Microeconomics- Topic: Firms and Production
Learning outcomes in this topic:
1. Productions - Firms converts inputs/factors of production into output using
all available technologies.
2. Short-Run Production - One input/factor is variable and One fixed input –
In the short, one factor is varies, in order to allow the firm to change output
by adjusting that variable input.
3. Long-Run Production: Two inputs/factors are variable. In this case, the firm
has more flexibility in how it produces and how it changes its level of
output in the long- run when all factors are varied.
4. Returns to Scale: How the ratio of output to input varies/changes with the
size of the firm is an important factor in determining the size of a firm.
Production
A firm uses a technology or what known as production process to transform
inputs or factors of production into outputs. Those inputs/factors are as
follows:
- Capital (K) – This includes land, buildings (factories, stores), and equipment (machines,
trucks).
- Labour (L) – This include people like managers, skilled workers (
architects, economists, engineers, plumbers) and less-skilled workers
(custodians, construction labourers etc)
- Materials (M) – This may include raw goods (oil, water, wheat) and
processed products.
The output can be either a service or physical product.
Productions Functions
Production function - Shows the relationship between the quantities of
inputs used and the maximum quality of output that can be produced,
given current knowledge about technology and organization.
The production function for a firm that uses only labour and capital is:
𝑞 = 𝑓 (𝐿, 𝐾 ), 1
, 𝑤ℎ𝑒𝑟𝑒 𝑞 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 (𝑤𝑟𝑎𝑝𝑝𝑒𝑑 𝑐𝑎𝑛𝑑𝑦 𝑏𝑎𝑟𝑠) 𝑎𝑟𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑.
𝐿 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑠 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑙𝑎𝑏𝑜𝑢𝑟 𝑎𝑛𝑑 𝐾 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
The production function only shows the maximum amount of output that
can be produced from given levels of labour and capital.
Time and the Variability of Inputs
Short run –A period of time so brief that at least one factor of production
cannot be varied practically.
Fixed input – A factor of production that cannot be varied practically in the
short run.
Variable input – A factor of production whose quantity can be
changed/varied by the firm during the relevant period.
Lon run - A lengthy enough period of time that all inputs can be
varied/changed.
Short-Run Production: One Variable and One fixed input
In the short, we assume that capital (K) is a fixed input and labour (L) is a
variable input.
In this case the firm increase output only by increasing the amount of
labour it uses.
Production Function in the short run is:
……………………………… 2
- q is output, L is workers, and is the fixed number of capital.
- Example, we consider that a firm assembles computers for a
manufacturing firm supplies it with the necessary parts, such as
computer chips and disk drives.
Total Product
The relationship between output or total production and labour can be
illustrated by using equation 2 or table 1.
Table 1 below shows the relationship between output and labour when
capital is fixed for a firm.
Learning outcomes in this topic:
1. Productions - Firms converts inputs/factors of production into output using
all available technologies.
2. Short-Run Production - One input/factor is variable and One fixed input –
In the short, one factor is varies, in order to allow the firm to change output
by adjusting that variable input.
3. Long-Run Production: Two inputs/factors are variable. In this case, the firm
has more flexibility in how it produces and how it changes its level of
output in the long- run when all factors are varied.
4. Returns to Scale: How the ratio of output to input varies/changes with the
size of the firm is an important factor in determining the size of a firm.
Production
A firm uses a technology or what known as production process to transform
inputs or factors of production into outputs. Those inputs/factors are as
follows:
- Capital (K) – This includes land, buildings (factories, stores), and equipment (machines,
trucks).
- Labour (L) – This include people like managers, skilled workers (
architects, economists, engineers, plumbers) and less-skilled workers
(custodians, construction labourers etc)
- Materials (M) – This may include raw goods (oil, water, wheat) and
processed products.
The output can be either a service or physical product.
Productions Functions
Production function - Shows the relationship between the quantities of
inputs used and the maximum quality of output that can be produced,
given current knowledge about technology and organization.
The production function for a firm that uses only labour and capital is:
𝑞 = 𝑓 (𝐿, 𝐾 ), 1
, 𝑤ℎ𝑒𝑟𝑒 𝑞 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 (𝑤𝑟𝑎𝑝𝑝𝑒𝑑 𝑐𝑎𝑛𝑑𝑦 𝑏𝑎𝑟𝑠) 𝑎𝑟𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑.
𝐿 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑠 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑙𝑎𝑏𝑜𝑢𝑟 𝑎𝑛𝑑 𝐾 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
The production function only shows the maximum amount of output that
can be produced from given levels of labour and capital.
Time and the Variability of Inputs
Short run –A period of time so brief that at least one factor of production
cannot be varied practically.
Fixed input – A factor of production that cannot be varied practically in the
short run.
Variable input – A factor of production whose quantity can be
changed/varied by the firm during the relevant period.
Lon run - A lengthy enough period of time that all inputs can be
varied/changed.
Short-Run Production: One Variable and One fixed input
In the short, we assume that capital (K) is a fixed input and labour (L) is a
variable input.
In this case the firm increase output only by increasing the amount of
labour it uses.
Production Function in the short run is:
……………………………… 2
- q is output, L is workers, and is the fixed number of capital.
- Example, we consider that a firm assembles computers for a
manufacturing firm supplies it with the necessary parts, such as
computer chips and disk drives.
Total Product
The relationship between output or total production and labour can be
illustrated by using equation 2 or table 1.
Table 1 below shows the relationship between output and labour when
capital is fixed for a firm.
