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Production Decisions

Extra Information
2 factors concerning production decisions

Production decisions are intertwined with price and quantity. Pricing is a function of cost and quantity produced.

General Inputs

CLEM: Capital, Labour Energy and Material

Production Function

  • It gives you the maximum level of output to be produced based on the various inputs.
  • The production function gives relationship between inputs used in the production and the maximum output production with given period of time and with given period of technology
  • \(Q = f(x_1, x_2, ….x_n)\) where \(x_1, x_2, …..x_n\) are inputs used in the production. \(Q\) is the maximum level of output.

Types of Production Function

Short Run Production Function

  • Consider a simple production function with 2 inputs: capital and labour \(Q = f(X,Y); Q: \text{Output}, X: \text{Labour}, Y: \text{capital}\)

  • A function which provides the maximum output produced for given inputs such that at least one of the production inputs remains unchanged

  • Usually for a short-term production function, capital remains unchanged
  • Short-term production function is useful in understanding short-term production goal for the firm

Long Run Production Function

  • Consider a simple production function with 2 inputs: capital and labour \(Q = f(X,Y); Q: \text{Output}, X: \text{Labour}, Y: \text{capital}\)

  • A function which provides the maximum output produced for given inputs such that at firm is free to vary ALL the production inputs

Terms Relating to Short-run analysis

  • Marginal Product, Average Product and Total Product are the three terms important to short-run analysis
  • Marginal Product (MP) \(= \frac{\Delta Q}{\Delta X}\)
  • Average Product (\(AP_x\)) \(= \frac{Q}{X}\)

Marginal Product and Average Product

  • MP gives you the estimate of change of production output resulting from unit change in a variable output
  • For example, let’s say a organic farming company wants to hire a manager, MP gives you how much additional production is achieved from this additional hire
  • MP helps in production decision making as stated in above example, should I hire an additional person or not
  • AP, for example gives you on and average what is total quantity of cement produced by 1 person applicable to a cement manufacturing firm
How does a firm decide how much to produce and when/where to stop hiring?

For a firm it is utmost important to locate the level of its production, this can be done with the help of production data (MP, TP, AP)