Production Flashcards
conceptualise production
the transformation of utility of a good, which may be either tangible or intangible, in terms of
1) structural utility or form AND
2) spatial utility or place AND
3) temporal utility or time
all 3 must be present simultaneously for production to take place, although order of importance may differ depending on the exact good/service being produced
The production function is QX = f (N, L, K, E, T) , where (list all variables)
THEN INCLUDE VENN DIAGRAMS FOR ILLUSTRATION
transformation of utility, NOT creation
MUST MENTION PRODUCTION FUNCTION
N - land, all natural factors
L - labour
K - capital
E - enterprise
T - state of technology
venn diagrams to explain production
1) All 3 sets MUST intersect (show intersecting sets labelled 1, 2 and 3 w different radii) for production to take place. If disjoint (show 3 disjoint sets) or tangential, there is no production
2) need not be congruent sets - differing radii represent differing importance of that particular factor
3) overlapping area represents EFFICIENCY of production while unshaded areas are wastage and inefficiency - the larger the area, the more efficient. production is concerned with managing 1, 2 and 3 to ensure the largest possible shaded region, which can be done by…… (give examples).
4) total convergence represents perfect efficiency, which might theoretically be achieved by complete automation (BUT breakdowns, spare capacity, etc)
how to reduce unshaded areas on production venn diagram
- automation
- training
- motivation
- capacity utilisation
- lean manufacturing e.g. JIT to reduce overproduction and inventory storage
- regular maintenance to avoid breakdowns and downtime
- standardise processess
- continuous improvement (kaizen)
- reorganise production (e.g. cell production, division of labour to limit time spent moving about)
Aggie Told Me, Cadence Learn Regression, So Cadence Regressed
identify and explain the 1, 2 and 3 of financial production with reference to the instruments of monetary policy
id the 1, 2 and 3 of education
total physical product (TPP)
- overall physical production due to the quantity of inputs used
- TPPn = MPP1 + MPP2 + … + MPPn
- TPP also equals - integration function
integrating with limits 1 to n (MPP)dQ
why use integration to calculate TPP?
more comprehensive and accurate than merely arithmetic (cement between bricks in a wall!)
average physical product (APP)
- the TPP produced PER UNIT of the inputs used
- APP(n) = TPP(n)/Q(n) - quantity of INPUTS not output
the term ‘per unit’ MUST be there when defining any ‘average’ metric
marginal physical product (MPP)
- the addition caused to TPP by using ONE ADDITIONAL unit of inputs
- MPPn = TPPn – TPP(n – 1 )
- MPP = d(TPPn)/d(Qn)
using derivatives and calculus is more accurate than just arithmetic
term ‘one additional’ is necessary
define law of variable proportions (AKA short term law of production and law of returns to a factor and law of diminishing marginal returns)
employing an additional unit of input leads to an intial rise in MP followed by a fall in marginal product
occurs in the SR when land and capital are fixed, meaning only labour can be increased to increase output
explain stage 1 of the LOVP with its applications
since DMR is a SR concept, land and capital are fixed, meaning only labour can be increased to increase output
initially, as more labour is added to fixed factors i.e. machinery/tools, productivity improvements occur as the under-utilised fixed factor is used more efficiently and specialisation and DOL take place. Fixed factor exhibits ‘MECHANICAL FRESHNESS’ that allows high productivity
Marginal product rises and TPP becomes convex upwards, increasing at an increasing rate. MC falls as each additional unit of labour adds to output at a faster rate than costs in this stage.
stage 1 ends when MPP peaks
applications of stage 1 of dmr
1) deciding warranty period (i.e. guaranteed efficiency) of a machine - test the machine to see how many hours of use it takes to enter stage 2 i.e. ‘mechanical fatigue’. can also be used for EXTENDED warranty by implying that the number of hours taken to reach stage 2 is fewer than reality
2) maintenance businesses benefit from stage 1 - periodic maintenance contracts to keep the machine healthy (not to repair)
explain stage 2 of dmr
eventually, as more workers are added to the same fixed factor capacity, inefficiencies begin to set in due to constraints posed by the fixed factor , e.g. less space resulting in workers getting in each other’s way, the machine being overworked and its performance worsening - fixed factor exhibits ‘MECHANICAL FATIGUE’.
Diminishing returns to labour set in at this point. MPP, while still positive, begins to fall, causing TPP to increase at a decreasing rate and the curve to become concave upwards.
applications of stage 2 of dmr
1) decision to repair or replace the fixed factor - replacement will be done by reputation-conscious firms while companies less financially well-off choose to repair
the gap between the MPP and APP peaks is the time during which the firm makes the R or R decision - draw graph
why is repair economically bad (not a very rational choice) for a financially well-off firm?
