UNIT 2.- PRODUCTION AND COSTS 1.- Production function. Productivity. 2.- Costs function. 3.- Revenue and profits. 1.- Production function. Productivity Introductory activity ACME, plc. shows the following information about its production function in the short run 1

of its good BEEP

Where L: Quantity of labour; hours worked or number of workers. Q: Output AP: Average product o average productivity. It is the output made by each worker as average MgP: Marginal productivity. It is the output corresponding to the increase in L.

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Complete the table above and plot two graphs 1.- Q = f(L) 2.- Q/L = f(L) and MP

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You should have obtain two graphs similar to those shown below:

Graphic 1 PRODUCTION FUNCTION.- In Economics, a production function relates physical output of a production process to physical inputs or factors of production. The production function is one of the key concepts of neoclassical theories, used to define marginal product and to distinguish allocative

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efficiency, the defining focus of economics. The primary purpose of the production function is to address allocative efficiency in the use of resources in production. As there is only one input (labour) to the short-run production function, it's pretty easy to plot the short-run production function graphically. As shown in the above diagram, the short-run production function puts the quantity of labor (L) on the horizontal axis (since it's the independent variable) and the quantity of output (q) on the vertical axis (since it's the dependent variable). The short-run production function has two notable features.

● First, the curve starts at the origin, which represents the observation that the

quantity of output is zero if the firm hires zero workers. (With zero workers, there

isn't even a guy to flip a switch to turn on the machines!)

● Second, the production function gets flatter as the amount of labor increases,

resulting in a shape that is curved downward. Short-run production functions

typically exhibit a shape like this due to the law of diminishing productivity.

In the graphic, dot A represents the inflexion point. From L=0 to L= L1 productivity

increases as more L is added. However, from L1 to L2 , productivity still grows but less. In

L2 the output the company obtains makes AP and MP equals, achieving the highest level

of productivity. When it happens, we say that the company has achieved its optimum level of production.

If the firm decides to add more units of labour, although the total output rises, the

productivity of labour decreases. This is due to the law of diminishing productivity.

Adding more units of labour from L3 is inconsistent, since both ouput and productivity

decreases, being negative the Marginal Product.

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ACTIVITY.-

Draw the Production functions and answer the following questions

1.- What is the quantity of labour and the total output in the optimal level of production

2.- How is the productivity once the company has achieved its optimal level of production.

3.- What is the maximum level of production.

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2.- COST OF PRODUCTION

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Bibliography.-

ECONOMICS for GCSE O-LEVEL.

Consulted web sites .-

● http://economics.about.com/

● https://en.wikipedia.org/wiki/Production_function

● http://www.uh.edu/~ghong/fina3334/sol_06.PDF

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