  Constant returns to scale: output doubles when all inputs are doubled  Size does not affect productivity  May have a large number of producers  Isoquants are equidistant apart 2011, FTU Kieu Minh 56 Returns to Scale Capital (machine hours) A 30 2 Constant Returns: Isoquants are equally spaced 10 2011, FTU Kieu Minh 10 15 Labor (hours) 57 Returns to Scale  Decreasing returns to scale: output less than doubles when all inputs are doubled  Decreasing efficiency with large size  Reduction of entrepreneurial abilities  Isoquants become farther apart 2011, FTU Kieu Minh 58 Returns to Scale: Carpet Industry  The carpet industry has grown from a small industry to a large industry with some very large firms  There are four relatively large manufactures along with a number of smaller ones  Growth has come from  Increased consumer demand  More efficient production reducing costs  Innovation and competition have reduced real prices 2011, FTU Kieu Minh 59 The U.S Carpet Industry 2011, FTU Kieu Minh 60 Returns to Scale: Carpet Industry  Some growth can be explained by returns to scale  Carpet production is highly capital intensive  Heavy upfront investment in machines for carpet production  Increases in scale of operating have occurred by putting in larger and more efficient machines into larger plants 2011, FTU Kieu Minh 61 Returns to Scale: Carpet Industry Results Large Manufacturers  Increased in machinery & labor  Doubling inputs has more than doubled output  Economies of scale exist for large producers 2011, FTU Kieu Minh 62 Returns to Scale: Carpet Industry Results Small Manufacturers  Small increases in scale have little or no impact on output  Proportional increases in inputs increase output proportionally  Constant returns to scale for small producers 2011, FTU Kieu Minh 63 Returns to Scale: Carpet Industry  From this we can see that the carpet industry is one where: There are constant returns to scale for relatively small plants There are increasing returns to scale for relatively larger plants  These are however limited  Eventually reach decreasing returns 2011, FTU Kieu Minh 64 ... profits 2011, FTU Kieu Minh The Technology of Production  We can represent the firm’s production technology in form of a production function  Production Function:  Indicates the highest output (q)... allowing them to use more of one input and less of another for the same level of output 2011, FTU Kieu Minh 37 Production: Two Variable Inputs  Substituting Among Inputs  Slope of the isoquant... can be substituted for the other and keep the level of output the same  Positive slope is the marginal rate of technical substitution (MRTS)  Amount by which the quantity of one input can be reduced