MBA, SEM 1 PRODUCTION FUNCTION-LONG RUN

MANAGERIAL ECONOMICS
DR. SUBHENDU DUTTA

Subhendu Dutta
PRODUCTION
FUNCTION-LONG RUN After attending this session, you will be able to:
 understand the relationship between output and inputs in the long run

 analyze the nature of returns to scale when all the inputs varied

 analyze how a rational producer achieves the objective of maximization

of output subject to cost constraint with the help of isoquants and
isocost line
Key Concepts
 marginal rate of technical substitution
 Isoquant
 Iso-cost line
 expansion path
 returns to scale

Subhendu Dutta
 TwoFor this
Which we needcases
portion
extreme to understand
of the the concept
isoquants
of production are offunctions
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relevant
Returns
How to to Scale
Production with Two Variablea Inputs
select inputs to produce given output at
PRODUCER’S 1. When inputs
minimum
Isoquants
2. the
When
are Perfect substitutes
Firms choosescost?
combinations of two inputs that are in the economic region of
inputs
In
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long withperfect
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both
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consider the best
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now
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produce output.
its
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ERP this,
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by increasing
labor and all of the inputs to production in proportion.
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• isoquant
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MRTS of of
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ofis
astheincreases
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called isoquant
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falls. isoquant Production service and client
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(MRTS).
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Draw a fig toline show decreasing returns clients.
isoquants
to scale are L-shaped
Subhendu Dutta
 • An isoquant is a curve that shows all combinations of inputs that yield a
SUMMARY given level of output.
• A firm’s production function can be represented by a series of isoquants
associated with different levels of output.
• Isoquants always slope downwards.
• The shape of each isoquant can be described by the marginal rate of
technical substitution at each point on the isoquant.
• The marginal rate of technical substitution of labor for capital (MRTS) is
the amount by which the input of capital can be reduced when one extra
unit of labor is used so that output remains constant.
• The possibilities for substitution among inputs in the production process
range from a production function in which inputs are perfect substitutes
to one in which the proportions of inputs to be used are fixed (a fixed
proportions production function).
• In long-run analysis, we tend to focus on the firm’s choice of its scale or
size of operation.
• Constant returns to scale means that doubling all inputs leads to
doubling output.
• Increasing returns to scale occurs when output more than doubles when
inputs are doubled.
• Decreasing returns to scale applies when output less than doubles.
Subhendu Dutta
 Microeconomics (2012), 10th edition, M. Parkin, Pearson
Microeconomics ()7th edition, Pindyck, Rubinfeld & Mehta

References

Subhendu Dutta