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Managerial Economics - Production Analysis

Measures Of Productivity - Production Analysis

   Posted On :  29.05.2018 12:24 am

The maximum level of output that can be produced with a given amount of input.

Measures Of Productivity
 
Total production (TP): the maximum level of output that can be produced with a given amount of input.
 
Average Production (AP): output produced per unit of input AP = Q/L
 
Marginal Production (MP): the change in total output produced by the last unit of an input

Marginal production of labour ΔQ / ΔL (i.e. change in the quantity produced to a given change in the labour)

Marginal production of capital ΔQ / ΔK  (i.e. change in the quantity produced to a given change in the capital)

Production Function:

 
A production function, like any other function can be expressed and analysed by any one or more of the three tools namely table, graph and equation. The maximum amounts of output attainable from various alternative combinations of input factors are given in the table.
 
The production function expressed in tabular form is as follows.

 

The firm has a set of fixed variables. As long with that it increases the labour force from 1 unit to 10 units. The increase in input factor leads to increase in the output up to an extent. After that it start declining. Marginal production increases in the initial period and then it starts declining and it become negative. The firm should stop increasing labour force if the marginal production is zero- that is the maximum output that can be derived with the available fixed factors. The 9th labour does not contribute to any output. In case the firm wants to increase the output beyond 153 units it has to improve its fixed variable. That means purchase of new machinery or building is essential. Therefore the firm understands that the maximum output is 153 units with the given set of input factors.

The graphical representations of the production function are as shown in the following graph.


The graphical presentations of the values are shown in the graph. The ‘X” axis denotes the labour and the ‘Y’ axis indicates the total production (TP), average production (AP) and marginal production (MP). From the given table and graph we can understand all the three curves in the graph increased in the beginning and the marginal product (MP) first fell, then the average product (AP) finally total production (TP). The marginal production curve MP cuts the AP at its highest point. Total production TP falls when marginal production curve cuts the ‘X’ axis. The law of diminishing returns states that if increasing quantity of a variable input are combined with fixed, eventually the marginal product and then average product will decline.
 
When the production function is expressed as an equation it shall be as follows:


Where,

 

Q         = Output in physical units of good X

 

Ld      = Land units employed in the production of Q

 

L               = Labour units employed in the production of Q

 

K              = Capital units employed in the production of Q

 

M             = Managerial Units employed in the production of Q

 

T               = Technology employed in the production of Q

 

f          = Unspecified function

 

fi          = Partial derivative of Q with respect to ith input.

 

This equation assumes that output is an increasing function of all inputs.

 

Tags : Managerial Economics - Production Analysis
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