PPT-6 - Lecture notes 2 PDF

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Short Run production Which factors can we change? Agriculture Land

Not possible

Car manufacturing

Airlines sector

Not possible

Not possible

Labour

Possible

Possible

Possible

Capital

Not possible

Not possible

Not possible

Not possible

Not possible

Enterprise

Not possible

Long Run Production 

1. Land: Possible to buy new land



2. Labour: Can change all kinds of labour



3. Capital: Possible to buy new heavy machinery, Huge loans



4. Enterprise: Possible to change



THEREFORE ALL FACTORS ARE VARIABLE IN THE LONG RUN

Short Run : Agriculture 

Land (hectares)

Labour (Numbers)

Factor Ratio (Land: Labour)

1 1

1 2

1: 1 1: 2



1 1

3 4

1: 3 1: 4



1

5

1: 5

  



Same is applicable to Car Mfg, and Airlines sector

Long Run Production 

Number/size of Mfg Unit

Labour

Factor Ratio



1 Plant

50

1:5



2 Plants

100

1:5



3 Plants

150

1:5



4 Plants

200

1:5



5 Plants

250

1:5

Types of productivity: measures in production 

Total product (TP) : it is the total quantity produced by all units of variable factor and fixed factor.



Average product: it is the output per unit of variable factor

   



TP AP = ----------------

TP = AP x variable factor

variable factor MP = it is the change in total product by employing one additional unit of variable factor

TP, AP, MP 

Fixed factor

variable factor TP

AP

MP



1

1

20

20

===



1

2

50

25

30



1

3

90

30

40



1

4

116

29

26



1

5

118

23.6

02



1

6

118

19.6

0



1

7

105

15

-13

Law of Variable Proportions / Law of Diminishing Returns / Short Run Production Function  

With one variable input ( law of variable proportions) or the law of diminishing returns



Statement of the law



By Prof. Paul Samuelson ” an increase in some varying inputs relative to other fixed inputs will, in a given state of technology, make total output increase; but after a point the extra output resulting from the same additions of extra inputs is likely to become smaller and smaller”.

 Prof.

George J. Stigler :” if the quantity of one productive service is increased by equal amounts, the quantities of other productive services remaining fixed, the resulting increments of the product will decrease after a certain point”.

 Prof.

Boulding :” as we increase the quantity of any one input which is combined with a fixed quantity of the other inputs, the marginal physical productivity of the variable input must eventually decline.”



Assumptions of the law:



1. The variable factor is increased unit by unit and all units are homogeneous , ie exactly identical in quality and quantity.



2.The fixed factors are held constant



3. The state of technology has not changed



4. Indivisibility of fixed factors



5. Non substitutability of the fixed and variable factors

3 HECTATES OF LAND, A WELL, some implements, some capital 

Number of workers

TP (quintals)

AP (quintals)

MP (quintals)



1

10

10

10



2

22

11

12



3

36

12

14



4

48

12

12



5

55

11

7



6

60

10

5



7

63

9

3



8

63

7.8

0



9

63

7

0



10

54

5.4

-9



1. MP will rise till TP is increasing at an increasing rate. After this, TP will still be increasing , but at a diminishing rate



2. MP is zero when TP is maximum



3. when TP actually starts falling, MP will be negative



4. AP will rise as long as MP is rising. it is MP that pulls up AP. So long as is rising, MP it will be above AP



5.When MP starts falling, it will cut the AP curve on it’s way down at the highest point of the AP curve. At this point AP = MP



6. After this, the AP curve will lie above MP curve because it is fall in MP that pulls down the AP...