- it reduces the overall efficiency of the machine because older parts can’t perform as well as newly-replaced ones and the machine as a whole works more poorly
- recurring cost - over time may accumulate to more than the amount it would cost to replace the machine
- the inefficiency of having to halt production while repairs take place - lower output means higher unit costs and less competitive prices
e.g. amazon trade-in offers for smartphones - discounts larger for devices still in stage 1 and 2, no exchange if in stage 3 - discount offered is inverse fucntion of status of mechanical fatigue
explain stage 3 of dmr
even if all workers are equally skilled and productive, each additional worker becomes less productive due to these constraints as the fixed factor is being over-utilised and breakdowns occur that can’t be repaired - mechanical exhaustion! more variable inputs are needed to produce even less output, leading to higher costs.
overall labour productivity (APP) begins to fall. MPP becomes negative and TPP falls, while MC increases.
Once exhaustion is reached, the fixed factor ceases to perform and additional output is zero
application of stage 3 of dmr
1) a market for scrap equipment emerges due to this stage, leading to the repurpose of recyclable parts of the discarded fixed factor
why are the three names of LOVP theoretically equivalent to each other?
lovp
sr law of production
returns to a factor
1) SR law of production shows that the time frame is too short for inventions to ahve take place and new technology to be injected into the system - from a firm’s POV, they may have not been around for long enough to establish credibility with lenders as a low-risk borrower, and thus do not have the finance to purchase new tech. May not have the space to accomodate it.
2) returns to a factor - labour is usually the only variable and experiences diminishing marginal returns as you add more labour to the fixed factor which is constant in the SR. FF will experience mechanical ‘freshness’, ‘fatigue’ and ‘exhaustion’ and varying levels of performance, therefore output is bound to change over time
3) LOVP - ‘variability’ of production refers to the varying status of MPP. ‘proportion’ refers to the proportion of machines to labour and can be attached to the fact that more and more labour is being introduced to a given fixed factor, which causes variable proportions of output (rapidly increasing MPP and TPP at first, reducing MPP and slower increasing TPP, then falling MP AND TPP)
when does stage 1 end and stage 2 begin?
can explain this EITHER ITO inflexion of TPP curve or the traditional idea that this is where MPP peaks, but MUST justify
inflexion - rate of change is changing in the same direction, meaning TPP is now increasing but at a slower rate due to marginal productivity falling. This will only happen once the fixed factor begins to display ‘mechanical fatigue’ and specialisation and DOL gains have been mostly exploited
MPP peaks - this is the highest the MPP is before it begins to fall while still being positive, meaning that at this point TPP will begin to increase but at a decreasing rate. This is explained by ‘mechanical fatigue’ of the fixed factor
define the isoquant used isoquant analysis - part of LR law of production
locus showing the various combos of labour (L) and capital (K) resulting in the same given level of output
iso = equal
isoquant map
a collection of isoqants showing different levels of production (output)
represents the WILLINGNESS of a producer to produce a certain quantity of output
isoquants further away from the origin represent a higher level of output and higher IQs are preferred to lower ones
factor cost line
AKA isocost line, shows all the combinations of labor and capital that are achievable for the same given total cost or with a given budget to the producer.
shows the FINANCIAL ABILITY of a firm to produce a given quantity of output
equation: TC = PkQk + PlQl
explain shifts in the factor cost line
- if budget increases while neither factor cost/price changes, will shift outwards PARALLELLY
- if pivotal shift outward, then the cost of that particular factor (labour or capital) has fallen while the other cost and budget stays constant (opposite for pivotal shift inward)
- if both factor costs change while the budget is constant, the line will shift either in or out depending on the change but the new slope will depend on the ratios of the change
like budget line, will shift when PRICES CHANGE while budget is constant or when BUDGET changes while prices are constant
to prove parallel shift - prove that tanx is the same for both lines
what does the gradient of the isocost curve tell us?
the relative prices of the two factors
as well as the opportunity cost - for e.g. a slope of 2 means for for every additional unit of X employed, you give up employing 2 units of Y
producer equilibrium
achieved where the FC is tangential to the highest possible isoquant, which is where the producer is producing a given level of output at the lowest possible cost - this is RATIONAL because the producer’s willingness and ability are equal
any point below this isoquant is IRRATIONAL because less is being produced at the same cost
any point above this isoquant is ASPIRATIONAL and UNATTAINABLE because the producer will have the willingness but not ability to produce that quantity with the given budget
the slope of the IQ and FC are equal here (marginal rate of substitution = input price ratio)
expansionary path
the trajectory of production that a firm adopts in the long run, when the state of technology and capital are variable, given its willingness and ability to produce
it traces out all the cost-minimising combinations of factors employed, i.e. all the different points of SR producer equilibrium
it suggests that to increase your output levels, you must increase both your input levels and your total cost incurred.
