Econ 206(A) Tutorial 4

1
Econ 206(A) Tutorial 4

• Theory of the Firm Production

2
The Production Function

• Q is output,
• 2 factors of production (inputs) Capital (K)
  and Labour (L).
• So
• Q f (K, L)
• All other things equal, the higher K or L, the
  higher Q (i.e. more input equals more output).

3
An Isoquant Curve
Capital, K
An isoquant shows every combination of capital
and labour that can produce a given level of
output.
K1
Isoquant
K2
Q 200
Labour, L
0
L1
L2
4
Isoquants
Capital, K
K
Q 300
Q 200
Labour, L
0
L1
L2
5
Seminar Topic 1

• Could isoquants ever cross?

6
Marginal Productivity
Capital, K
Here the marginal productivity of labour is 20
(as we move from A to B).
A
B
30
Q 220
Q 200
Labour, L
0
10
11
7
Diminishing Returns to Labour
Capital, K
Where L3-L2 gt L2-L1
K
Q 400
Q 300
Q 200
Labour, L
0
L1
L2
L3
8
Economies of Scale

• Economies of scale If a firm doubles its inputs
  its outputs increase by more than double.
• Diseconomies of scale If a firm doubles its
  inputs its outputs increase by less than double.

9
Seminar Topic 2

• Draw an isoquant and identify increasing returns
  to scale and decreasing returns to scale?

10
Economies of Scale
Capital, K
4
Q 230
2
Q 100
Labour, L
0
2
4
11
Diseconomies of Scale
Capital, K
4
2
Q 180
Q 100
Labour, L
0
2
4
12
Economies of Scope

• Economies of scope Where it is cheaper for a
  firm to produce 2 or more goods/services than for
  these goods/services to be produced by two
  separate firms.
• Examples Multi-product retailers, large
  multi-product brands (for instance Yamaha),
  office supplies (Hewlett Packard sells printers,
  copiers, paper, toners etc).

13
Seminar Topic 3

• Discuss the economies of scale and scope within
  this university?

14
Production Choice and Isocost

• How does a firm choose how much to produce?
• Prices
• If labour costs equals wages (w) and capital
  costs equal interest rates (r), an isocost line
  gives the relative cost of each input (r/w)

15
An Isocost Curve
Capital, K
K1
Isocost curve r / w
K2
Labour, L
0
L1
L2
16
The Efficient Point of Production
Capital, K
E
K
Isoquant
Q
Isocost curve r/w
Labour, L
0
L