Production Theory Lecture 6 PDF

Production theory  Definition of production The creation of economic benefits, whether the work is represented in material or non-material production Factors of production 1 - Land 3- Capital 2...

Production theory  Definition of production The creation of economic benefits, whether the work is represented in material or non-material production Factors of production 1 - Land 3- Capital 2- labor 4- Management  1- Land (nature) It is all the natural forces that help man in his productive efforts Includes the surface of the earth and its soil, sea, and rivers, as well as the Sunshine or light and winds above it, also the oil, minerals, and any other wealth in its interior Land characteristics 1 – Land is a gift from 4- The relative importance of land nature decreases when compared to other resources of production (such a 2- Not a subject to capital) as a result of its contribution destruction (Destructible) to productive activity 3- relatively inelastic of movement  2- labor: It is not limited to manual or muscular labor but extends to include every effort made by a person, whether this effort is muscular or intellectual and directed to create economic benefits The labor characteristics: 3- Inelastic to changes in demand 1 – Inability to store for it 2- Less capable of moving 4- The amount of labor in a society is than some other resources determined by the number of people, (such a capital) due to the their age distribution, and the extent to social and psychological which men and women contribute to connections work  3- Capital It means the goods and services that is produced with the aim of using them in producing more goods and services A - Fixed capital B – Circulating or working capital: It means the capital that is not It means the capital that is exhausted exhausted by contributing once to by using it in the production process the production process. Such = machinery, equipment, and It does not contribute to production buildings more than once We have to distinction the Land prices are determined primarily of demand only, as its supply is constant. As for capital, both the demand & supply for it affects its prices  4- Management: It is a type of labor, but it is special and has an independent function like assembling and coordinating the various elements of production  The Law of Diminishing Returns When successive, equal, and homogeneous units of a certain productive resource are added to a fixed amount of other productive resources, total production increases first at an increasing rate and then increases at a decreasing rate, and then begins to decrease with the continued addition of new units of the variable resource. Marginal product: is the amount of change in total production resulting from changing the units of the variable resource by one unit. Average Product: It is the average share of the variable resource unit of the total quantities produced of a certain commodity. = Dividing the total production by the number of units used of the variable resource Production stages of the law of diminishing returns  Production Curve Production 2nd stage 1st stage 3rd stage Total production Average product Marginal product V, Resource  The first stage 1- Total production increases during this stage at a rate exceeding the rate of increase in the units of the added variable resources. 2 - The marginal product reaches its maximum before the end of stage. 3 - The end of this stage is determined by the situation where the average product reaches its maximum and intersects with the marginal product.  The second stage 1 - Total production increases during this stage at a rate less than the rate of increase in the units of the added variable resources until the total product reaches its maximum at the end of this stage. 2 - The marginal product decreases until it reaches zero at the end of stage 3 - The average product decreases.  The third stage 1 - The total product deteriorates or decreases. 2 - The marginal product takes negative values. 3 - The average product continues to decrease.  The Economic Stage of Production Practicing production activity during the first stage is considered an uneconomical behavior. This is due, to the production efficiency of the units used from the variable resource, which is followed by the increasing trend of profitability of the successive units used from this resource We do not need to point out that The third stage is of course, uneconomical also, because this stage is characterized by the tendency of the total production level to decrease with an increase in the units used of the variable resource Therefore, it is natural for production to take place during the second stage of the law of diminishing returns, where the units of the variable resource have reached their maximum production efficiency at the beginning of this stage, and the efficiency of the fixed resource has reached its maximum efficiency by its end The optimal level of production that achieves to the producer the greatest possible amount of profits When the is the marginal product value is greater than the cost of the resource unit. the producer continues to add more units of the variable resource as long as the value of marginal revenue exceeds the marginal cost. The final production level is determined when the increase in total revenue resulting from using the last unit of the variable resource becomes equal to what this Unit adds to the total cost. marginal revenue = marginal cost (unit cost) Marginal product * price of output units = price of resource unit If (the price of output = PO) & (price of resource unit = PR) Marginal product * PO = PR Marginal production = PR / PO  Production elasticity Definition Production elasticity - relative relativechange changein inthe thequantity quantityof ofproduction productionto tothe therelative relativechange changein inthe the number of used units of the variable resource. number of used units of the variable resource. Production elasticity= The relative change in the production quantity relative change in the units of the resource QP2 – QP1 R2 – R1 QP R R QP R QP QP = / = / = QP * = * = QP1 R1 QP R R R R/ R QP QP = MP / MP Thank you