1. Producer Equilibrium

2. A firm or an organization is an
economic unit that converts inputs
(labor, materials, and capital) into
outputs (goods and services) by
employing various factors of
production.
It carries out the following functions:
1. Employment of FOP
2. Production of goods and services
3. Profit maximisation

3.  Also called as Inputs, refers to the
resources consisting of land, labour,
capital, technology, information,
organization etc… which are collectively
employed in the process of
manufacturing a specific product or
delivering a defined service.

4.  Products  Services
1. Tangible 1. Intangible
2. Durable 2. Non durable
3. Homogeneous 3. Heterogeneous
4. Consumption can be 4. Simultaneous
postponed production &
consumption

5.  Once the product decision is taken,
producer has to look at main major areas
pertaining to production. They are:
1. Quantity of output
2. Optimal combination of inputs for a
specified level of output.
 In order to do the above mentioned, a
producer has to define the production
function & optimal input employment
rate.

6.  production process: transform inputs or
factors of production into outputs
 common types of inputs:
•capital (K): buildings and equipment
•labor services (L)
•materials (M): raw goods
•Orgnisiation: organising
various fop in one place for
the purpose of producing
products .

7. It explains the functional relationship
between quantities of inputs used and
maximum quantity of output that can be
produced, given current knowledge
about technology and organization.
Note:
We assume in our discussion that the
producer employs only two factors of
production, usually labor or capital.

8.  In simple words, firm’s production
function for a particular good (q) shows
the maximum amount of the good that
can be produced using alternative
combinations of capital (k) and labor (l)

9. a production function that uses only labor
and capital:
q = f (L, K, A, M, T…)
to produce the maximum amount of
output given efficient production.
Here, q is quantity of output
f denotes the functional relationship
L denotes unit of Labor
K denotes unit of capital
A denotes unit of land
M denotes management or organising
T denotes Technology

10.  Shows max level of output that can be
produced by employing one and all input
combinations.
 It defines max level of output for all or
any combination of inputs.
 It does not tell about the least cost
combination.
 It does not trace out the profit max output
levels.

11. 5 500 1000 1500 2000 2500
C
4 400 800 1200 1600 2000
A
P
3 300 600 900 1200 1500
I
T 2 200 400 600 800 1000
A
L 1 100 200 300 400 500
0 1 2 3 4 5
RATE OF LABOR

12.  one of the most widely estimated
production functions is the Cobb-
Douglas:
q = ALα Kβ
 A, α, β are positive constants
 Q is the quantity of output
 K & L are units of Capital & Labor
Eg: Q = 100Lα Kβ

13.  The relationship between the factors of
production (land, labor, capital,
entrepreneurs) and output of goods
and services.
 Short run – change in one input due to
less time
 Long run – change in more variables
or inputs i:e land & capital

14.  Stage I – Increasing returns
*output rises at an increasingly faster rate (each
new worker makes more than the previous worker
did)
 Stage II – Diminishing returns
*output rises at a diminishing rate (each new
worker increases output, but not as much as the
previous worker did)
 Stage III – Negative returns
*output decreases as each new worker is added

16.  Measures the change in output for a
proportionate change in both inputs.
 Returns to scale can be:
1. Increasing
2. Constant
3. Decreasing

17. explains how output changes if all inputs
are increased by equal proportions
 how much does output change if a firm
increases all its inputs proportionately?
 answer to this question helps a firm to
determine its scale or size in LR

18.  when all inputs are doubled, output
doubles
f(2L, 2K) = 2f(L, K)
 potato-salad production function is CRS

19.  when all inputs are doubled, output more
than doubles
f(2L, 2K) > 2f(L, K)
 increasing the size of a cubic storage
tank: outside surface (two-dimensional)
rises less than in proportion to the inside
capacity (three-dimensional)

20.  when all inputs are doubled, output rises
less than proportionally
f(2L, 2K) < 2f(L, K)
 decreasing returns to scale because
• difficulty organizing, coordinating, and
integrating activities rises with firm size
• large teams of workers may not function as well
as small teams

21. as a firm increases an input, holding all
other inputs and technology constant,
• the corresponding increases in output will
become smaller eventually
• that is, the marginal product of that input will
diminish eventuall

22.  both capital and labor are variable
 firm can substitute freely between L and
K
 many combinations of L and K produce a
given level of output:
 q = f (L, K)

23.  curve that shows efficient combinations of
labor and capital that can produce a single
(iso) level of output (quantity):
 examples: q = f ( L, K )
• 10-unit isoquant for a Norwegian printing firm
10 = 1.52 L0.6 K0.4
• Table 6.2 shows four (L, K) pairs that produce q = 24

25.  have most of the same properties
 biggest difference:
• isoquant holds something measurable, quantity,
constant
• indifference curve holds something that is
unmeasurable, utility, constant

26. follow from the assumption that
production is efficient:
1. further an isoquant is from the origin,
the greater is the level of output
2. isoquants do not cross
3. isoquants slope down

27. slope of an isoquant shows the ability of a
firm to substitute one input for another
while holding output constant