Theory of production

Chapter 5
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Hierarchy of Isoquant
s
 It is an array of isoquants which corresponds to
different level of resource inputs and plant capacity.

Hierarchy Of
Isoquants
All points of Q1 move upward to form a higher
isoquant which is the Q2 as more capital and labor
increases capacity.
This overall change is actually the upward and
rightward shift in the production function
curve.
There is an infinite number of isoquants as there
are infinite levels of the capacity
in the hierarchy.
The Isocost Curve a
nd Its Hierarchy
 There are infinite combinations of production

The Isocost Curve and

resources that a given budget can buy.

Between one point and another along the curve,

one resource is given up in exchange for other
because of a fixed budget.
Its Hierarchy
Marginal rate of substitution
define as how much of one resource should be given
up in order to buy an additional unit of the other,
given a fixed budget.

 
 Table 14:
Isocost and Its hierarchy
Budget = Php10,000 Budget = Php20,000
CAPITAL LABOR CAPITAL LABOR
5 0 10 0
4 4 8 8
3 8 6 16
2 12 4 24
1 16 2 32
0 20 0 40

Price of Capital = Php2,000

Price of labor = Php500
Marginal Rate of Substitution (Capital/Labor) = 0.25
The Isoquant and Isocos
s Combination
 Isoquant curve
- represents what can be

Isocost Combination
produced
Isocost curve
The Isoquant and

-the cost and budgetary limits of

production
This overall change is actually the
upward and rightward shift in the
production function curve.
Change in Resource
Mix
 Infographic
Resource mix or Style
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combination
 Defined as how much of one resource is used per unit
of the other. Optimum combination changes with
relative resource price and efficiency.
 Optimum resource combination favors the use of
cheaper and more efficient inputs to maximize
production.
PRODUCTIVITY
 PRODUCTIVITY
  CONCEPTS ADVANTAGES
 
 CONCEPTS
Average productivity is the
efficiency of inputs taken
as whole and as measured
as their average output .
Marginal productivity is
the efficiency of additional
inputs and it is measured as
their marginal output.
ADVANTAGES
Output per monetary unit of
input measured the profitable
improvement in overall resource
efficiency in the foregoing is
categorized as an economic
efficiency.
Two Economic efficiency:
Technical efficiency capitalizes
on the output, while Cost
efficiency gives emphasis to the
cost of inputs.
RELATIVE RESOURCE
EFFICIENCY
 Change the nature of the resource through
innovation.
Improve Resource
Basic Ways to
Change the external condition of
Efficiency resources.

More balanced resource

combination

Using resource-saving
technology.
 Figure 45: Resource Saving Technology
B2

Q2

Capital B

B1

Q1
A

Labor
 Infographic
Returns to Scale andStyle
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Productivity
 
 Infographic
Returns to Scale Style
and
Insert the title of your subtitle Here
Productivity
 
 Figure 46: Return to Scale
Proportion Line

TP2
B2

Output Tp1
B1

A1
A2

Resource input
 Reasons Infographic
for Returns Style
to Scale
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• The early part of plant expansion conditions resource

specialization and division of labor which increase returns to
scale. This stage is characterized by the efficiency of size or
economic of scale. In a small plant, e resource may be
assigned different functions because no job is extensive
enough to be its monopoly. But large- scale production
enables resources to concentrate on job requirements instead
of diffusing efficiency.
 Table 15:
Returns to Scale
Average
Productivity
Returns Output/Input

Greater than 1 Increasing Increases Increases

Equal to 1 Constant Constant Constant

Less than 1 Decreasing Decreases Decreases

Less than Zero or Decreasing Negative Decreases

Negative and Negative
 Figure 47: Return to Scale and Innovation

E
C
Plant
Capacity
B D
A
Decreasing Returns
Constant Returns Negative Returns
Q2
Increasing Returns
Q1

Plant Size
That’s all Tha
nk you.
 Presented by:
DATINGALING, CHE CHE H.
ERMITA, JULIE ANN