LONG RUN PRODUCTION FUNCTION

PRESENTED BY-

INDU KUMARI

MANORANJAN PAUL NALINAKSH TRIPATHI RANJIT KUMAR NAYAK SAURABH KUMAR SONI

What Is Production Function?

Production function deals with the maximum output that can be produced with a limited and given quantity of inputs.

What is long run production function ?

• Long run refers to that time in the future when all inputs are variable inputs.

• Output can be varied by changing the levels of both L & K and the long run production function is expressed as:

Q = f (L, K)

Returns to scale

• Returns to scale is a factor that is studied in the long run.

• Returns to scale show the responsiveness of total product when all the inputs are increased proportionately.

Kinds of Return to Scale

• Constant returns to scale

• Increasing returns to scale

• Decreasing returns to scale

UNIT OF LABOR

UNIT OF CAPITAL (Rs.’OOO)

PERCENTAGEINCREASE IN LABOR AND CAPITAL

TOTAL PRODUCT(’00 UNIT)

PERCENTAGE INCREASE IN TOTALPRODUCT

RETURN TO SCALE

1 100 - 100 0 INCREASING

2 200 100 220 120 INCREASING

3 300 50 350 59 INCREASING

4 400 33.33 500 42.9 INCREASING

5 500 25 625 25 CONSTANT

6 600 20 750 20 CONSTANT

7 700 16.66 860 14.66 DECREASING

8 800 14.29 940 9.3 DECREASING

9 900 12.5 1000 6.4 DECREASING

RETURN TO SCALE IN A SILICON CHIP FACTORY

Constant Return To Scale

Labor (hours)

Capital(machine

hours)

10

20

30

155 10

2

4

0

A

6

Increasing Return To Scale

Labor (hours)

Capital(machine

hours)

10

20

30

5 10

2

4

0

A

8

3

combination capital labour units of watchesA 1 15 100B 2 11 100C 3 8 100D 4 6 100E 5 5 100

Example

Characteristics of Isoquant Curve

• They slope downward to the right.

• It is convex to origin.

• It is smooth and continuous.

• Two isoquants do not intersect.

TYPES OF ISOQUANT

• LINEAR ISOQUANT

• INPUT-OUTPUT ISOQUANT

• KINKED ISOQUANT

• SMOOTH CONVEX ISOQUANT

The marginal rate of technical substitution

-It is the rate at which an input can be exchanged for the other input without altering the production level.

- At any given point, it is the absolute value of the slope of the isoquant.

-It is decreasing along a given isoquant.

L

KMRTS

Graphical definition of the marginal rate of technical

substitution

Marginal rate of technical substitution and marginal

productivity

• There is an important relation between the MRTS and the MP

• A variation in output can be decomposed as follows

Along a given isoquant:K.MPL.MPQ KL K.MPL.MP0 KL

K

L

MP

MP

L

K

K

L

MP

MP

L

KMRTS