the gradient of the EP depends on whether production is more capital intensive or labouri intensive - will lean more sharply towards that particular axis
can see the effect of varying returns to scale on your expansionary path. (IF QUESTION NECESSITATES, BRING IN SCHUMPETER AFTER ALL THIS IS EXPLAINED)
INCLUDE 2 DIAGRAMS HERE - THE TYPICAL EXPANSIONARY PATH, AND THE LABOUR VS CAPITAL INTENSIVE EP
returns to scale
in the LR, when all factors of production are variable, an increase in all your FOP in the same proportions and at the same time will increase the scale of production, which can have one of 3 outcomes:
IRS - outputs increase by proportionately more than inputs, at a faster rate. For e.g., if K and L both double, output will triple. This is because __________
DRS - outputs increase by proportionately less than inputs, at a slower rate. For e.g. if K and L double, output will increase only by a factor of 0.5. This is because ___________
CRS - outputs and inputs increase in the same proportion. If K and L double, output will double. This is because _____________
reasons for IRS
- Higher labour specialisation and DOL - by concentrating on one task repeatedly, will achieve mastery and increase efficiency compared to a generalist worker (possible as you can better divide up tasks as you increase the amount of labour)
- being able to afford more efficient and specialised tech that can produce more unit per output time; also, highly specialized equipment is better utilised at higher output levels to maximise productivity gains (small vs big firm buying an automated machine)
- indivisible factors (labour, capital - oven example) are better utilized at higher output levels
- this is illustrated by decreasing distances between sucessive isoquants and equlibrium points as an equal increase in output is achieved with successively smaller increments in input
- for the same oven cost, you’re getting 4× the output → more cakes without needing 4 ovens.
reasons for DRS
- managerial inefficiencies - control, coordination, communication and motivation issues as the firm grows larger. resulting in a fall in productivity
- natural resource scarcity - e.g. you double the number of coal factories, but coal supply remains limited, so new factories run at low capacity and output increases by less than double.
- this is illustrated by increasing distances between sucessive isoquants and equlibrium points as an equal increase in output is achieved with successively larger increments in input
reasons for CRS
- all factors of production (labor, capital, land) can be increased in exactly the same proportion
- Each additional worker or machine produces the same amount as before, meaning there’s no gain in efficiency (like IRS) or loss in efficiency (like DRS)
this is a theoretical benchmark as efficiencies and inefficiencies in production with varying scale are inevitable
- this is illustrated by equal distances between sucessive isoquants and equlibrium points as an equal increase in output is achieved with proportionately identical increments in input
variable returns to scale
- the type of RTS experienced is a function of growth and changes at different levels of production
- at lower outputs, IRS occur because of…. Initial increases in labour for example, allow large gains from specialisation.
- this is illustrated by decreasing distances between sucessive isoquants and equlibrium points as an equal increase in output is achieved with successively smaller increments in input
- as the firm grows, RTS are eventually exhausted and very little additional benefit, if any, stands to be gained from specialisation of labour or technology, for e.g.
- this is illustrated by equal distances between sucessive isoquants and equlibrium points as an equal increase in output is achieved with proportionately identical increments in input
- at higher outputs, DRS occur because of…
- this is illustrated by increasing distances between sucessive isoquants and equlibrium points as an equal increase in output is achieved with successively larger increments in input
explain the relationship between economies of scale and returns to scale
!!! SEE CHAT GPT
1st mover advantages
1) lack of rivalry - control over price of inputs and outputs (monopoly and monopsony power)
2) sole access to resources - exclusive contracts or monopolizes scarce inputs, they can produce at a lower cost than competitors; control over distribution channels
3) IPR protection - barrier to entry that restricts competition and gives pricing power
4) Novelty value - brand recognition; customer acquisition and retention
5) Govt patronage
6) Finance access
RAIN GF! - Rivalry absent; Access to resources; IPR; Novelty value; Govt patronage; finance access
loss of 1st mover advantages
1) Backfired product
2) Rivalry and substitute threat - erodes market share if rivals are better or cheaper; increases cost of competition
3) Scarcity of resources - higher input costs
4) price rises and demand falls
5) profitability reduces
6) Obsolescence
7) govt patronage reduces
8) opportunity cost
BROS POP G - Backfired; Rivalry; Obsolescence; Scarcity; Profitability; Opportunity Cost; Price rise fails; Govt patronage
Creative Destruction and the Expansionary Path
- Schumpeter: CD is disruptive innovation in the manufacturing process that increases productivity, driven by the desire to break away from crowded systems and gain a competitive advantage:
a) new products/version
b) new raw materials/sources
c) new production methods
d) new markets
e) new methods of business/financing
- on the EP, periods of innovation repped by vertical disconnects between segments of the EP signifying actual expansion of firm
- allow firm’s output to leap to higher growth trajectory due to increases in productive capacity
- innovation leads to cost-savings and is typically capital intensive - changes factor cost ratio and results in new segments being angled more sharply towards K axis
- each segment reps a set of eq production levels that can be achieved at a lower average cost than before, increasing profitability
differences between IRS and DRS - profit illustration
SEE NOTES!
let there be 2 firms: A and B
- both increase both L and K used
- both reach 50 units of production
- both generate 5000 INR total revenue
1) increments of L and K, and thus the increase in the total L-K input, occur at a slower/faster rate
2) TC = (3000 for A, 4500 for B)
3) profit = 0
4) IRS/DRS seen because if input is growing slower/faster than output, input costs must also be growing slower/faster than outputs and so profits are higher/lower (assuming factor costs constant at all levels of production)
